Litigation
Jul. 30, 2002
Judge Tosses Case Against Intel by Public Shareholders
A federal judge has tossed out a case pitting public shareholders against the largest computer-chip maker. The plaintiffs contended that they got a raw deal when an Intel Corp. subsidiary acquired a technology company.
A federal judge has tossed out a case pitting public shareholders against the largest computer-chip maker.
The plaintiffs contended that they got a raw deal when an Intel Corp. subsidiary acquired a technology company.
U.S. District Judge Claudia Wilken earlier this month granted summary judgment for the defense in the case accusing Intel of making improper payments to three insiders to get them to tender their shares. Harris v. Intel Corp., C00-1528 (N.D. Cal. July 8, 2002).
The case is one of a number of suits that have been filed over the past few years challenging tender offers under Section 14(d)(7) of the Securities Exchange Act of 1934 on the grounds that the transactions were discriminatory. This statute prohibits acquiring companies from paying insiders more for their stock than they shell out to public stockholders.
Plaintiffs Edward Harris and two other shareholders brought the case against Intel, the company's subsidiary CWC Acquisition Corp., CWC President Susan A. Miller, and Intel Vice President and general counsel F. Thomas Dunlop Jr.
The New York-based law firm Milberg Weiss Bershad Hynes & Lerach was lead counsel for the plaintiffs in the case, which the court declined to certify as a class action. Patrick Coughlin, a San Francisco partner at Milberg Weiss, didn't return several calls seeking comment.
In November 1999, the Intel subsidiary acquired DSP Communications Inc., which develops technology for wireless phones. The plaintiffs allege that Intel made extra payments to the three DSP executives for their shares, payments that the company didn't provide to other shareholders. The payments include bonuses totaling at least $10 million for the executives, Davidi Gilo, David Aber and Stephen P. Pezzola.
But the defendants contend that the payments were part of a pre-existing bonus plan intended to keep senior DSP management in place during a change of control.
"The judge applied existing 9th Circuit authority and concluded that the plaintiffs were unable to establish that the executive bonus payments, severance agreements and covenants not to compete were intended to induce insiders to tender their shares," says Martin C. Washton, a Los Angeles partner at Gibson, Dunn & Crutcher who represented the defendants.
"The court concluded that the payments were not payments for their stock but payments for their various employment-related obligations and benefits," Washton says.
Intel first learned of DSP's bonus plan during routine due diligence on Oct. 9, 1999, six days after Intel and DSP agreed in principle on the price for the tender offer, according to Steven J. Johnson, a Palo Alto special counsel at Gibson Dunn who also worked on the case.
It's not uncommon for companies to establish compensation plans that provide bonuses to insiders who remain with a company during a change in control, according to Washton.
"If a senior executive knows he will lose his job if a merger occurs and he doesn't have protection in an agreement, he may leave, and if he leaves, he may leave a big hole in the management structure," Washton says.
"The goal is to make sure the company can be sold as a going concern. It's difficult to sell a company as a going concern if key personnel are leaving at the time when it's trying to sell the business," he adds.
Toni Vranjes
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