SanDisk Sued Over M Systems Deal

Shareholders look to halt the acquisition on backdating claims.
Author:
Publish date:

SanDisk

(SNDK)

is facing a pair of lawsuits seeking to scuttle its proposed acquisition of

M Systems

(FLSH)

The two suits, which SanDisk disclosed in its 10-Q quarterly report Thursday, allege that executives and directors at M Systems breached their fiduciary duty by backdating stock options and sought to further their own interests by approving the merger. All of these actions were aided and abetted by SanDisk, according to its characterization of the complaints.

SanDisk announced last month

its intention to acquire M Systems in a stock deal valued at $1.33 billion. The combination would bolster SanDisk's position as a top supplier of the flash memory chips that are increasingly used in electronic devices like cell phones and MP3 players.

Israel-based M Systems announced in July that it had detected discrepancies in certain stock option grant dates, requiring it to restate five years worth of financial statements. M Systems also pulled the plug on a planned secondary stock offering as a result of its internal stock option investigation.

SanDisk's acquisition offer put a 13% premium on the value of each M System share at the eve of the announcement, making some investors feel that the price tag could have been higher.

The two lawsuits, both of which seek class action status, allege that the terms of the deal are not fair to M Systems shareholders. The complaints seek an injunction halting the merger and declaring it unlawful, as well as compensatory and punitive damages.

The news comes a few months after another

big merger in the flash industry was almost derailed because the price tag was deemed inadequate. Several hedge funds, including Icahn Partners, purchased big stakes in

Lexar Media

in the hopes of forcing it to find a better deal than the $774 million bid by

Micron

(MU) - Get Report

. Micron ultimately upped its price by 5% and the deal garnered enough support to be approved by the majority of shareholders.

Representatives of SanDisk and M Systems were not immediately available for comment.

The two lawsuits, filed in California state court in Santa Clara County on Aug. 7, name senior executives at M Systems as defendants, as well as the M Systems and SanDisk corporate entities.

Shares of SanDisk were off 2.23%, or $1.05, at $45.46, while M Systems shares were off 1.58%, or 56 cents, at $34.86 in midday trading.