Quinn Emanuel Urquhart & Sullivan LLP's John Quinn thinks he has a rarity: a merger lawsuit with real damages at the end of the road.
The Los Angeles litigator, who was tapped Monday to lead a shareholder fight against Sprint Nextel Corp.'s $2.2 billion acquisition of Clearwire Corp., said he expects the trial to yield “very substantial” payouts for Clearwire's minority stockholders, either through damages or an exercise of appraisal rights.
That would make it an outlier in deal litigation, where most lawsuits settle for disclosures and attorneys' fees. Just one mergers and acquisitions case last year included a payout to shareholders — a suit over El Paso Corp.'s sale to Kinder Morgan Inc. Since 2009, about a dozen have, a small fraction of the hundreds of merger challenges filed each year.
For Quinn and the rest of hedge fund Crest Financial Ltd.’s legal team to deliver, experts say they will have to win one of two arguments in Delaware Chancery Court: either that Clearwire’s board breached its duty to minority investors, or that $2.97 per share undervalues the broadband company.
Experts say both are uphill battles, but not impossible, given the overlapping web of corporate interests involved in the case.
“The big-dollar settlements we've seen have almost all come through the Chancery Court,” said Matt Cain, an M&A expert at Notre Dame. “They’re not shy in giving out large settlements when they feel it's warranted.”
In most of those settlements, the common thread is a conflict of interest. Some had a controlling stockholder on both sides of the deal, as was the case in Southern Peru Copper Corp.'s record $2 billion damages. Others had undisclosed side dealings involving management (El Paso and J. Crew Group Inc.), or bankers with mixed incentives (Del Monte Foods Co.).
Crest has made similar claims of conflict, arguing that Sprint used its 51 percent stake to bully the board into accepting a lowball price. Quinn, who declined to comment for this story, said in an earlier statement that Sprint was “thumbing its nose” at Clearwire’s minority stockholders and trying to scoop up its spectrum — some of the best on the market — on the cheap.
Because Sprint controls Clearwire, its takeover will be subject to the “entire fairness” standard of review in Delaware, which entitles minority investors to a fair price and a fair process. Crest bears the burden of proving unfairness, but experts say the higher standard of review gets the hedge fund’s foot in the door.
“There is clearly a conflict here,” said Lawrence Hamermesh, an Delaware law expert at Widener Law School. “The next question is, was there an appropriate process to handle it? This transaction had a lot of very good lawyers who all know how to run a good process. What [Crest] has to show is that that process broke down somewhere.”
Clearwire appears to have done the little things right. It formed a special committee, hired Simpson Thacher & Bartlett LLP and Delaware specialists Richards Layton & Finger PA to advise it, and negotiated certain deal protections, like a majority-of-the-minority provision.
Crest’s chances for a payout may hinge on the shareholder vote scheduled for May 21, said Bernard Black, a corporate expert at Northwestern Law School. So far, opponents of the deal control about 26 percent of the non-Sprint shares — enough to make the next few weeks interesting, but not enough to block it.
“If the minority votes for the transaction, unless there’s some coercion involved, it’s going to be very tough to persuade a court that the process was tainted,” Black said.
Crest has made the coercion argument, too. Under the merger agreement, Clearwire agreed to sell debt to Sprint that could later be converted into a large stake in Clearwire. Crest has argued that the notes are “hugely coercive" and effectively force minority shareholders to support the deal by increasing Sprint's ownership to the point at which "no" votes would be futile.
“Other minority stockholders that [Crest is] going to be soliciting are going to say, 'Screw it. You've already shifted all the money over to their side of the table,’” Collins Seitz Jr., a lawyer for Crest, said at a January hearing.
The other issue is price. Crest has claimed that Sprint’s bid undervalues Clearwire's spectrum — possibly by a factor of five, according to a study the hedge fund commissioned. And it has pointed to a higher, $3.30-per-share bid from Dish Network Corp. and a separate $1.5 billion bid from Verizon Wireless for some of Clearwire’s bandwidth, as proof that Sprint is lowballing.
“The battle for Clearwire has just begun," it said in a letter to stockholders this week.
But again, Sprint’s controlling position becomes a factor. The wireless giant says it won’t sell, which takes the teeth out of Dish’s bid — a point made months ago by Chancellor Leo E. Strine Jr., the Delaware judge presiding over the case.
“The special committee is duty-bound to do what it can,” the chancellor said at a hearing earlier this year. “But the reality is, until Sprint is convinced to become a seller ... nobody else can get the company.”
That means it’s this deal or no deal. And for its part, Clearwire has said it can’t survive alone, effectively asking stockholders to choose between $2.97 per share from Sprint and a possible fire sale or bankruptcy that could wipe out equityholders.
Either way, Crest isn’t backing down. It has retained proxy solicitor D.F. King & Co. and this week mailed its own proxy statements to Clearwire shareholders. It has also taken its case to the Federal Communications Commission, urging regulators to block the deal.
John Coffee of Columbia Law School said that by adding Quinn Emanuel to a legal team that already includes Vinson & Elkins LLP, Bancroft PLLC and Seitz Ross Aronstam & Moritz LLP, Crest is sending Sprint a message: End this now, or dig in for a long fight.
The LA-based firm doesn’t do much, if any, garden-variety shareholder M&A challenges. Instead, it’s known for long-running, deep-in-the-trenches litigation for clients who play to win, not settle. Quinn represented Samsung Corp. in its unsuccessful patent crusade against Apple Corp. — a highly charged battle of wills — and his addition to Crest's legal team may be an effort to scare Sprint into a quick price bump, Coffee said.
“It’s the threat of a long-term appraisal suit for unknown amounts of money,” Coffee said. “Sprint may decide it's worth it to settle rather than get dragged into that.”
Crest is represented by John Quinn of Quinn Emanuel Urquhart & Sullivan LLP, Collins Seitz Jr., David Ross and Garrett Moritz of Seitz Ross Aronstam & Moritz LLP, Viet Dinh of Bancroft PLLC and Michael Holmes, Steve Gill, Kai Haakon Liekefett, Shaun Mathew and Benjamin Barron of Vinson & Elkins LLP.
Sprint is represented by Robert Saunders and Ronald Brown of Skadden Arps Slate Meagher & Flom LLP.
Clearwire is represented by Martin Lessner of Young Conaway Stargatt & Taylor LLP and Matthew Solum of Kirkland & Ellis LLP. The company's independent committee is represented by Rudolf Koch of Richards Layton & Finger PA and Joe McLaughlin of Simpson Thacher & Bartlett LLP.
Clearwire founder Craig McCaw is represented by Kenneth Nachbar of Morris Nichols Arsht & Tunnell LLP and by Friedman Kaplan Seiler & Adelman LLP.
The case is Crest Financial Ltd. v. Sprint Nextel Corp. et al., case number 8099, in the Delaware Court of Chancery.
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