Download; Between a rock and a lawsuit – shareholder suit against Worldcom

Download; Between a rock and a lawsuit – shareholder suit against Worldcom – Company Business and Marketing

Toby Weber

Ruling could prevent WorldCom’s collaboration with Digex When WorldCom announced its acquisition of Intermedia in September, the carrier made no secret that it was after Digex, the data services company majority-owned by Intermedia.

But a Delaware judge has indicated he might make a ruling that would prevent WorldCom and Digex from working together for three years.

Chancellor William Chandler’s statement came in a ruling that denied a request from Digex minority shareholders to halt WorldCom’s acquisition of Intermedia.

Many Digex shareholders oppose the merger because it gives WorldCom control without a direct purchase. Instead, through Intermedia, WorldCom is attempting to gain interest in Digex for less than shareholders believe it is worth. WorldCom bought Intermedia for $3 billion and assumed the competitive local exchange carrier’s $3 billion of debt and preferred stock, while Global Crossing reportedly was willing to pay significantly more for Digex alone.

The suit sought an injunction on the grounds that the deal, through its roundabout method of acquisition, essentially usurped Digex’s corporate authority.

While rejecting this argument, the judge said that there was a “likelihood of success” for the shareholders’ argument that Digex wrongly waived their rights under Section 203 of the Delaware state code. This law, a protection against hostile takeovers, prevents new shareholders from working with the company in question for a period of three years without consent from two-thirds of the minority shareholders. In friendly takeovers, the acquired company’s board can waive the right.

According to Megan McIntyre, a partner with Grant & Eisenhofer, which represents Digex minority shareholders, a condition of the WorldCom/Intermedia Deal was that Digex wave its Section 203 rights.

The Digex board did just that, based largely on the votes of company directors who also held seats onthe Intermedia board, she said. “We’re alleging that Digex breached its fiduciary duties in granting that waiver,” McIntyre said.

As a condition of approving the Intermedia merger, the Department of Justice required WorldCom to divest all of Intermedia except Digex. If the judge reinstates Digex’s Section 203 rights, WorldCom could face the prospect of an almost valueless merger. A WorldCom spokesman declined to comment.

In his ruling, Chandler said WorldCom has two choices: continue with a merger that might not produce synergies for three years or nix the deal – an act that might trigger breakup penalties and probably would incur a lawsuit from Intermedia stockholders.

“The current record strongly suggests that the 203 waiver decision was not entirely fair to the Digex minority,” read the judge’s decision.

More serious than legal entanglements is the threat this situation poses to WorldCom’s long-term strategy of becoming a data services powerhouse.

“It is extremely important from a strategy standpoint [for WorldCom] to really be able to leverage the significant presence that Digex has in the hosting space,” said Pascal Aguirre, vice president of Adventis.

For this reason, Aguirre predicts WorldCom will be extremely flexible in trying to reach an agreement with the Digex minority shareholders.

Though she declined to say whether the two parties were negotiating, McIntyre indicated that WorldCom will need this flexibility.

“I think [the judge’s statement] puts the Digex stockholders in a strong negotiating position,” she said. “Since there was no injunction [to block the merger], there’s some question if WorldCom can walk away if it wants to. There’s certainly no risk-free way for them to walk away.”

If WorldCom continues with the merger without striking a deal with Digex shareholders, its early data strategy includes reselling Digex’s portfolio through a contract signed in November. But Aguirre feels that this would not be significant enough to satisfy WorldCom.

“I don’t think it would be quite as attractive because you want to integrate assets,” he said. “[Resale] is really the first step. You want to build a platform of value-added services…. You can’t do that when you’re reselling.”

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