An American private equity suitor for supermarket Morrisons is embroiled in a long-running legal battle over allegations that it ‘asset stripped’ a company and left it ‘on the verge of bankruptcy’.
Clayton Dubilier & Rice is accused of ‘siphoning’ around $575million (£415million) from US water treatment company Culligan in dividends, payments and fees.
More than 70 former business associates and shareholders – including the founder’s grandchildren – allege that CD&R illegally extracted money and left Culligan with ‘massive debts’.
The claims – strongly denied by CD&R – could reignite the debate about private equity ownership after a string of failed high street buyouts including Debenhams and Comet.
CD&R’s interest in Morrisons emerged three weeks ago. Last weekend, a rival private equity-backed group agreed to buy the grocer but CD&R still has time to make a counter offer.
The allegations form part of an ongoing dispute over CD&R’s ownership of Culligan to 2012. Culligan is still operating and has since changed hands. CD&R says the Culligan case – now in the fifth round of a nine-year battle in New York – is ‘thoroughly flawed’ and should be ‘dismissed’.
It insists Culligan was ‘never insolvent’ nor unable to pay bills. It argues the company paid off debt in the years after a $375million dividend in 2007 – including $30million shared proportionally with the claimants.
But it has other less auspicious forays. In 2016, it bought High Ridge Brands, owner of Zest and V05, which filed for bankruptcy protection in 2019.
CD&R bought Culligan in 2004. It ‘repaid itself’ an initial $200million equity stake two years later, then borrowed more than $850million to pay the $375million dividend – ‘almost all’ to CD&R, the papers allege.
CD&R’s ownership of Culligan spanned Bermuda and Cayman Islands tax havens.
The claimants say they accepted dividends in 2007 with assurances Culligan was a ‘strong healthy company’. But they claim a 2012 restructure to cope with unmanageable debts slashed the value of their shares. The claimants say it is ‘illegal’ under New York law to remove funds which leave a company unable to pay its bills.
CD&R said in a statement: ‘The plaintiffs cashed those cheques and pocketed the money.
‘Despite now challenging the dividend, the plaintiffs have never returned their portion of it.
‘When the business was eventually restructured after the financial crisis, the shareholder plaintiffs received equity in the new company.’
CD&R added the claims ‘have no merit and ‘believes the lawsuit will be dismissed’.