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AmeriPath chief executive officer James New’s plan to sell the publicly traded medical diagnostic laboratory services company to New York-based private investment firm Welsh Carson Anderson & Stowe for $629 million is facing opposition from individual and institutional shareholders. On Dec. 23, 2002, and Jan. 2, shareholders of New’s Riviera Beach, Fla., company filed two separate class action lawsuits against the company and its individual directors in Palm Beach Circuit Court alleging breach of fiduciary duty. The plaintiffs argue the deal violates Florida law that requires corporate directors to maximize shareholder value in transactions that lead to change of corporate control. Instead, they claim, AmeriPath’s board has acted at shareholders’ expense to favor its own and Welsh Carson’s interests. New’s plan is also under attack by Millbrook Capital Management, a politically connected, New York-based investment firm that is one of AmeriPath’s top 10 shareholders, with a 3.8 percent stake. Millbrook vice president Jerome Lande told the Miami Daily Business Review that his company is acting independently of the shareholder lawsuits. Yet all three groups’ arguments against the sale are nearly identical: that because of AmeriPath’s strong financial prospects the acquisition price is too low and that the deal is overly advantageous to New. Lande said Millbrook is preparing for a proxy fight, “actively seeking to have other AmeriPath shareholders vote against the sale.” No date has yet been set for the shareholder vote. The sale agreement was announced Dec. 9. Under the deal, Welsh Carson, which owns a 4.9 percent stake in AmeriPath, would acquire the remaining shares for $21.25 per share in cash, a total of $629 million. The investment firm would also assume $107 million in AmeriPath debt and $36 million in merger-related fees and expenses. On completion of the sale, now targeted for April 30, AmeriPath would become a privately held subsidiary of Welsh Carson. All but one of seven current senior AmeriPath managers would continue in their present posts. As part of the deal, chief executive New would get an option to buy 5 percent of the newly private AmeriPath’s shares at $1 a share, half in graduated steps and the remainder if he serves for seven years after completion of the merger. AmeriPath is a leading U.S. provider of cancer and other medical diagnostic services, with annual revenues of $419 million in 2001. The company employs about 400 physicians working in laboratories in more than 200 hospitals and at 40 outpatient clinics across the country. Welsh Carson, with more than $12 billion in assets, specializes in investments in information services, telecommunications and health care. Attorneys Paul Geller and Jonathan Stein, partners at Cauley Geller Bowman & Coates in Boca Raton, Fla., filed the December class action. The lead plaintiff is Ellen Portman, an AmeriPath shareholder who lives in Missouri. Scott Shepherd, a partner at Media, Pa.-based Shepherd Finkelman Miller & Shah, filed the January class action on behalf of lead plaintiff Francis Reardon, who lives in Massachusetts. “We feel the arrangement is both substantively unfair and procedurally unfair,” Geller said. He and Shepherd, a former law partner of Geller’s in Boca Raton, plan to consolidate the two class actions. The plaintiffs are asking for an injunction blocking the deal, and for costs and damages. In its Securities and Exchange Commission filings, AmeriPath executives justified the sale on the grounds that Welsh Carson’s offer per share was 29 percent higher than AmeriPath’s then-current share price. The value of the shares had dropped precipitiously in July 2002 following the company’s announcement that new Medicare payment rules for lab services and rising premiums for medical malpractice insurance had dimmed the company’s future earnings prospects. AmeriPath and Welsh Carson representatives declined to comment for this article. In a Dec. 26, 2002, news release, however, New said the class action complaint “rehashes previous incorrect comments” and “misstates other facts.” New predicted the lawsuit would not stop the sale. But the AmeriPath buyout proposal is likely to draw “special scrutiny” from the judge in the shareholders’ suit, according to Jonathan Cole, a partner and former head of the private equity practice group in the West Palm Beach, Fla., office of Edwards & Angell. Because there is little Florida case law on corporate buyouts, the judge may face a steep learning curve, Cole said, with a reliance on the corporate law of Delaware, where many U.S. companies are incorporated. “The key is to get the proposal enjoined,” he said. “Once the deal is completed it’s hard to disentangle it.” AmeriPath shares were trading for $16.45 per share just prior to the deal and jumped to $21 after the sale was announced. During the past year, shares traded as low as $12 a share and as high as $32. At the end of 2002, the shares traded at $21.50 and are currently fluctuating within pennies of that figure. In October 2001, the company completed an offering of 4.1 million shares at $26 per share. New, who joined AmeriPath in 1996, has led the company through major growth. When it first went public in 1997, it reported annual revenues of $108.4 million and net profits of $5.8 million. In 2001, the latest full year for which figures are available, AmeriPath reported $418.7 million in revenues and $23.3 million in profits. Millbrook accepts as accurate AmeriPath’s estimate of 2003 net income of $55 million, 10 percent growth over 2002′s expected figures. But Millbrook predicts AmeriPath’s 2004 earnings will surge by another 30 percent to 40 percent in 2004. “You have sold 2004′s robust growth at 2003′s weak prices!” Millbrook president Clay Lifflander wrote to the AmeriPath board’s “special committee” that recommended the deal. The class action plaintiffs and Millbrook also object to the structure and timing of the sale, which according to the class action complaints, “freeze out” shareholders and “place an artificial lid” on the company’s market price. “They set it up so that the announcement came before fourth-quarter results were out,” plaintiff attorney Geller said. “Our clients lacked information to evaluate the offer. We believe current shareholders will be denied the chance to benefit from the company’s future growth.” The sale agreement includes a 12-day window that ended Dec. 21, 2002, for AmeriPath to consider offers from other corporate suitors. In his Dec. 10 letter to the special committee, Lifflander called the 12 days “unacceptably short.” Lifflander and the class-action plaintiffs cite Quest Diagnotics Inc. and Laboratory Corp. of America as potential bidders that were shut out by the deal’s timing. Both companies were engaged in the completion of other acquisitions when the AmeriPath sale was arranged. Lifflander also alleges possible conflicts of interest on the part of investment banker Salomon Smith Barney, AmeriPath’s chief adviser on the proposed sale. In his letter to the AmeriPath special committee, he wrote that Salomon handled AmeriPath’s 1997 initial public offering, served as lead underwriter on the October 2001 secondary issue and has published research on the company since the sale announcement, labeling AmeriPath stock as “high risk.” “We are amazed” that AmeriPath would rely on them, Lifflander wrote. “Clearly [Salomon] is management’s investment banker and cannot be relied on to shop AmeriPath to other, likely higher bidders.” “We’re not against going private in a buyout,” Lande said, “but this one’s got my goat. This deal reflects Mr. New’s desire to buy the company [stock] on the cheap. We’re going to the mat on this one.”

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