In re Kenneth Cole Productions, Inc. Shareholder Litigation

Kenneth Cole Productions, Inc. (KCP) (defendant), an apparel company, had two classes of common stock: Class A (each share entitled to one vote) and Class B (each share entitled to 10 votes). KCP founder Kenneth Cole (defendant) held 46 percent of the Class A stock and all of the Class B stock. Cole sought to implement a going-private merger under which KCP would cease to be a publicly traded company. KCP’s board of directors (defendants) established a special committee of independent directors to carry out the transaction. Cole made an offer of $15 for each outstanding share, subject to the approval of (1) the special committee and (2) a majority vote of the minority (i.e., non-Cole) holders of the common stock. The price was later increased and approved at $15.25 per share. A group of minority shareholders (plaintiffs) brought a class-action lawsuit, alleging breach of fiduciary duties by Cole, KCP, and the directors. The court dismissed the complaint for failure to allege any facts that would show a fiduciary-duty breach. The appellate division affirmed. One of the minority shareholders, Erie County Employees Retirement System (plaintiff), argued that the applicable standard of review was the entire-fairness standard, which would place the burden of showing a fair process and fair price on the corporation’s directors—as opposed to the much more deferential business-judgment rule. The case was appealed to the New York Court of Appeals.