A manager of union pension money has sued Sprint Corp. and WorldCom Inc. over the stock option implications of their failed merger attempt.
The Amalgamated Bank's Longview Collective Investment Fund, in a lawsuit filed last month, claims the failed merger was used to perpetuate a plan that enabled Sprint CEO William Esrey and four other senior managers to obtain $600 million in stock options ahead of schedule.
Sprint disputes the progression of events as presented in the lawsuit.
The Longview Fund, which contains $7 billion of union pension money, owns 600,000 shares of Sprint stock. According to the court filing, the fund lost $20 million on its investment when the price of Sprint and its tracking stock, Sprint PCS, lost more than $80 billion in market capitalization when the merger deal collapsed in July. Sprint stock closed at $60.875 a share on Oct. 4, 1999, the day the deal was announced. On July 13, the day the deal was cancelled, the stock closed at $48 a share. Sprint shares closed at $22 on Jan. 2
Sprint PCS closed at $78.6875 a share the day the deal was announced. By July 13 it had fallen to $61.8125 a share. It closed at $18 a share on Jan. 2.
The lawsuit, filed in the Circuit Court of Jackson County, Kansas City, Mo., accuses Sprint management of a "breach of fiduciary duty, waste of corporate assets, unjust enrichment and fraud," claiming that Mr. Esrey and his colleagues had inside information that the merger "was almost certain never to occur" but nevertheless pursued it "to improperly get for themselves" millions of dollars in personal gain.
Named as defendants
Mr. Esrey and WorldCom CEO Bernard Ebbers were named as defendants in the lawsuit, in addition to more than 20 other Sprint executives and directors.
The merger between Sprint, Kansas City, Mo., and WorldCom, Jackson, Miss., failed because of objections from antitrust regulators in the United States and Europe.
The lawsuit contends that the accelerated plan to vest employee stock options valued at $1.7 billion went forward, despite the collapse of the deal. Since the options were exercised, several senior managers and more than 2,000 employees have left the company.
"Despite the fact that this merger was essentially dead in the water from the beginning, it was used as a vehicle to make winners out of management and losers out of the shareholders," said William Lerach, partner at Milberg Weiss Bershad Hynes & Lerach LLP, San Diego, which is representing the New York-based Longview Fund.
Institutional investors hold 66% of Sprint's outstanding shares.
Mr. Lerach said the fund is not actively seeking other institutional investors to join it in the lawsuit "but if one wants to come forward, Amalgamated will talk."
The lawsuit alleges the plan to boost the value of the stock options arose in 1998 when Sprint executives believed they would not be able to realize the value of their options, which were due to vest over several years.
According to the suit, "the events of the late '90s placed Sprint's top insiders in a very dangerous situation." They "had been granted options to buy millions of shares of Sprint common and wireless stocks" at prices far below the current market prices of the stocks - making the options potentially worth hundreds of millions of dollars. But by 1998, almost all the options were still unvested and due to vest over several years. Sprint executives were concerned that if the company experienced a slowdown in growth and its financial results were below expectations "they knew it was likely they would never be able to realize the value of these options," according to the lawsuit.
While stock options usually take three to five years to mature, an early cashout policy is used by many companies to protect executives and employees who may lose their jobs after a merger. The early cashout policy is usually triggered after a merger is completed.
Sprint's rules had defined a "change of control" as either a turnover of the majority of directors over a two-year period or as the acquisition of more than 20% of the outstanding stock by an outside company. But the lawsuit alleges that in late 1998, without a shareholder vote, Sprint's top officers and directors altered the definition so that a change of control "would be deemed to occur upon a shareholder vote to approve a sale or merger of Sprint even if that sale or merger never actually took place."
But Robin Carlson, a spokeswoman for Sprint, said that the arrangement for vesting stock options on shareholder approval of a change of control went into effect in 1986 and was contained in a 1987 proxy report on executive compensation.
However, Mr. Lerach insists that "there was never a provision in the executive compensation plan that change of control was triggered by shareholder approval of a merger."
Randy Baron, a partner of Mr. Lerach's, said the firm's investigation of the case shows that the change was made in the change of control agreement on Nov. 24, 1998.
Neither Ms. Carlson nor Mr. Baron would make documentation available to Pensions & Investments.