By Dan Freed From The Street

Big investor threatens lawsuit over $1.4 billion deal linked to Ocwen, Fortress

NEW YORK (The Deal) — Companies linked to mortgage debt collector Ocwen Financial (OCN – Get Report) and asset management giant Fortress Investment Group (FIG – Get Report) may face a legal battle over a $1.4 billion deal reached earlier this year without shareholder approval.

The potential legal threat comes from a major shareholder in Home Loan Servicing Solutions (HLSS) an affiliate of Ocwen, who contends that all of HSSL’s assets were sold to New Residential Investment Corp. (NRZ – Get Report), a Fortress-managed REIT, without shareholders being able to vote on the transaction. This shareholder would only talk on the condition he not be identified.

The shareholder’s possible action comes as several market watchers are expecting litigation over a stock sale by Nationstar Mortgage Holdings (NSM), another Fortress-controlled mortgage company with close ties to New Residential.

Must Read: Nationstar Draws Scrutiny for Stock Sale Before Earnings Miss

At issue in this case is the sale of substantially all the assets of HLSS, a Caymans Islands-based company that had just 14 employees before the deal, to New Residential.

HLSS and New Residential had initially agreed to an outright sale on Feb. 22, but on April 6 they changed the structure of the deal to a sale of substantially all the assets of HLSS. The change was designed to get past large investors who were opposed to the deal, according to a major HLSS institutional shareholder who said he is considering bringing a lawsuit accusing HLSS and its management of breach of fiduciary duty.

The original transaction would have required that a super-majority of HLSS shareholders approve the deal, according to a regulatory filing. However, the way the deal was restructured no longer requires a shareholder vote for the asset sale.

The asset sale valued HLSS at slightly more than $17 per share, roughly where it traded the day before the deal was announced and below the $18.25 price originally agreed upon between the two companies. HLSS had spent much of 2013 and 2014 above $22 while paying a dividend that yielded in the high single digits. Shares of New Residential are up nearly 12% since the deal was announced compared to a gain of roughly 2% for the S&P 500.

The institutional shareholder considering litigation said the asset sale significantly undervalued HLSS, and the company’s management and board should either have let the company remain independent or given more serious consideration to other bidders described in a May 1 proxy.

Ocwen is the only bidder identified out of the five described in the proxy, but according to four people familiar with the deal three of them were Credit Suisse (CS), Apollo Global Management (APO) and Fidelity National Financial (FNF).

Spokesmen for Credit Suisse and Apollo declined to comment. Fidelity National Financial did not respond to a call or an email message. A spokesman for Citigroup, which advised HLSS, declined to comment. An Ocwen spokesman declined to comment. Calls and email messages to executives at Fortress were not returned.

Had HLSS been incorporated in the state of Delaware, as most U.S. companies are, it would have required a shareholder vote on the asset sale. However, because HLSS was based in the Cayman Islands, shareholder approvals weren’t necessary for such transactions.

In an interview, John Van Vlack, CEO of HLSS, acknowledged U.S. companies have different rules. Still, he said, “our analysis was we were a company based in Cayman and we were looking at options given how we were domiciled.”

Van Vlack pointed to disclosures in HLSS’s 2011 registration statement prior to its public listing which notes, among other things, that “the rights of shareholders under Cayman Islands law may differ from the rights of shareholders of companies incorporated in other jurisdictions.”

Nonetheless, Van Vlack disputed the assertion that the deal was switched to an asset sale to avoid a shareholder vote.

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The institutional shareholder said whether or not he brings a lawsuit will depend in large part upon whether he can make a case that HLSS is effectively a U.S. rather than a Cayman Islands company and so was required to receive shareholder approvals for the asset sale.

For more on this story go to: http://www.thestreet.com/story/13170269/1/big-investor-threatens-lawsuit-over-14-billion-deal-linked-to-ocwen-fortress.html