Securities-litigation firms based on opposite coasts are investigating whether PAETEC Holding Corp.s board of directors breached its fiduciary duties to shareholders by failing to adequately shop the company and obtain maximum value for shareholders. The New York-based telecommunications provider earlier this week announced an agreement to be acquired by Windstream Corp. in a $2.3 billion deal.
At least two firms have launched investigations: Boston-based Kyros & Pressly LLP and San Diego-based Robbins Umeda LLP.
Under an agreement announced Aug. 1, Little Rock, Ark.-based Windstream is buying PAETEC for $891 million in stock and the assumption or refinancing of $1.4 billion in debt.
PAETECs shareholders will receive 0.46 shares of Windstream for each share of PAETEC stock, and PAETEC stockholders are expected to own 13 percent of the combined company upon closing. Based on Windstreams closing price on July 29, PAETEC shareholders can expect to receive the monetary equivalent of $5.62 per share, according to Robbins Umeda.
Thats more than what PAETECs stock is currently worth shares were trading Thursday afternoon at $5.01 on the NASDAQ.
But Robbins Umeda claims some leading financial analysts have valued PAETECs stock at $7.00 per share based on some target prices. Kyrus & Pressly also asserts that an analyst has set a price target of $7 per share on PAETECs stock.
In a press release, Robbins Umeda said its probe focuses on whether PAETECs board is undertaking a fair process to obtain maximum value and adequately compensate shareholders in light of the companys recent positive financial results.”
PAETECs first-quarter results, the firm added, exceeded analysts expectations.
Kyros & Pressly is investigating whether PAETECs board breached its fiduciary duties to shareholders by failing to adequately shop the company. The firm also is looking into whether shareholders are being underpaid for their stock.
A spokesman for PAETEC did not respond Thursday to a request for comment.
By law, a board of directors owes fiduciary duties to protect the best interests of shareholders. Such duties entail a continuing process to be diligent in the representation of the interests of the people who own the stock,” said William Kyros, a partner with Kyros & Pressly.
In many transactions, such as the one under review, its difficult to know whether shareholders were adequately represented until a company makes specific disclosures about the deal, such as how the company calculated the purchase price, Kyros said.
PAETEC already has filed some documents related to the transaction with the Securities and Exchange Commission, and more detailed information is expected to be revealed as PAETEC seeks shareholder and regulatory approvals.
The irony from my standpoint as a lawyer in this space [is] it can be difficult to know in advance whats a good case,” Kyros said in an interview. Some agreements appear dirty on their face but a lot of deals such as this one its difficult to know until we get the information.”
PAETECs board is led by its president and CEO, Arunas Chesonis, who told us in an interview earlier this week he will be leaving the company but will stay through the integration process.
The board is comprised of 10 people, including Shelley Diamond, who serves as global managing partner for Young and Rubicam, an advertising agency responsible for large multinational clients.
The other board members are: Richard Aab (vice chairman), H. Russell Frisby Jr., Tansukh Ganatra, Michael MacDonald, William McDermott, Alex Stadler, Keith Wilson and Mark Zupan.
Windstreams acquisition of PAETEC was somewhat unexpected, Kyros said.
Shareholders [are] looking at it more warily also because of the nature of the payout,” he said, adding that some PAETEC shareholders have contacted his law firm.
The merger of PAETEC and Windstream will create a company with estimated annual revenues of $6.1 billion and EBITDA of $2.4 billion, with 70 percent of revenues deriving from business and broadband sales, according to Zachs Equity Research.
Founded in 1998 and based in Fairport, N.Y., PAETEC provides telecommunications services primarily to business customers in 46 states and the District of Columbia. The company has about 5,000 employees.
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