Investor Sues to Prevent Payment of ‘Bust-Up’ Fee
Newport Electronics Inc.’s largest shareholder has asked a federal court to block the Santa Ana firm from paying a $400,000 “bust-up” fee to a Silicon Valley company in the wake of a scrapped merger attempt.
Connecticut investor Milton B. Hollander claims in a lawsuit that Sensor Control Corp. of Sunnyvale is not entitled to a $400,000 fee for legal, administrative and other expenses incurred when it tried unsuccessfully to merge with Newport.
The suit, filed on Aug. 20 in U.S. District Court in Santa Ana, claims that Sensor acted fraudulently by not disclosing problems it was having in arranging financing for the merger.
Newport, a manufacturer of digital electronic measurement instruments, and Sensor, a maker of heat and pressure sensors for industrial applications, agreed to merge last April, but the deal ran into trouble in July after Hollander launched a rival offer for Newport.
Sensor dropped its bid earlier this month after Newport Chairman Barret B. Weekes and director Norman Gray said they would sell their combined 25% stake in Newport to Hollander. Sensor had offered to acquire 43% of Newport shares for $9.75 each and the remaining shares for $9 each in a merger agreement.
Plan for Board Change
Sensor’s withdrawal cleared the way for Hollander to complete his offer to pay $11 per share for 35% of Newport stock, raising his stake to 48%. After his offer is completed, Hollander plans to oust three of Newport’s five directors and replace them with his own.
Hollander’s suit claims that Sensor failed to disclose to Newport “the tenuous nature of Sensor’s financing arrangements for the tender offer and merger agreement.” It also alleges that they failed to disclose that BT Commercial Corp. was reconsidering its commitment to extend credit to Sensor because of deterioration in the company’s operations.
Sensor President James B. Hawkins declined to comment on the Hollander suit.
Hollander states in his suit that certain Newport directors who backed the Sensor bid stood to profit from the merger by the cancellation of their stock options. The suit claims that Norman Gray, John Virtue and Robert H. Davis would have made $90,000 on cancellation of stock options and that director George Pratt would have made $60,000.
The suit seeks to nullify the board’s approval of a $400,000 fee as reimbursement for expenses it incurred as part of its merger agreement. Gray said Newport’s board believed that Sensor was entitled to payment.
‘The board decided we should pay it as soon as possible,” Gray said Tuesday. “We felt it was a valid obligation.”
In his suit, Hollander claims that paying the fee would hurt Newport’s financial condition because that amount is more money than the company has in cash on hand. Gray said the fee does exceed the company’s cash, although he did not specify how much cash the company has. He said Newport probably would have to borrow money to pay the fee.
Hollander’s suit also seeks $5 million in punitive damages against Newport and Sensor.
