More Cos Find That Bad Post-Merger News Can Land Them In Ct
Dow Jones Newswires -- October 19, 1998
By Michael Rapoport
NEW YORK (Dow Jones)--Imagine getting married to someone who throws a lot of money at you - and then finding out a few weeks later that he or she isn't as rich as you thought.
No, it's not the plot of the latest Danielle Steel novel. It's what ex-shareholders of some recently acquired or merged companies are facing with regard to their new partners. Those partners announced bad news about their business shortly after their transaction was safely approved and completed - a move that irks some investors who think, at the least, that the timing of the news was a bit curious.
Now some of those holders are unhappy enough to take their new partners to court. In at least three recent cases, including the controversy over BankAmerica Corp.'s (BAC) losses, they have sued the company that bought or merged with them. Some of them allege bad news was held back to get shareholders to approve the merger; all say the news should have been disclosed before the transaction was a done deal.
"I don't know what would have happened if they (disclosed the news) earlier, but I think shareholders on both sides were entitled to know it earlier," said Mark Gardy, a New York plaintiffs' attorney whose firm, Abbey Gardy & Squitieri, has filed such lawsuits against two companies.
These kinds of suits aren't new. But attorneys said conditions are ripe for more of them to start popping up. With a wave of big mergers earlier this year, followed by an economic downturn that has resulted in more companies reporting unpleasant surprises, it is only natural that some of that bad news is going to hit a company right after it has been involved in a merger, they said.
"I think it's the confluence of the two events, that just as a statistical event, it's more likely," said Joseph A. Grundfest, a Stanford University law professor who tracks shareholder lawsuits.
"I think mergers that are sort of on the end in a big bull market get swept up in this sort of situation," added Rick Roberts, a former Securities and Exchange Commission member who is an attorney with Thelen Reid & Priest in Washington.
BankAmerica has been hit with lawsuits, some brought by former NationsBank Corp. shareholders, alleging that it should have disclosed trading losses from its alliance with D.E. Shaw & Co. before BankAmerica and NationsBank completed their $43 billion merger last month. Last week, BankAmerica took a $372 million charge against third-quarter earnings as a result of the losses.
In addition, former DSC Communications Inc. shareholders sued Alcatel S.A. (ALA) after Alcatel said, a week after the two companies closed their merger, that its 1998 earnings would be below expectations. And former Bay Networks Inc. holders allege Northern Telecom Ltd. (NT) misled them by not announcing layoffs and lower-than-expected revenue growth until after the Nortel-Bay merger was completed.
A BankAmerica spokesman noted that the bank had said before the NationsBank merger closed that it had suffered quarter-to-date trading losses of $330 million, although it didn't say at the time that the
losses were because of Shaw.
"These lawsuits seem to be automatically filed with very little thought or analysis about the actual facts," the spokesman said.
A Northern Telecom spokesman said the allegations are "without merit and we are going to defend ourselves vigorously." An Alcatel spokesman couldn't immediately be reached for comment.
Similar lawsuits have been filed before. Most notably before the latest wave, ex-shareholders of HFS Inc., one of the two companies that merged last December to form Cendant Corp. (CD), have sued Cendant over accounting irregularities at the company's other component, CUC International Inc.
"Litigation of that sort has been going on for years," said Grundfest, the Stanford professor.
But the events of this year may make such suits more likely, because the huge merger volume of the first part of 1998 has been followed by an equally sizable wave of negative forecasts about earnings and growth as the economy and the market head south.
According to First Call Corp., 473 companies have made negative preannouncements about their third-quarter earnings so far - up dramatically from 259 in last year's third quarter and nearly equaling the record of 493 in 1998's second quarter, with some time still to go.
"I would expect a lawsuit anytime you have bad earnings that come out right after one of these things," said Larry Soderquist, a Vanderbilt University law professor and an attorney at Tuke Yopp & Sweeney in Nashville. That goes not only for mergers, but for other corporate transactions like stock offerings, he said.
In addition to the allegations that shareholders of acquired companies were misled by the acquirers into approving mergers without knowing about the bad news, the lawsuits allege the shareholders have been hurt in a more fundamental way - they have lost money. Their old shares were exchanged for stock in the acquirer, and BankAmerica, Alcatel and Northern Telecom shares all went down after their bad news was announced.
That concern doesn't apply to holders whose companies are involved in all-cash deals. The situation
is reversed in that case: Shareholders who receive cash in a merger are better off if bad news later
sends the stock down, because they have gotten greater value for their shares.
"They've cashed out, if anything, for more than their shares were worth," said John Olson, a securities attorney with Gibson Dunn & Crutcher in Washington, who is part of the potential class of ex-Bay Networks shareholders who could benefit from the Northern Telecom suit.
Part of the companies' defense to the lawsuits probably will be that they didn't know the bad news was coming before the merger was completed and couldn't have been expected to know. Soderquist said they will "want to show the jury that they did their jobs, that they weren't negligent."
"It's the only defense," added Boris Feldman, an attorney with Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif., who represents companies in shareholder suits.
Roberts, the former SEC commissioner, said the three new cases may also fuel efforts to prod companies into better and prompter financial disclosure. SEC Chairman Arthur Levitt has campaigned for better disclosure by companies, and the sweeping overhaul of securities laws under consideration by the SEC calls for tighter disclosure requirements.
"You do see more aggressive stances in disclosure/nondisclosure than ever before," Roberts said.
-Michael Rapoport, 212-227-2017,
michael.rapoport@cor.dowjones.com |
