Earlier in October, IBM purchased open source, cloud software business Red Hat for a whopping $34 billion in cash and debt. On December 10, Red Hat announced that it had scheduled the stockholder vote for January 16, 2019.
However, in a plot twist of sorts, one Red Hat shareholder has filed a putative class action suit this week in Delaware Federal Court seeking to block a shareholder vote on the planned sale, saying a proxy statement urging support for the deal omits or misrepresents information needed to make an informed decision.
Charles Orgel filed his complaint against Red Hat and members of the company’s Board of Directors, alleging several violations of federal securities laws. In response, Red Hat filed a proxy statement on December 12 with the U.S. Securities and Exchange Commission, which recommends that Red Hat stockholders vote in favor of the proposed IBM Corp. transaction, announced in October.
According to the complaint, Guggenheim and Red Hat senior management began meeting with representatives of IBM toward the end of 2017 to discuss a potential partnership between the two companies. Those talks carried into 2018, and at an Oct. 28 meeting, the board approved the merger agreement.
But “Red Hat and IBM insiders are the primary beneficiaries of the proposed transaction, not the company’s public stockholders,” Orgel’s suit alleges, adding that the top execs will get certain benefits.
“Notably, certain Red Hat insiders have secured employment for themselves upon consummation of the proposed transaction,” the suit states.
“Moreover, Red Hat’s directors and executive officers stand to reap substantial financial benefits for securing the deal with IBM,” the suit adds. “Pursuant to the merger agreement, all cashout restricted shares, restricted stock units and performance share units will vest and convert into the right to receive cash payments.”
“In short, unless remedied, Red Hat’s public stockholders will be forced to make a voting or appraisal decision on the proposed transaction without full disclosure of all material information concerning the proposed transaction,” the complaint states.
Charles Orgel is represented by Ryan M. Ernst of O’Kelly Ernst & Joyce LLC, and Richard A. Acocelli, Michael A. Rogovin and Kelly K. Moran of Weisslaw LLP.
The case is filed as Charles Orgel v. Red Hat Inc. et al., case number 118-cv-02006, in the U.S. District Court for the District of Delaware.