Bain and KB Toys:

This is rather convoluted but interesting:

The 2000 Sale Of The KB Toys Businesses To Bain Capital

Before 2000, the KB Toys businesses were wholly owned by Big Lots, then
known as Consolidated Stores, Inc. The KB Toys structure at that point consisted
of a holding company called KB Consolidated, which was directly owned by
Consolidated Stores, and various operating companies positioned as subsidiaries of
KB Consolidated.

The sale of KB Consolidated to the defendants took the form of a
complicated multi-step transaction. First, Big Lots formed HCC, to which it
transferred 100% of KB Consolidated’s stock in exchange for all of the stock of
HCC. This left the entire KB Toys structure described above as a subsidiary of
HCC. The defendants created KB Holdings and its wholly owned subsidiary, KB
Acquisition Corporation. The parties then consummated the transaction by
transferring all of the stock of HCC to KB Acquisition for $257.1 million in cash
and a $45 million pay-in-kind note issued by HCC and due in December 2010 (the
“PIK Note”).


At the conclusion of all related transactions, KB Holdings owned HCC,
which held all the stock of KB Consolidated, which, in turn, wholly owned the
various subsidiaries that operated the KB Toys businesses. In essence, the PIK
Note became the obligation of a company (HCC) with no assets other than the
stock of another holding company. From its inception and by its terms, therefore,
the PIK Note was subordinated to the rights and claims of creditors of the
operating companies held by KB Consolidated in any Chapter 11 proceeding.5

2. The 2002 Transaction

On April 23, 2002, KB Toys undertook a series of transactions which
included the redemption and repurchase of shares of the KB Toys businesses, the
restructuring of equity, and the payment of bonuses to more than 50 managers and
senior executives of the KB companies.6 Briefly, KB Toys was able to do this by
causing the operating subsidiaries to raise debt, part of which was paid
immediately to executives as bonuses. The remaining additional funds were paid
upstream to HCC, and then eventually to KB Holdings at the top of the corporate
structure. KB Holdings then used these funds to repurchase 65% of its own
outstanding stock from the Bain defendants, Glazer, Feldman, and other KB
insiders. However the parties characterize these events, the fundamental purpose is
clear–the 2002 transaction constituted a liquidity event which allowed Bain and its
affiliates, as private equity investors, to withdraw certain sums of money from the
KB Toys businesses.

Big Lots had no contractual rights in any capacity to block the 2002
transaction.7 Nonetheless, on April 23, 2002, Feldman wrote to Charles Haubiel,
General Counsel of Big Lots, certifying that following the repurchase agreement
which constituted part of the 2002 transaction KB Holdings would continue to
have a consolidated net worth of “not less than $20,000,000.” The complaint
alleges that the purpose of this certification, although not required for any reason,
was to induce Big Lots to “generally cooperate with and not object to or seek legal
relief with respect to the (2002 transaction).”9

Although it is conceded that KB Toys survived through the entire holiday
season of 2002, and then the entirety of 2003, the complaint alleges that the 2002
transaction led directly to a Chapter 11 bankruptcy filing on January 14, 2004,
some 22 months after the 2002 transaction. As a result of the bankruptcy,11 the
PIK Note became due and payable in the amount of approximately $57 million,
consisting of $45 million in principal plus accrued interest.12


more:

http://courts.delaware.gov/opinions/download.aspx?ID=73930