Update: Legato suits aim to block EMC acquisition

Disgruntled stock holders have filed two separate class action lawsuits seeking to halt EMC's planned acquisition of Legato.

The lawsuits, which both make similar allegations, allege that Legato executives tailored the terms of the acquisition to meet deadlines in Legato's Retention Bonus Program rather than to obtain the highest available price for their company, according to court documents filed on July 8 and July 9 in Santa Clara County Superior Court by the San Diego law firms Milberg Weiss Bershad Hynes & Lerach and Robbins Umeda & Fink.

The suits also allege that Legato's board agreed not to disclose the company's financial results for the quarter ending June 30 until after the news of the acquisition had been announced.

Xu Fan and Craig Batchelor are separately named as plaintiffs in the filings. They are both Legato shareholders, according to the documents.

Legato denied the allegations, saying that information it is about to include in S-4 U.S. Securities and Exchange Commission documents it must file relating to the merger will clear up questions about executive bonuses. "As will become very apparent when we file the S-4, the supposed self dealing and breach of fiduciary duty simply did not occur. All of those facts will be made available to shareholders, including the plaintiffs, in the near future," said Legato Vice President and General Counsel Noah Messel.

Messel also denied that Legato has delayed its earnings announcement. "We didn't move back the earnings. We've never announced our earnings, to my knowledge, in the first week of a quarter," he said, pointing out that Legato would have had to have announced its earnings in the first week of July to make them before it went public with the EMC acquisition deal on July 8.

Legato will announce its financial results late this month, Messel said.

Lawyers representing Fan did not return calls about the lawsuits, and Batchelor's lawyer, Jeffrey Fink, declined to comment on the case.

Observers were at a loss to explain the exact motivation behind the lawsuits, but one financial analyst offered a straightforward explanation. "I think the issue is that they believe that Legato is worth more than what EMC is going to pay for them," said Mark Kelleher, an analyst with First Albany Companies.

Though the value of the all-stock transaction, which was pegged at $1.3 billion at the time the deal was announced, has dropped to the $1.1 billion range, Kelleher said he believes that Legato negotiated a good price.

Another analyst echoed Kelleher's view.

"I think the price was more than fair, given the position of Legato," said IDC storage analyst John McArthur. "They should be thrilled."

EMC has said that it expects to complete the acquisition in the fourth quarter of this year, pending regulatory approval and the consent of Legato shareholders.

The lawsuits are not expected to slow things down, an EMC spokesman said. "We don't expect them to have any impact on EMC's planned acquisition of Legato," he said.

The IDG News Service is a Network World affiliate.