In October, Hudson's Bay Company sold its Lord and Taylor's flagship building to WeWork Property Advisors and equity to Rhone Capital in a creative deal set to give the company much needed liquidity.
Now, activist fund Land & Buildings Investment Management is trying to stop at least part the transaction.
Earlier this month, Land & Buildings applied with the Ontario Securities Commission to request a review of the Rhone sale, according to documents seen by CNBC. The fund is asking the commission to review the conditional approval granted by Toronto Stock Exchange (TSX) for the deal.
Unless it grants of a stay of TSX's approval, it will request an urgent hearing.
Hudson's Bay said in a statement on Wednesday the company "believes that there is no merit to this appeal, particularly in light of the fact that written consent in support of the equity investment, from sophisticated long-term shareholders representing well over 50 percent of HBC's outstanding common shares."
Land & Buildings previously said, the fund "believes a majority of the non-insider shareholders should have a chance to vote on the material and dilutive Rhone transaction, and should have the full information."
As structured, the deal sought to sell the Lord & Taylor Fifth Avenue building for $850 million (1.075 billion Canadian dollars) to WeWork Property Advisors, while a minority stake of preferred stock would be sold to Rhone Capital for $500 million (CA$632 million). The deal is set to close as early as Wednesday.
At issue for Land & Buildings is the equity component of the deal. The activist fund argues it was dilutive and the company did not get sufficient shareholder approval. It says the company did not create an independent board committee to evaluate the offer.
The minority stake, if held to maturity, will ultimately represent nearly a third of the company.
The preferred stock was sold at roughly the same price of its common stock. Because preferred stock has special protections compared to common stock, it usually fetches a 30 percent premium, though that premium can vary. It also is requiring Rhone to vote with certain board members for a period of time, says the fund.
Hudson's Bay is seeking to have the TSX decision confirmed and the appeal dismissed on an expedited basis. It is proceeding with filling out regulatory requirements to close the Rhone deal.
Regardless of outcome, the new legal tussle highlights the uncertainty around the way in which Hudson's Bay has put together a retail empire that includes Lord and Taylor, Gilt and Germany's Galeria Kaufhof department store chain.