PetSmart / Chewy — 2018 Spin-Out

PetSmart distributed approximately 16.5% of its equity in Chewy, Inc. — acquired in 2017 with proceeds that included term-loan financing — to its parent in 2018, then transferred a further interest in Chewy to a newly-designated Unrestricted Subsidiary. The mechanic relied on §7.03 Investment capacity, which the agreement expressed without a cap.

First-lien lenders sued, arguing that the transaction violated the agreement's spirit if not its letter, that Chewy was the principal economic asset of the post-acquisition borrower group, and that distributing it stripped the collateral package. The court declined to reverse the transaction, holding that the agreement's plain language permitted what the borrower had done. Subsequent appellate proceedings produced split outcomes that contributed to the broader 'is uncapped really uncapped?' debate now reflected in the Serta-related circuit split.

The transaction is now a standard data point cited alongside J.Crew for the proposition that absent specific carve-outs, sponsor flexibility under standard sponsor-friendly drafting is very wide.