The deal is facing at least three other legal challenges, as previously reported.
Morris Akerman filed his proposed class action, individually and on behalf of all others similarly situated, before the U.S. District Court for the Eastern District of New York. His case names Ladenburg Thalmann, its board of directors, Advisor Group and Harvest Merger Sub, a subsidiary of the Advisor Group as defendants.
Richard Liebman filed his lawsuit against Ladenburg Thalmann and its board before the U.S. District Court for the Southern District of New York.
Omission from proxy statement
Similar to the other lawsuits filed against the deal, both the Akerman and Liebman complaints are based on material omissions in Ladenburg’s proxy statement dated December 6, 2019 that allegedly violate Sections 14(a) and 20(a) of the Securities Exchange Act of 1934.
“[U]nless remedied, Ladenburg’s public stockholders will be irreparably harmed because the Proxy Statement’s material misrepresentations and omissions prevent them from making a sufficiently informed voting decision on the Proposed Transaction,” states Leibman’s complaint.
According to the complaints, the proxy filing omits details of Ladenburg’s financial projections and data relied upon by Jefferies LLC, the financial advisor to the transaction that conducted a valuation analysis and gave its fairness opinion on the deal.
“The disclosure of projected financial information is material because it provides stockholders with a basis to project the future financial performance of a company, and allows stockholders to better understand the financial analyses performed by the company’s financial advisor in support of its fairness opinion,” states the Akerman complaint.
The Akerman complaint also states Ladenburg failed to disclose if it entered into any non-disclosure agreements that are or were preventing other counterparties from submitting superior offers for the firm.
“Without this information, stockholders may have the mistaken belief that, if these potentially interested parties wished to come forward with a superior offer, they are or were permitted to do so, when in fact they are or were contractually prohibited from doing so,” states the Akerman complaint.
The sale process
The question about the lack of details regarding the sale process features more prominently in Liebman’s complaint, which details the presence of other parties as listed in the proxy filing.
According to the proxy, in February 2019 a firm referred to as ‘Party B’ due to a non-disclosure agreement approached Ladenburg for a potential sale and Jefferies was engaged to undertake an evaluation.
In March, Party B communicated it was interested in acquiring Ladenburg at a price of $4.75-$5.00 per share, even though its stock was trading at $2.87 a share. That offer was withdrawn by Party B just a week later on April 2.
At the next Ladenburg Board meeting on April 23, the company undertook a strategic look at its future plans and began implementing cost-cutting and efficiency initiatives after that meeting.
The matter of a potential sale was revisited in the next Board meeting on July 8, where resolutions including those to enter into non-disclosure agreements with interested parties and negotiation of transaction documents were adopted. At the following board meeting on September 5, the Board determined 13 interested parties that Jefferies eventually contacted for the purpose of a deal.
Ladenburg received incoming inquires that took the number of interested parties including the Advisor Group to 19, out of which it received four written proposals.
“Advisor Group at a purchase price of $3.75 per share; Party B at a purchase price of $2.50 per share; Party C at a purchase price range of $2.30-$2.60 per share; and Party D at a purchase price range of $2.30-$2.91 per share,” states the proxy.
The Advisor Group bid was later revised to $3.25 a share, but after negotiation the deal was struck at $3.50 a share. after which both parties entered into an exclusivity agreement. The final deal price assigns Ladenburg an enterprise value of $1.3 billion.
The deal was eventually announced in November 2019.
Potential conflicts for Ladenburg insiders?
According to Liebman’s complaint, “Ladenburg insiders are the primary beneficiaries of the Proposed Transaction, not the Company’s public stockholders. The Board and the Company’s executive officers are conflicted because they will have secured unique benefits for themselves from the Proposed Transaction not available to Plaintiff and the public stockholders of Ladenburg.”
The complaint further explains that Ladenburg Board directors and executives will receive cash payments for stock options — both vested and unvested, as well as restricted stock units. In addition, if any of those individuals are terminated as a result of the deal, they are set to receive substantial severance benefits.
The proxy details the severance for executives often referred to as ‘golden parachute' compensation. For Ladenburg executives it is a lump sum payment depending on a factor of their base salary, among other considerations.
For example, Ladenburg CEO Richard Lampen would stand to get more than $6 million in his golden parachute compensation, whereas executive vice president and director Mark Zeitchick would get close to $5.8 million and COO Adam Malamed would make about $4.69 million.
The complaint also alleges that the proxy fails to disclose that some Ladenburg executives have secured positions with the merged entity, a fact that was mentioned in the press release announcing the deal.
The complaint alleges that details of post-transaction employment negotiations must be disclosed to shareholders as it's important for them “to understand potential conflicts of interest of management and the Board, as that information provides illumination concerning motivations that would prevent fiduciaries from acting solely in the best interests of the Company’s stockholders.”