Judge OKs Sale of St. John Knits to Gray Family

An Orange County judge on Friday ruled that the sale of upscale women’s clothier St. John Knits Inc. to the founding Gray family could proceed, but indicated that disgruntled shareholders may be able to show that the Irvine company’s directors gave the Grays special treatment in arranging the buyout.

Superior Court Judge William F. McDonald said that the shareholders failed to show that an injunction stalling the company’s sale was justified. He also said that they had not shown a “reasonable probability” that they could prove that the $30-a-share, $522-million offer price is too low, or that a special committee of directors that evaluated the deal was not truly independent.

But shareholders’ attorneys did show “a reasonable probability of success” that they may able to prove their claims that directors breached their duty to other shareholders by showing “preferential treatment” to the Grays.

Shareholders’ attorneys argued that the Grays--who currently own about 14% of St. John--would get a better deal than other shareholders because of other compensation they would receive.

If the deal goes through, the Grays would get $17 million in cash, 15.6% of St. John, options for 5% more and a “lease arrangement” regarding use of the company jet, said shareholder attorney Venus Soltan. That effectively raised the value of the deal to $37 a share for the Grays, she said.

McDonald ruled Friday that the Grays will not be permitted to receive compensation “in any form” beyond the $30 a share until the matter is resolved in court.

Last December, the Grays announced plans to team up with New York-based Vestar Capital Partners and buy the rest of St. John’s shares they don’t already own. Tired of trying to satisfy Wall Street’s unceasing demand for rapid growth, a Gray family spokesman said the goal now is to slow down the company and take it private.

St. John’s stock got hammered last year when the company announced it would not meet analysts’ expectations in the second and third quarters, the first time that had ever happened. In the fourth quarter of 1998 and the first quarter of 1999, St. John’s profits dropped for the first time.

McDonald also said that the shareholders showed “a reasonable probability of success” in trying to prove their claim that St. John directors breached their duty to other shareholders by re-pricing stock options owned by directors Richard A. Gadbois III and David A. Krinsky.

Stock options belonging to the pair were re-priced in September from $38.99 a share and $45.75 a share down to $18 a share, which the shareholders contend gave the duo a financial interest in selling the company.

As a result of Friday’s ruling, neither man will be able to cash out his $18 per share options until the case is settled.

Gadbois is a senior vice president for Merrill Lynch. Krinsky is a partner in the Newport Beach law firm of O’Melveny & Meyers, which provides legal services for St. John.

The options were priced lower because the stock price had fallen dramatically and options at the higher price provided no incentive, St. John attorney Michael G. Yoder said. Other key employees’ stock option prices were also reduced, attorneys said.

The decision to re-price the stock occurred in August, two months before the company’s first contact with Vestar, said R. Brian Timmons, an attorney for St. John Chief Executive Robert E. Gray and his family.

Both sides applauded the judge’s ruling Friday .

“The Grays are very pleased with the court’s overall ruling since it allows the shareholders to vote on the transaction,” Timmons said.

Soltan said the disgruntled shareholders were encouraged because the ruling shows that McDonald “recognized that there are some things happening here that shouldn’t be happening.”

“Short of getting the preliminary injunction, we’re very pleased,” she said.