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.
Richard Baker, who ran the private equity firm NRDC Equity Partners that bought Hudson's Bay and took it public, has long controlled Hudson's Bay like a private equity owner. That hold gave him flexibility to pursue his splashy acquisitions of Saks and Gilt and ultimately abandon bids for Macy's and Neiman Marcus.
He maintained control through a shareholder base with roughly half inside ownership: Baker and select members of Hudson's Bay's board through L&T B (Cayman), the Abu Dhabi Investment Council and Ontario Teachers' Pension Plan Board.
It was enforced by a voting provision that required Abu Dhabi Investment Council to vote in favor of board nominees select board-members put forth, not uncommon in Canada. As part of the Rhone deal, that voting provision is no longer in place.
To finance the company's deals, the company also behaved largely like a private equity firm, relying on debt and joint ventures with real estate investors.
This model allowed Hudson's Bay to be more aggressive than its peers, but it also left it more vulnerable. Debt and real estate costs can be lethal for a retailer when its sales drop.
Those pains were acknowledged by Baker in a recent interview with CNBC.
"Most important, perhaps, is what this does for HBC's financial condition," Baker said, of the deal.
"This drives in a tremendous amount of cash and allows us to pay down $1.6 billion in debt ... This sets us up to be really strong financially going forward, as we execute what's really a difficult retail environment."
Meanwhile, Austrian investment firm Signa Holding launched a bid for Galeria Kaufhof shortly after the Rhone/WeWork deal was announced. It used the muted shareholder reaction to the transaction as a pressure point, highlighting opportunity its own bid gave for liquidity without shareholder dilution.
Hudson's Bay does not believe Signa's financing is credible. Signa contests those claims.
Selling Kaufhof would also be contrary to the empire that Baker has tried to build, say people familiar with his thinking.