MCK’s inadequate merger proxy: restated earnings likely
Earlier Proceedings in this case: On September 28, 2000, the trial judge entered a complicated order on McKesson’s motions to dismiss the First Amended securities class action Complaint, but he permitted the plaintiffs to file a new seconded amended complaint. On November 14, 2000 the plaintiffs filed a Second Amended Complaint. McKesson’s response (new motions to dismiss) are expected January of 2001, and a hearing will be scheduled later in the first quarter of 2001.
Litigation Background: Originally, the HBOC/McKesson merger collapsed because information about the deal leaked to the press. McKesson sued Smith Barney claiming it leaked privileged information, and Smith Barney counter-claimed for its fee. The case was settled. The merger negotiations were then revived several months later and the deal was eventually consummated. During the first round of merger negotiations, McKesson engaged its own auditors, Deloitte and Touche, to conduct the due diligence investigation.
In the Second Amended Complaint, the plaintiffs now refer extensively to the Deloitte Report and to phone memorandums between Deloitte and McKesson. Deloitte’s findings were not mentioned in the proxy materials even though Deloitte opined that there was a “high” likelihood that the SEC would require restatement of HBOC’s financial statements if it learned of the violations. A letter from Cravath, Swaine and Moore, quoting minutes from a McKesson’s Board Meeting, is offered to substantiate these allegations of McKesson’s Board’s knowledge. Although Verdict for Investors has not seen the documents and McKesson has not replied to these allegations, the charges in the Second Amended Complaint clearly raise the settlement stakes.
The complaint alleges that
“…before the merger, McKesson’s Board of Directors discovered that HBOC’s accounting practices violated GAAP, that HBOC had improperly recognized revenue and manipulated reserves, and that, if these facts were discovered, the SEC would require that HBOC’s financial statements be restated. Despite this knowledge, McKesson’s officers and its Board decided to proceed with the merger McKesson instructed it s financial advisor on the [second] merger, Bear Stearns, who knew these facts, to ignore them in issuing its fairness opinion. Bear Stearns’ fee for its Fairness Opinion was increased by $15 [from $5 million to $20 McKesson’s Board issue a Joint Proxy it knew was false.”
A full copy of the 126 page Seconded Amended Complaint is available at http://securities.stanford.edu/cases/mck.html) [the summary on pages 2-4 and the Facts from pages 14- 56 are clearly worth at least a quick read for any interested investors.
Conclusion: There are specific periods (“settlement windows”) during securities litigation when settlement is likely to occur, and the settlement price to the McKesson or any defendant corporation increases after each stage. The settlement windows occur:
1-after the final amended complaint is filed and all motions to dismiss have been heard but before the issue of class certification is argued.
2-after the class is certified, but before discovery is completed 3- after discovery is complete and before summary judgement motions are argued; 4- if summary judgement is defeated by the plaintiffs then virtually all cases settle.
At this point, the allegations of the plaintiffs are not challenged by a responsive pleading from McKesson so a complete analysis is premature, but the second amended complaint is a bombshell.