MANHATTAN (CN) – Shareholders claim 3Com concealed details about a risky merger with a company that “had strong ties to the Chinese military” and “possible links to cyber warfare against the United States.” Plaintiffs Joseph and Judy Ehrenreich say 3Com knew the federal government was likely to block the merger with Bain Capital Partners, because the deal would give Huawei Technologies, of China, a stake in the new company.
According to the complaint, 3Com sent out a press release in September 2007 announcing that it “signed a definitive merger agreement to be acquired by affiliates of Bain Capital Partners LLC, a leading global investment firm.”
The statement emphasized Bain’s purchase price of $5.30 per share, which it said represented “a premium of approximately 44 percent over 3Com’s closing price of $3.68 on September 27, 2007.”
The transaction was to close after completion of “customary regulatory approvals and other customary closing conditions.”
But the couple says that the roadblocks standing in the way of the deal could not “by any stretch be characterized as ‘customary.'”
The merger required affiliates of Huawei Technologies to acquire a minority interest in the company and become a commercial and strategic partner of 3Com. Money Morning reported that Huawei’s “highly reclusive CEO, Ren Zhengfei, is a former officer in the People’s Liberation Army” and that the company “got its start building military communications networks for the Chinese army,” according to the complaint
The Washington Times quoted Pentagon officials as saying that “the Taliban will gain access to U.S. defense-network technology under the proposed merger.” The paper also reported that “Huawei has been linked to the U.N. oil-for-food scandal, which involved millions of dollars in payoffs to Saddam’s regime during a time of U.N. sanctions.”
The Ehrenreichs say that 3Com knew that the U.S. president could block the merger under the Defense Production Act of 1950 through the Committee on Foreign Investment in the United States (CFIUS). So the company did not request a CFIUS review until the independent reporting came to light, the complaint states.
In February 2008, 3Com issued another press release saying that it was encountering problems with its CFIUS filing, and common stock values plummeted more than 30% within two days of the announcement, according to the complaint. The next month 3Com announced that it had withdrawn the voluntary filing and the stocks sank another 22%.
Finally, a day later, Bain withdrew from the merger because CFIUS made it clear that it would be blocked, and stocks declined another 10%, the complaint states.
The Ehrenreichs say they 3Com knew of the risk, and that that is evident from litigation papers that became public record when the company sued Bain to recover a termination fee. The documents allegedly concealed 3Com’s actions through code words, referring to CFIUS as “a U.S. Federal regulatory agency (that is not an antitrust regulatory agency).”
The Ehrenreichs demand a jury trial and seek compensatory damages. They are represented by Niall O’Murchadha of Schlam Stone & Dolan LLP.