Suit Seeks to Bar Stock Options for Viratek Insiders
A lawsuit seeking to prevent insiders at Viratek Inc. from obtaining options to buy the Costa Mesa-based company’s stock at a deep discount to its market price was filed in Delaware court Monday by a shareholder who argues that options are illegal under that state’s laws.
Filed in Delaware’s chancery court, which deals primarily with corporate law, the suit accuses Robert Finch, Viratek’s chairman; Milan Panic, vice chairman; former U.S. Sen. Birch Bayh and four other directors of violating their duties to the company’s shareholders by voting themselves the options, worth more than $38 million at current prices.
Viratek, a 43%-owned subsidiary of ICN Pharmaceuticals Inc., is incorporated in Delaware. Panic is ICN’s founder, chairman and chief executive officer.
In addition to Panic, Finch and Bayh, the suit names Viratek directors Francis Dale, Vernon Knight, Roland Robins and Roberts Smith, as well as the company itself.
Approved by Viratek’s directors in April but not disclosed to the shareholders until early November, the options would permit the seven to purchase up to 507,000 shares at an exercise price of $13.625 a share. Viratek closed Monday at $75 a share on the over-the-counter market.
Because the options would be exercisable upon shareholder approval--a vote is scheduled for Thursday--the seven insiders could realize huge profits from the purchase and immediate sale of Viratek stock, contends Ira Klein, the Houston physician who brought suit against the company.
Panic alone could realize about $30 million in profits from the 400,000 shares that the options would allow him to buy, based on Monday’s closing price.
Hearing Set Wednesday
The suit, which seeks unspecified monetary damages, also asks for a temporary restraining order and permanent injunction preventing both the vote Thursday and the exercise of the options, if they are approved by the shareholders. In addition, it seeks to block a company proposal to limit the liability of the directors for breach of their fiduciary duty.
A hearing in Wilmington is scheduled for Wednesday morning, according to Thomas Grimm, the attorney representing Klein.
Neither Panic nor Bayh, former senator from Indiana and unsuccessful contender for the 1976 Democratic presidential nomination, returned phone calls Monday.
In a brief statement issued late Monday, Viratek said that it had been advised of the suit, that it believes the allegations are groundless and that it plans to “vigorously” defend itself.
Viratek, which traded for as low as $10.375 a share this year, has increased sharply in market value since the beginning of summer, largely because of speculation that the anti-viral drug Virazole will eventually be approved for treating AIDS and influenza. Shares of ICN and another of its subsidiaries, SPI Pharmaceuticals Inc., have also appreciated considerably this year. Both are involved with Virazole.
According to the suit, the seven directors either knew or had reason to know that Viratek stock was “substantially undervalued” and that they stood to gain enormous profits when they voted to grant themselves the options in April.
‘No Reasonable Relationship’
Because of Viratek’s high market value relative to the exercise price of the options, the suit contends that there is “no reasonable relationship” between the services rendered by Panic and the other directors and the value of the options.
“The stock options thus constitute a waste of corporation assets and are void and illegal under Delaware law,” the suit states. Granting themselves the stock options and recommending that shareholders approve them “constitutes a breach of their fiduciary duties to Viratek and its stockholders,” the suit alleged.
Klein also contends that the additional shares that would be added to Viratek’s float upon the exercise of the options would be injurious to small shareholders because of the dilutive effect they would have on earnings and voting rights.
The additional stock would represent about 5.9% of Viratek’s 7.9 million shares outstanding, which, Klein charged in an interview, would be “substantial and inappropriate dilution of stock.”
