Newcastle Files Lawsuit against Whitehall Jewellers

In the latest twist in the saga of the ailing Whitehall Jewellers, Inc., Newcastle Partners, L.P. announced on Thursday that it had filed a lawsuit against Whitehall, Prentice Capital Management, L.P., and Holtzman Opportunity Fund, L.P., seeking, among other things, injunctive relief arising from certain securities law violations.

The announcement came on the same day that Newcastle upped its offer for all outstanding Whitehall shares from $1.20 per share to $1.50 per share. Newcastle already holds a 14.46 percent stake in the jeweler.

The lawsuit alleges that Whitehall, Prentice and Holtzman have engaged in a series of violations of the federal securities laws, including violations of tender offer rules and regulations.  Among other things, the complaint alleges that Prentice and Holtzman have been secretly acquiring a control block of shares, without disclosing their plans and purchases. It claims that Prentice and Holtzman have engaged in a de facto tender offer, under which a select group of shareholders are being offered a substantial premium to market prices as a coercive device to pressure them to tendering their shares. It also accuses Whitehall of violating federal proxy laws by failing to disclose the activities of Prentice and Holtzman in support of the proposals submitted by Whitehall management for consideration at the special meeting of shareholders.

The complaint further alleges that Whitehall has violated Delaware corporate law by favoring Prentice and Holtzman in the “auction” now underway for control of Whitehall. It accuses the board of Whitehall of invoking a "poison pill" against Newcastle, while waiving this protective device against Prentice.

Mark Schwarz, the managing member of Newcastle Partners, stated: "We believe that the Newcastle tender offer provides Whitehall's shareholders with a clearly superior alternative to the Prentice transaction. Under Newcastle's offer Whitehall shareholders would receive $1.50 per share, a significant premium to market. It is clear to us that shareholders could suffer badly if the Prentice financing is approved in this manipulative manner. Whitehall shareholders will lose the opportunity to accept a premium offer and be left with a pink sheet investment of questionable value with no significant protections from majority holder Prentice whose economic interests have an inherent conflict with all minority investors. Newcastle was compelled to file its complaint to prevent further securities laws violations and to preserve the right of all of Whitehall's shareholders to fairly choose between the Newcastle offer or the other alternative."

In late December Whitehall’s board rejected Newcastle's previous bid, recommending an offer by Prentice Capital Management. On October 4, the company announced its entry into agreements with funds managed by Prentice and Holtzman Opportunity Fund, L.P.