Mike Ashley, the billionaire founder of Sports Direct, has stepped up threats to take legal action against individual directors at Debenhams as the prospect of him participating in a rescue of the struggling department store group recedes.
A letter dated April 4 from Sports Direct to the Debenhams board, seen by the Financial Times, repeated the view that “the directors have not acted in the best interests of the company or to promote its success” and alleged they could be in breach of various duties as outlined in the UK’s Companies Act.
It requested that Debenhams provide documentation relating to refinancing proposals including minutes of meetings that covered Sports Direct’s various offers of financial assistance.
These would “allow Sports Direct proper opportunity to assess . . . whether there are good grounds for bringing a derivative claim against some or all of the members (or former members) of the board, and on what grounds,” the letter said.
Mr Ashley and his team have engaged in increasingly hostile communication with Debenhams as the department store group has tried to push through a rescue refinancing that Sports Direct, its largest shareholder, opposes.
He has on several occasions warned Debenhams’ directors that he could pursue legal action against them for breaches of fiduciary duty.
Last month, Sports Direct’s deputy finance director Chris Wootton pledged to “leave no stone unturned in pursuing those responsible for this long-planned theft”, a reference to the financial restructuring that will most likely lead to Debenhams’ lenders taking control of the group via a “pre-pack” administration.
The talk of legal action comes as Mr Ashley’s capacity to influence events at Debenhams wanes. The company has set a deadline of April 8 for Sports Direct to state that it will either launch a takeover bid or confirm that it will underwrite a rights issue.
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Sports Direct has protested that it has not been provided with sufficient financial information or time, and said the urgency was at odds with statements earlier in the year that Debenhams would need to refinance within 12 months.
“I would give him a 1 per cent chance of success [of preventing a pre-pack administration],” said one restructuring adviser. “The bar has been set so high by the creditors.”
Mr Ashley’s problem is that a full takeover bid would trigger change of control clauses in Debenhams’ bank and bond debt, potentially requiring him to refinance more than £500m of borrowings — equivalent to a doubling of Sports Direct’s existing net debt.
The other alternative proposed by Debenhams — Sports Direct underwriting a £200m rights issue — could lead to an even more expensive outcome, depending on how many other investors take up their shares. A fundraising at Debenhams’ current share price of 2p would require the issue of 10bn new shares. In that scenario, just maintaining its equity stake at the current 29 per cent level would cost Sports Direct almost as much as buying the remainder of the existing shares at 5p each, as it indicated it might do.
Debenhams’ share price, which had spiked as high as 5p per share after Sports Direct indicated that it was considering a bid for the remaining equity, is now back at 2p. Sports Direct’s own share price is little changed.
The department store chain previously stated that it would not provide a response to an earlier request for information about the proposed refinancing from Sports Direct “if it is framed in the context of contemplated litigation”. Debenhams declined to comment on the latest correspondence.
