Ruling threatens WorldCom/Intermedia merger

(Telephony) While refusing to block outright the WorldCom/Intermedia merger, a Delaware judge has indicated that he might grant Digex minority shareholders an injunction that could prevent WorldCom from working with the data services company.

WorldCom is currently in the process of gaining control of Digex through its acquisition of Intermedia, Digex’s majority shareholder. WorldCom has directly stated that the deal’s purpose is to gain control of Digex, widely considered to be much more valuable that Intermedia.

According to Megan McIntyre, a partner with Grant & Eisenhofer, attorneys for Digex minority shareholders, a condition of the WorldCom/Intermedia merger was that Digex waive its rights under section 203 of the Delaware code. This law, a protection against hostile takeovers, limits the ability of new stockholders from entering into agreements with a company for a three-year period.

The Digex board waived this right, however, based largely on the votes of directors who also held seats on the Intermedia board.

“We’re alleging that Digex breached its fiduciary duties in granting that waiver,” McIntyre said. “The Digex board could have said, ‘We’re not granting this waiver unless you give some sort of benefit to the Digex shareholders,’ but they didn’t do that.”

In his ruling, the judge did not directly revoke the 203 waiver made by Digex’s board, but said that if the issue went to trial, Digex minority shareholders have “a likelihood of success.”

“If this case goes to trial, the defendants have the burden of proof establishing the entire fairness of the 203 waiver…As I have noted in this Opinion, the current record strongly suggests that the 203 waiver decision was not entirely fair to the Digex minority.”

A ruling in favor of the Digex minority would make WorldCom’s acquisition of Intermedia practically worthless. The carrier has already agreed to divest itself of all Intermedia assets except for the interest in Digex.

WorldCom, said the judge, is now faced with a tough decision.

“The defendant’s choice becomes whether they will proceed with a WorldCom-Intermedia merger knowing that this court seriously questions the integrity of the 203 waiver decision and knowing that certain of the defendant fiduciaries stand accused of faithless acts,” the judge’s decision said.

McIntyre declined to say if WorldCom and the Digex minority were negotiating a settlement. No trial date on the 203 issue has been set, however.

A WorldCom spokesman declined to comment.