What duties, if any, does a potential acquiror of a company owe to the target's shareholders? Amida Capital Management II LLC posed that question Wednesday by filing suit against Cerberus Capital Management LP in the U.S. Southern District of New York.
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Amida, a New York arbitrageur, claims that it bought $14.4 million worth of stock in United Rentals Inc. in November after Cerberus said it was committed to to the deal. On Nov. 14, the New York PE shop walked from the deal, causing URI stock to plummet from $34.01 to $23.50, meaning that the value of Amida's investment fell by about $4.5 million. Delaware Chancellor William B. Chandler III found after a two-day trial that the merger agreement governing the deal gave Cerberus the right to walk on payment of a $100 million breakup fee, an option that Cerberus exercised. Amida had sold most of its URI stake by March 31, according to filings it made with the U.S. Securities and Exchange Commission.
Amida faces an uphill battle under the federal securities laws, which generally don't impose any duty of disclosure or truth-telling on defendants absent a fiduciary duty to or trade with the plaintiff.
Amida's lawsuit is reminiscent of that filed by shareholders of IBP Foods Inc. against Tyson Foods Inc. after that deal closed in 2001. Tyson had agreed to buy IBP in early 2001 but walked from the deal in March, alleging that an earnings restatement by IBP constituted a material adverse effect under the parties' merger agreement that allowed Tyson to walk from the deal. Delaware Vice Chancellor Leo E. Strine Jr. ruled otherwise and forced Tyson to close the deal. During a two-week trial in the case, IBP's lawyers at Wachtell, Lipton, Rosen & Katz were able to paint an unfavorable picture of the Tyson executives' conduct in deciding to walk from the deal. (Two of those lawyers, Mark Wolinsky and Peter Hein, are representing Hexion Specialty Chemicals Inc. in its attempt to get out of its agreement to buy Huntsman Corp., a suit filed in Chancery Wednesday.) In essence, Tyson seemed concerned about the demand for beef in the wake of a mad cow disease scare and was looking for a way out of the deal.
But despite that scenario and damaging testimony and e-mails from Tyson executives, IBP shareholders failed in their claim that Tyson had committed securities fraud in walking from the deal. Though the shareholders survived a motion to dismiss, they lost in summary judgment at both the U.S. District Court and the 3rd Circuit.
That outcome suggests Amida will have a hard time winning its case. Cerberus won the Delaware Court of Chancery case that URI brought in an attempt to force Cerberus to close the deal, and neither the discovery in the case nor the two days of trial generated the kind of evidence unflattering to the prospective buyer that the Tyson case did. Furthermore, Cerberus had the contractual right to walk from the URI deal -- an issue at the heart of the Delaware litigation. Amida bought its URI stock knowing full well that Cerberus thought it could walk from a $6.6 billion deal upon payment of a $100 million breakup fee. The fact that Cerberus did so may be bad luck for Amida, but it isn't fraudulent behavior by Cerberus. - David Marcus
