Legal News

Bear Shareholder Litigation: Let the Games Begin!

By Dan Slater

If JP Morgan’s quintupling of its original $2 a share bid to buy Bear Stearns was intended to placate investors and stave off shareholder lawsuits, JPM got an early sign yesterday that the move didn’t work. Two Michigan pension funds — the Wayne County Employee’s Retirement System and Detroit’s Police and Fire Retirement System — have filed a TRO in Delaware state chancery court seeking to block the pending sale of 95 million new voting shares to JPM, and a lawsuit against Bear, its board of directors and JPM alleging that Bear’s board breached its fiduciary duty by accepting a low-ball bid. Here are stories from Bloomberg and the WSJ. Click here for the TRO and here for the complaint — both filed by lawyers from Chimicles & Tikellis.

The shareholders are alleging that the stock sale “is designed primarily, if not solely, to eviscerate the voting franchise” of the shareholders, that the “combination of onerous deal protections in the merger agreement and related agreements effectively preclude a topping bid’” and and that the companies “devised an improper plan to buy the necessary votes.”

Over at the Conglomerate Blog, Professor Gordon Smith compares the facts of the case to the Omnicare precedent, and concludes that Bear shareholders might come up short. In Omnicare, the Delaware Supreme Court invalidated a merger agreement because the acquiring company had struck agreements with the two controlling shareholders of the targets, in which the shareholders agreed to vote their shares in favor of the challenged transaction. In addition, the controlling shareholders agreed that they would present the transaction for a shareholder vote, even if the target board received a better offer. The court held that the agreements were inconsistent with the target directors’ fiduciary duties.

Is the Bear situation like Omnicare? Not quite, writes Professor Smith. “Which board of directors was more faithful to its obligations: the board that allowed existing majority shareholders to commit themselves to a transaction that they viewed as favorable (Omnicare), or the board that is planning to issue stock to the acquiring company to make approval of the transaction over the objections of the existing shareholders much more likely (Bear Stearns)?” Smith asks, and answers: “the lawyers have structured the Bear Stearns-JP Morgan transaction in a manner that elides the obvious pitfalls in Omnicare. That is, it is not technically a fait accompli, and the Acquisition Agreement contains a fiduciary out.”

In other news from the Bear litigation fiesta, the Greek Orthodox Archdiocese Foundation sued Bear yesterday in New York district court claiming that misleading statements made on March 12 by Bear CEO Alan Schwartz artificially inflated its share price. Here’s a Bloomberg report.

Full post as published by Law Blog - WSJ.com on March 26, 2008 (boomark / email).