Toys RU bankruptcy case could shake private equity

Toys R Us is long gone, but the former private equity owners still can’t shake it.

Send the news: A US bankruptcy court judge has ruled that a group of former top executives and directors of the bankrupt retailer, including partners of Bain Capital and KKR, may be sued.

Looking back: In 2017, Toys R Us went bankrupt, causing some 3,000 employees to lose their jobs.

  • There was enough guilt to go around. The PE firms for too much debt. The senior lenders for refusing to negotiate. Management for not innovating.
  • The PE firms would later create a $20 million severance fund for laid-off workers. Also at the GP level, they realized a slight gain on Toys, even though LPs were wiped clean.

The case: Creditors allege that the company spent about $600 million on goods and services between filing Chapter 11 bankruptcy and liquidating its stores, without sufficiently disclosing to sellers that the company’s finances were so bad that closures were likely. .

  • Plaintiffs also object to the advisory fees paid to the firm’s private equity sponsors between 2014 and 2017, plus certain management bonuses.
  • Judge Keith Phillips allowed both claims. However, he dismissed allegations that the company’s decision to seize financing for debtors would be a breach of fiduciary duty.

What to know: Private equity representatives on boards of directors are generally covered by directors’ and officers’ liability insurance (D&O), although such policies typically include willful fraud exemptions.

  • No comment on Bain or KKR’s ruling, and it’s unclear how their specific D&O policies would (or would not) be applied if the firms lost in court.
  • It’s also worth noting a line from the defendants’ failed request for summary judgment, which doesn’t do much for the reputation of PE or people like former Toys CEO Dave Brandon: “As long as a company is not insolvent, the members of the board of directors owe a fiduciary duty to the company and its owners, and can take actions that benefit the owners to the detriment of the company.”

It comes down to: If creditors were to prevail, regardless of specific insurance coverage, it could shake the private equity model. In fact, they are arguing for a de facto chargeback from the private equity owners of the company, just as a PE fund would owe its limited partners as an investment to lose money, based on pre-insolvency fees.

  • In theory, this could apply to money earned today by PE directors on the board of a portfolio company.

Leave a Comment