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As securities class actions wane, the mergers and acquisitions boom is fueling another type of shareholder class action: court fights that challenge the terms of a merger that would transform a public company into a private one. The Delaware Court of Chancery is clogged with scores of shareholder class actions brought against companies entertaining public-to-private acquisition offers, but cases are also scattered in state courts across the nation, including those in California, Florida, New York and Texas. Private equity-funded transactions and other going-private deals are often inked at an unfair price, while company executives cut deals that give them increased compensation and even equity in the private company, said plaintiffs’ lawyer Gerald Silk at New York-based Bernstein Litowitz Berger & Grossmann. “It’s a reality that shareholders sometimes have to resort to litigation to be treated fairly,” he said. Silk’s firm represents institutional investors in shareholder litigation. One of Silk’s current shareholder cases is against cable television provider Cablevision Systems Corp. of Bethpage, N.Y., and its controlling shareholders, the Dolan family. In re Cablevision Shareholders Litigation, No. 06-017002 (Nassau Co., N.Y., Sup. Ct.). John Hall of New York’s Debevoise & Plimpton, who represents the Dolan family, declined to comment on the suit. Following the market? Defense lawyer James Edward Maloney of Baker Botts in Houston contends that plaintiffs’ lawyers are simply following the market by challenging public-to-private deals of all types, including private equity-funded deals or a proposed buyout of minority shareholders by majority shareholders. “There’s a lot of activity in the market to take companies private, so there’s going to be more litigation,” Maloney said. “Plaintiffs’ lawyers have to have something to sue about. As long as there are deals, there are going to be lawsuits.” Successful suits have postponed deals and forced companies to make additional disclosures about the proposed transactions. Also, the litigation has forced some companies to reopen the process to so-called “strategic buyers” � who are generally industry competitors � to vie with financial buyers such as private-equity firms. Settlements in other cases have bumped up the buyout price, increasing the dollar-per-share take for stockholders in a buyout once a deal closes, or awarded damages to shareholders after the deal closed. Brian Long and his partner, Seth Rigrodsky of Wilmington, Del.-based Rigrodsky & Long, are handling 40 such cases across the nation. Most of the cases, which are in Delaware, Florida, New York and Texas, have been filed since Long and his partner split off from another firm to form a corporate litigation boutique last August. “With the spate of private-equity deals, there has been an increase recently in these cases,” Long said. “There was a lull, but in the last year, things have taken off.” The abundance of private-equity money increases deal opportunities for public companies, while the costs of complying with the Sarbanes-Oxley Act of 2002 boosts the incentive to go private, particularly for smaller and midsize public companies, lawyers agree. Plaintiffs’ lawyers also point to deal sweeteners that enhance executives’ compensation, the desire to duck public scrutiny of compensation packages and even the drive to preserve compensation threatened by stock-options backdating investigations. The complaints against companies and directors typically allege breach of fiduciary duty violations for putting a proposed acquisition on the table that inadequately compensates shareholders and for inadequate disclosures to shareholders about the proposed deal. Some lawsuits also include claims against private-equity sponsors for aiding and abetting the companies and boards. One of Long’s current cases involves a proposed acquisition agreement between National Home Health Care Corp. of Scarsdale, N.Y., which wants to be acquired by a consortium led by New York hedge fund Angelo, Gordon & Co. and go private. Helaba Invest Kapitalanlagegesellschaft mbH v. Frederick H. Fialkow, No. 2683-N (New Castle Co., Del., Ch.). The lawsuit alleges that the terms of the deal unfairly benefit specific company directors and executives, including those who are majority shareholders, at the expense of minority shareholders. The lawsuit also accuses the company of locking up the deal with Angelo Gordon by not shopping the company to other potential buyers. The plaintiff contends that National Home also discouraged other bidders through an “atypically high” breakup or termination fee, which the target company pays to the first potential acquirer if another buyer tops a binding merger agreement. Noting a strategic buyer’s interest after National Home announced the Angelo Gordon deal, the plaintiff believes National Home could get a better price if the board shopped around. “Our goal is to stop the merger and open up the process,” Long said. National Home defense lawyer Gregory V. Varallo of Wilmington-based Richards, Layton & Finger said the breakup fee was amended on March 30 and it’s “well within the range of case law guidance.” Varallo also said National Home’s board rejected the strategic buyer’s deal because the company making the offer didn’t have solid bank financing to pay for the deal. “I can offer to buy your house for $10 million and it may be a good offer but if I’m not worth $10 million it’s not much of an offer,” Varallo said. A preliminary injunction hearing is scheduled for April 23. Cost of doing business Most cases are settled, even before the temporary injunction hearing, to keep the deal moving forward, Maloney said. “It has become a cost of doing business,” Maloney said. But plaintiffs’ lawyers point to settlements that change the buyout price as evidence that shareholders were shortchanged in company negotiations of deals that take a company private. Plaintiffs’ lawyer Randall Pulliam of Baron & Budd in Dallas cited a case in a Texas state court against the convenience store chain 7-Eleven Inc. The litigation culminated in a settlement that sweetened the tender offer by $5 per share to $37.50 when Japan-based Seven & I Holdings Co. Inc. bought the company in late 2005. In re 7-Eleven Inc. Shareholders Litigation, No. 0508944-M (Dallas Co., Texas, Dist. Ct.). All too often, executives’ and majority shareholders’ interests conflict with shareholder interests in deals that take a company private, Pulliam said. “They’re not trying to maximize shareholder value in many instances,” Pulliam said. “They’re getting something themselves from the company doing the acquiring and they have an incentive to leave money on the table.” Neither 7-Eleven nor the law firms that represented the company in the case, Shearman & Sterling and Weil, Gotshal & Manges, both of New York, responded to calls.

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