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Investors have launched a legal challenge to Comcast Corp.’s $42 billion acquisition of AT&T Broadband, charging that a provision in the deal exempting directors from annual election until 2005 is improper. The lawsuit filed Feb. 15 asserts that Pennsylvania law bars companies from installing an entire board of directors for a three-year term, as Comcast and AT&T proposed in proxy materials filed last week with the Securities and Exchange Commission. Rather, the law says investors must elect directors annually, the suit charges. “The proposal for three-year terms of the proposed AT&T Comcast directors is in direct violation of Pennsylvania statute,” according to the suit, which seeks class action status. James G. Flynn, a partner at Wechsler, Harwood, Halebian & Feffer in New York who represents the investors, said his clients want the companies to drop the three-year delay in electing directors. If they refuse, investors may ask the court to block the merger, Flynn said. “The companies want to insulate themselves from accountability, and we know that an absence of accountability is a formula for disaster,” Flynn said. “This is the most far-reaching entrenchment effort anyone can remember.” Wechsler Harwood filed the suit in New York Supreme Court on behalf of AT&T shareholder Norman Salsitz and Comcast shareholder Michael Grening. The law firm has been lead counsel on numerous class action securities suits, including claims against Columbia/HCA Healthcare Corp. and Oxford Health Plans Inc. Comcast and AT&T officials declined to comment. Last week, a Comcast spokesman said the three-year board term was intended to give the companies a chance to complete their integration. The official also noted that directors would be elected annually starting in 2005. Investors frequently file suits in mergers. Most challenge the adequacy of the compensation or the accuracy of statements by the companies. Few deal so explicitly with corporate governance. Comcast and AT&T filed a preliminary proxy Feb. 11 with the SEC. The companies flagged several corporate governance provisions they said were “atypical” for a large publicly traded company. Besides the three-year initial term for the board, the proxy also disclosed that Chairman Michael Armstrong and CEO Brian L. Roberts effectively could not be removed from their posts prior to the 2005 annual meeting. The companies also said they would not hold annual meetings prior to 2005. After that year, shareholders would elect directors annually. But no one could buy more than 10 percent of AT&T Comcast stock without board approval. These provisions would make it difficult to launch a hostile takeover of the company. Flynn said his clients are upset because Comcast and AT&T want to deprive them of their only means to influence corporate decision-making. “These companies are trying to prevent shareholders for at least three years from exercising their only meaningful power,” he said. “This move says shareholders should not be seen or heard.” The suit was filed in New York, where AT&T is based. But it alleges the merger will violate Pennsylvania law; Comcast is based in Philadelphia, which will be home to the combined company. Flynn said AT&T Comcast would have an “unclassified” board, which means directors are elected all at once. Pennsylvania law requires annual election of unclassified boards, he said. Companies also may adopt a classified board, which means members serve staggered terms lasting as long as four years. But Flynn said the law requires companies with classified board to put a minimum percentage of directors up for election every year. “I am not aware of any state law that allows the canceling of elections for directors for even one year,” Flynn said. The lawsuit must be assigned to a state judge. Flynn said the plaintiffs will seek expedited discovery and relief. The companies have said they expect to close the deal by the end of 2002. Comcast announced Dec. 19 that it had agreed to acquire AT&T Broadband in a transaction valued at the time at $72 billion. The Department of Justice, the Federal Communications Commission and shareholders must still clear the merger. Copyright (c)2002 TDD, LLC. All rights reserved.

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