Court Allows Shareholder Suit Over MCA Executive Deal

A federal appeals court in San Francisco ruled on Wednesday that a large group of MCA Inc. shareholders may be entitled to more than $1.4 billion in damages as a result of special deals that were given to the company’s two top officials--Lew R. Wasserman and Sidney J. Sheinberg-- when Matsushita Electric Industrial Co. acquired the entertainment powerhouse in 1990.

In a 2-1 decision, the U.S. 9th Circuit Court of Appeals said MCA stockholders who tendered their shares at the time of the $6.9-billion acquisition have the right to go to trial on claims that Wasserman, then MCA’s chairman, and Sheinberg, then the firm’s president, were given huge benefits not offered to other holders, in violation of federal securities laws.

Both Wasserman and Sheinberg were dismissed as defendants years ago in the huge case, called Epstein vs. MCA and Matsushita, which already has produced one ruling from the U.S. Supreme Court and may be headed there again, legal experts say.

Matsushita attorneys had no immediate comment. But the ruling was hailed by lawyers for the plaintiffs and by a class-action specialist at Ralph Nader’s Public Citizen Litigation Group, which filed a friend-of-the-court brief contending that shareholders’ interests had been undermined by class-action lawyers in a companion case in Delaware.

Indeed, the 9th Circuit decision lambasted the conduct of four East Coast law firms--led by New York’s Milberg, Weiss, Bershad, Hynes & Lerach--for inadequately representing the stockholders.

Matsushita made the massive acquisition through a tender offer of $66 a share, plus $5 worth of stock in WWOR-TV, a television station that was spun off from MCA. During negotiations, the Japanese firm stressed that it wanted Wasserman and Sheinberg to commit their shares to Matsushita in advance of the friendly takeover and to remain at MCA for five years.

At the time, Wasserman owned 4.9 million shares of MCA common stock worth $351.7 million at the tender price. However, rather than tendering his shares, Wasserman entered into a separate deal with Matsushita in which he exchanged his shares for preferred stock in a wholly owned Matsushita subsidiary--with a face value of $327 million and an 8.75% annual dividend.

Attorneys involved in the transaction said at the time that Wasserman avoided a capital gains tax of $100 million as a result of the separate deal.

The plaintiffs also objected to the deal given Sheinberg, who owned more than 1.1 million shares of MCA common stock. He received $83.7 million for the shares. Two days after Matsushita accepted all tendered shares, Sheinberg received an additional $21 million in cash.

The plaintiffs contend that the payment constituted a covert premium of $17.80 per share designed to induce Sheinberg to tender his shares. Matsushita counters that the payment was designed both to cash out stock options that MCA had given Sheinberg because of his performance as chief operating officer and to compensate him for agreeing to amend his employment contract with MCA.

Before the deal was consummated, two class-action suits were lodged on behalf of shareholders. The first was filed in Delaware Chancery Court by four East Coast law firms alleging that MCA directors had breached their fiduciary duty during the negotiations. The second was filed 10 weeks later in Los Angeles federal court by other lawyers. The Los Angeles suit--which led to Wednesday’s ruling--is based on a federal law that prohibits a bidder from making a tender offer to shareholders at varying prices. The lawyers in the Delaware case immediately moved to amend their complaint, including adding the allegations made in the Los Angeles case.

Just a week later, the lawyers in Delaware announced that they had settled their case and would get $1 million in fees, even though there would be no money for class members. A Delaware judge immediately rejected that deal. The case was settled later for $2 million--amounting to about 2 cents a share--including $250,000 in attorneys’ fees. The settlement stated that it was a resolution of all claims, an attempt to bring an end to the Los Angeles case as well.

But the plaintiffs’ lawyers in the Los Angeles case, led by Columbia University law professor Henry P. Monaghan, contended that their clients were not bound by the Delaware judgment because that court had no jurisdiction over the federal claims and because the plaintiffs had been inadequately represented by the class-action lawyers in Delaware. U.S. District Judge Manuel Real threw the case out, but the 9th Circuit reinstated it, leading to a U.S. Supreme Court appeal.

In 1995, the high court said that under certain circumstances a state court could resolve all the claims. However, the Supreme Court did not render a ruling on whether the plaintiffs were adequately represented and sent the case back to the 9th Circuit for further proceedings.

On Wednesday, Appeals Court Judge William A. Norris of Los Angeles issued a stinging opinion saying that the East Coast law firms had a clear incentive to settle their weak shareholder class action on the cheap in Delaware state court in order to reap a handsome fee, thereby subverting the more substantial claims filed on behalf of shareholders by other lawyers in Los Angeles.

“There was a jarring misalignment of interests between class counsel and members of the federal class,” Judge Norris wrote. “Indeed, the misalignment of interests and incentives between class counsel and their clients in these extraordinary circumstances was so great that it is fair to say that counsel’s interests were more in line with interests of Matsushita than those of their clients.”

Stephen G. Schulman, the Milberg Weiss lawyer who advocated the Delaware settlement, said, “We believe that we always acted in accordance with our fiduciary responsibilities and feel vindicated” because the Delaware Supreme Court approved the settlement.

But Brian Wolfman of Public Citizen said the 9th Circuit decision was clearly warranted because the plaintiffs had been inadequately represented and gotten a “lousy deal. Now they have a chance to get what Wasserman and Sheinberg got on a per-share basis.”