Claiming that the deal “significantly undervalues” Ruby Tuesday, a proposed class of Ruby Tuesday Inc. shareholders filed suit against the company and its impending sale in Tennessee federal court last week. The stockholder class action, brought by lead plaintiff Larry Patterson, seeks to halt private equity group NRD Capital’s October-announced acquisition of the struggling casual dining chain, which has posted a net loss for nine consecutive quarters.

NRD Capital is poised to pay $2.40 per share, a 37 percent premium over Ruby Tuesday’s closing share price on March 13, the day before the company said it would explore strategic alternatives.

The class action claims that Ruby Tuesday and its directors violated the Securities Exchange Act of 1934. An inadequate and unfair negotiating process breached the organization’s fiduciary duties, it said, which includes board chairman Stephen Sandove and president and CEO James Hyatt.

According to Law360, Patterson said: “Defendants breached their fiduciary duties to the company’s stockholders by agreeing to the proposed acquisition which undervalues Ruby Tuesday and is the result of a flawed sales process. Post-closure, Ruby Tuesday’s stockholders will be frozen out of seeing the return on their investment of any and all future profitability of Ruby Tuesday.”

The suit also names NRD Capital affiliates RTI Holding Co. LLC and RTI Merger Sub Inc. It hopes to stop a stockholder vote scheduled for the first quarter of 2018, Law360 added.

“Notably, as evidenced by the proxy, the sales process leading up to the proposed acquisition was rife with inadequacies, including no less than two activist stockholders urging the board to sell the company with at least one publicly threatening a proxy fight,” the suit said.

NRD Capital is a franchisee-sponsored and managed equity investment fund, and has a majority stake in 90-unit Fuzzy’s Taco Shop and owns Frisch’s Restaurants Inc. The deal values Ruby Tuesday at $335 million, including debt.

The securities litigation law firm of Brower Piven notified investors that a class action lawsuit was commenced in the United States District Court for the Eastern District of Tennessee on behalf of all common stockholders of Ruby Tuesday, Inc. opposing the proposed acquisition of Ruby Tuesday by NRD Capital, it said in a press release.

“The complaint seeks relief on behalf of the named plaintiff and all other similarly situated shareholders of Ruby Tuesday and asserts that the company’s board of directors breached their fiduciary duties by failing to maximize shareholder value and/or protect the interests of Ruby Tuesday shareholders,” the release said.

Ruby Tuesday had reported revenue decline year-over-year for the past five. It closed more than 100 restaurants over the past year. As of September 5, Ruby Tuesday had 599 locations in 41 states and 14 countries. Franchisees operated 58 of those units. That number shifted to 543 restaurants and 62 franchised locations as of June 6.

For fiscal 2017, Ruby Tuesday’s total revenue dropped 12.8 percent to $952 million. Same-store sales decreased 1.6 percent in the fourth quarter compared to 3.7 percent in Q4 2016. They declined 3.1 percent for fiscal 2017.

However, the suit claims that the deal doesn’t account for Ruby Tuesday’s strong market position, “extraordinary growth,” and positive future outlook, pointing to the fact Ruby Tuesday’s stock has reached as high as $3.68 in the past year.

It also says that despite and “upward trajectory and improvements made in line with the ‘Plan to Win’ strategy the defendants pushed Ruby Tuesday into the deal and deprived the plaintiff and other public stockholders from reaping the benefits of Ruby Tuesday’s present and future success.

“Ruby Tuesday’s stock had shown [and continues to show] sustained solid financial performance, including in the time leading up to the entry into the original merger agreement. For example, in on an October 16, 2017, press release announcing the company’s financial results for Q1 of the 2018 fiscal year [which was released concurrently with the press release announcing the proposed acquisition], the company reported that such positive results as an increase in adjusted EBITDA from $4.9 million to $13.3 million year-on-year,” the suit said. “These positive financial results are not an anomaly, but rather, are indicative of a trend of continued financial success by Ruby Tuesday. Looking further back, one can see evidence for this typical success. For example, in an August 21, 2017 press release announcing the company’s Q4 fiscal 2017 financial results, Ruby Tuesday reported such highlights as a Q4 net loss of $8.7 million compared to a net loss of $27.6 million year-on-year, showing significant improvement in implementing the company’s ‘Plan to Win’ to ‘address sales and operation challenges, improve financial profitability, and thereby enhance long-term value for shareholders.’”

Read more about Ruby Tuesday’s Plan to Win strategy here.

Patterson alleges that Hyatt, who served as the CEO of Church’s Chicken from 2011–2016 and was previously the president and CEO of Cosí before taking the Ruby Tuesday post in April, could earn about $1.18 million from an exchange of his currently owned and illiquid Ruby Tuesday stock, plus $850,000 in cash, Law360 pointed out.

The lawsuit said it has “strong evidence” that the deal could be tainted by the self-interest of company insiders, including Ruby Tuesday management, Law360 reported.

“Certain insiders stand to receive massive financial benefits as a result of the proposed acquisition as the large, illiquid chunks of shares currently held by certain defendants and company insiders will be exchanged for cash,” Patterson said.

“… pursuant to the terms of the merger agreement, upon the consummation of the proposed acquisition, company board members and executive officers will be able to exchange large, illiquid blocks of company stock for massive payouts, in addition to receiving cash in exchange for certain outstanding and unvested options and/or other types of restricted stock units,” the suit said. “Moreover, certain directors and other insiders will also be the recipients of lucrative change-incontrol agreements, triggered upon the termination of their employment as a consequence of the consummation of the proposed acquisition. Such large paydays upon the consummation of the proposed acquisition, have clearly tainted the motivations of the board in approving it.”

Patterson also claimed that the agreement has provisions that would unduly benefit NRD Capital by making an alternative transaction either prohibitively expensive or otherwise impossible. One factor: a termination fee provision that requires Ruby Tuesday to pay up to $7.5 million to NRD Capital if the deal is terminated under certain circumstances.

The suit claims that Ruby Tuesday’s board met with legal and financial advisors on February 13 to discuss the company’s valuation and possible future strategy. While other possible strategic alternatives were discussed in addition to discussions with NRD Capital, “no third-party outreach was contemplated or initiated at this time.”