Hudson’s Bay Co. Chairman Richard Baker’s plans to take the Canadian retailer private were dealt a setback as a prominent shareholder advisory firm came out against the deal.

Institutional Shareholder Services Inc. urged investors to vote against Baker and his partners’ plans to take the owner of Saks Fifth Avenue private for $1.9 billion. The advisory firm said there was no clear reason offered by the company why shareholders should accept the deal when private equity firm Catalyst Capital Group Inc. has offered a higher price.

“Given that significant defects have been identified with the sale process, shareholders cannot be confident they are receiving maximal available value for their shares,” ISS said in its report.

Gabriel de Alba, Catalyst’s managing director, alleged that a group led by Baker had engaged in an “egregious pattern of conflicts, misrepresentations and self-serving games.” That raises concern about unanswered questions “and what additional actions and agreements remain undisclosed,” de Alba said in a statement Saturday.

Baker and his partners, who collectively own a 57 per cent stake in Hudson’s Bay, reached an agreement to buy the Toronto-based retailer in October for $10.30 a share. The takeover was unanimously supported by the company’s board and is subject to a vote on Dec. 17 that requires the support of most of the minority holders.

Catalyst Capital, which owns a 17.5 per cent stake, opposed the takeover, arguing it undervalued the company. Last month, it put forth a rival $11-a-share proposal, which was rejected by a special committee set up by the board of Hudson’s Bay.

Catalyst will reject “any coercive offer and urges other shareholders to vote
against the arrangement resolution,” de Alba said.

A representative for Hudson’s Bay wasn’t immediately available for comment.

'Only Defect'

Baker and his allies have said they weren’t interested in any transaction that would result in the sale of their interest in Hudson’s Bay. Because the Catalyst offer requires at least three-quarters of the shareholder votes, it can’t be completed given the holdings of Baker and his group, the committee said.

“The only defect identified by the board’s special committee with the company bid has been the opposition to Catalyst’s offer from the continuing shareholders (who are likewise seeking to acquire the company, but at a lower price),” ISS said. “The committee has not questioned the Catalyst proposal’s financing or ability to win regulatory approval.”

Catalyst filed a complaint with regulators over its objections to the deal. Another minority shareholder, Ortelius Advisors, which owns a 0.5% stake in Hudson’s Bay, has launched a separate lawsuit against the company and Baker, accusing them of suppressing the value of the stock to help the bid by Baker’s group.

Significant Hurdle

Still, Catalyst owns about 32 per cent of the minority shareholder votes, posing a significant hurdle to Baker’s group winning support for its plan.

“Although the special committee appears to have restricted its own ability to determine that US$11 is in fact superior to US$10.30 by agreeing to a narrow definition of a ‘superior proposal,’” ISS said, “there is no legitimate rationale from a governance perspective for recommending that shareholders accept $10.30 cash per share in light of what appears to be a legitimate outstanding offer to purchase the company at a higher price.”