Delaware’s Chancery Court denied motions to dismiss three counts in a lawsuit that alleges Clayton Dubilier and Rice LLC (CDR) swayed a construction industry supplier into a $1.2 billion merger. The merger includes Ply Gem Parent LLC, Ply Gem Holdings Inc. and a firm CDR purchased three months prior. Stockholders started the lawsuit against CDR and several NCI directors, claiming that the company “breached its fiduciary duties to NCI.”

The plaintiff includes Gary Voigt, who also represents stockholders. Defendants include: James Metcalf, Donald Riley, Nathan Sleeper, William VanArsdale, Jonathan Zrebiec, Kathleen Affeldt, James Berges, Lawrence Kremer, George Martinez, George Ball, Gary Forbes, John Holland and CDR. NCI Building Systems Inc. (NCI) is listed as a nominal defendant.

“The plaintiff owns common stock in NCI, a publicly traded Delaware corporation,” a portion of the decision reads, adding, “The plaintiff alleges that the private equity firm known as CDR controls NCI, citing indicia that include CDR’s control over 34.8% of its voting power, the presence of four CDR insiders on the NCI’s 12-member board of directors (the board), relationships of varying significance with another four directors, and a stockholders agreement that gives CDR contractual veto rights.”

According to court documents, NCI acquired Ply Gem Parent LLC (New Ply Gem) in July 2018. The acquisition was structured as “a direct merger of Ply Gem with and into NCI.” As a result, the equity interests in New Ply Gem were converted into shares, court documents explain, adding that shares were to be split equally between the former owners of the two pre-transaction entities. Voigt (the plaintiff) is challenging the merger transaction.

“Just three months before the challenged transaction, CDR created New Ply Gem by completing a leveraged buyout of its publicly traded predecessor, Ply Gem Holdings, Inc. (Old Ply Gem), then combining Old Ply Gem with a portfolio company owned by Golden Gate Capital (the precedent transaction). After the precedent transaction, CDR owned 70% of New Ply Gem and had the right to appoint a majority of its directors,” a portion of the court’s decision reads. Voigt alleges that the transaction was not entirely fair, because when negotiating the deal, “CDR insisted on terms that valued the equity of New Ply Gem at nearly $1.236 billion.” Three months prior, when completing the precedent transaction, CDR and Golden Gate agreed that the value of New Ply Gem’s equity was $638 million, according to the court’s decision.

“As the plaintiff sees it, the NCI paid CDR and Golden Gate a 94% premium, amounting to a $600 million windfall, for their three-month investment,” a portion of the decision reads.

According to court documents, the three counts that were dismissed include:

• Count I asserts a claim for breach of fiduciary duty against CDR in its capacity as the NCI’s controlling stockholder;
• Count II asserts a claim for breach of fiduciary duty against the “director defendants.” The complaint elsewhere defines this term to include Metcalf, Riley, Sleeper, VanArsdale, Zrebiec, Affeldt, Berges, Kremer, Martinez, Ball, Forbes, and Holland; and
• Count III asserts a claim for unjust enrichment against CDR.

Look to a future edition for continued coverage of this suit.