Saying No to an LBO

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The courts, though, decided investors needed more details about potential conflicts. Strine, the same judge in the Lear suit, ruled in mid-June that Topps needed to disclose two previous bids by Upper Deck. He also said management should tell investors that Eisner planned to keep Topps' management in place. CEO Arthur T. Shorin would stay on as a consultant, while Scott Silverstein, his son-in-law and the company's current president, and others would have a spot at the company—assurances Upper Deck didn't make. "Shorin has known that time is running out for him," Strine wrote in his recent opinion. "He was motivated to find a buyer that would guarantee that Shorin and his son-in-law would continue to play leading roles at Topps."

After getting the go-ahead from the courts, Upper Deck contacted shareholders directly on June 25 with a formal offer for the company. Topps, which still opposes such a merger but is currently in discussions with Upper Deck, hasn't moved forward with a vote yet. Topps declined to comment.

"DIFFERENT SET OF MOTIVATIONS"

The buyout boom has proven to be fertile ground for litigation. While shareholder suits overall are down, those involving private equity firms have doubled in past three years, according to insurance broker Marsh Inc. (MMC).

And judges don't necessarily have to weigh in for suits to be effective. Last year, as a result of litigation, hospital giant HCA Inc. agreed to cut the termination fee it would pay buyers, from $500 million to $220 million, in the event the deal fell through. Shareholders then approved the buyout. On June 10, Affiliated Computer Services Inc. (ACS) suspended an exclusive agreement with Cerberus Capital Management for a $6.1 billion buyout and agreed to solicit other bids; Affiliated must now reimburse Cerberus $7.5 million for expenses plus $15 million if the company goes to another firm. Suits had alleged that Affiliated's chairman was trying to take the company private on the cheap. Affiliated declined to comment.

In one case, a judge has even refused to sign off on a settlement already approved by shareholders. Last November, Delaware Vice-Chancellor Stephen P. Lamb took William C. Stone, founder and chief executive of SS&C Technologies Inc., to task for negotiating with Carlyle Group without first letting the board know he was shopping the tech outfit around. In the deal, Stone sold some of his shares for cash and traded the rest for a larger stake in the soon-to-be private company. "A manager who has the opportunity to take $72 million in cash from the transaction and roll a portion of his equity into a larger [share] in the surviving [company] has a different set of motivations than one who does not," Lamb wrote in his opinion.

In the end, Lamb rejected a proposed settlement agreement on behalf of shareholders, citing concerns about the original buyout. A jury trial is scheduled for next July. Says Stone: "I firmly believe that we got top value for shareholders, and our position will be sustained."

Indeed, Stone, CEO of a private SS&C, doesn't seem fazed by the continued turmoil. In mid-June he filed with the Securities & Exchange Commission to sell shares to the public, 19 months after he took the company private.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.