Harbinger Must Face Trial on Alleged Merger Tips

Tuesday, 29 Dec 2009 03:28 PM

 

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The Harbinger Capital Partners hedge fund has failed to win dismissal of a lawsuit accusing it of receiving accurate tips about a rival bid for an appliance company it eventually bought and amassing a big stake before merger talks became public, court papers show.

Nacco Industries Inc may pursue breach of contract and fraud claims against Harbinger in connection with their 2006-2007 battle for Applica Inc., Vice Chancellor J. Travis Laster of Delaware Chancery Court wrote in a December 22 opinion.

The Wall Street Journal reported the preliminary decision, which is not a finding on the merits of Nacco's claims, earlier on Tuesday.

In his 63-page opinion, Laster said it was too soon to rule on the merits of the claims and ordered a trial within a year. He also dismissed some of Nacco's other claims.

Harbinger said on Tuesday it "acted fairly and honestly in the Applica transaction and notwithstanding Nacco's contentions, will prevail in this lawsuit.

Run by Philip Falcone, a former star hockey player at Harvard College who was ranked at 296 on the Forbes 2009 list of the global billionaires, Harbinger manages $8 billion.

The fund became known for its successful bet against the subprime market and for an activist stake in the New York Times Company.

Harbinger ultimately took over Applica in 2007 for $8.25 per share, valuing it at roughly $206 million, and combined it with a company it controlled, Salton Inc.

The firm on Tuesday labeled as "wholly unsubstantiated" claims by Nacco that it wrongfully interfered with efforts to buy Applica and that some securities filings failed to accurately describe its true investment intent.

Nacco and a lawyer for the Cleveland-based company did not immediately return calls seeking comment.

According to the opinion, Nacco alleged Applica management leaked details about its early 2006 takeover efforts to a Harbinger consultant, David Maura, believing Harbinger was likely to retain senior Applica executives.

The judge's opinion also cites a variety of e-mails during 2006 about Applica involving Falcone, Maura and others.

It said one in February indicates Falcone told a broker to "START ACCUMULATING QUIETLY. SIZE," while in another in June, Maura "described for Falcone the proposed structure of the (Nacco) merger, which was not yet public."

In July 2006, Applica accepted a takeover by Nacco, but three months later took a competing offer from Harbinger, which had by then taken a 39 percent stake in the company.

Nacco said that, in terminating the earlier merger, Applica breached a "no-shop" agreement that limited its ability to explore competing transactions.

The judge wrote that Nacco's allegations "support a pleading stage inference of a pattern of contacts between Applica insiders and Harbinger representatives that continued after the execution of the (Nacco) merger agreement and in violation of its terms."

But he added: "I also recognize that there are potentially legitimate explanations for each of the communications and for Applica's and Harbinger's conduct."

Falcone said in a statement that "Harbinger acted with total propriety in this transaction. Plain and simple, this is a case of sour grapes over a takeover battle. (With) 20-20 hindsight, I wouldn't do one thing different."

Maura said in a statement: "I categorically deny that I ever received any nonpublic information from Applica regarding its potential transaction with Nacco or any other entity. My information was based on publicly available data and market chatter and speculation."

Nacco has twice tried and failed to enjoin the Harbinger transaction. In 2006, Nacco went to Delaware Chancery Court, but withdrew its motion for a preliminary injunction hours before the injunction hearing.

It also tried to stop the transaction in federal court in its home state, Ohio, where a judge denied the application, saying that Nacco was unlikely to win.

© 2014 Thomson/Reuters. All rights reserved.

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