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On2 shareholders unhappy with Google deal

Lawsuit challenges the acquisition of the video-compression software company on grounds that it undervalues the company.

Google's acquisition of video-compression software company On2 Technologies is being challenged in court by On2 shareholders dissatisfied by Google's $106.5 million offer.

The lawsuit, which was filed Monday in Delaware Chancery Court, seeks class action status and a permanent injunction against the deal. The suit, first reported by the New York Post, also seeks an accounting of all damages caused by the defendants Google and On2's board of directors.

On2 declined to comment, and Google did not immediately respond to requests for comment.

Under the terms of the stock swap, which was announced earlier this month, each share of On2 will be exchanged for 60 cents' worth of Google common stock--a 57 percent premium over On2's closing stock price on the last trading day before the announcement. The complaint notes that On2's stock traded at 65 cents in May and reached as high as $1.16 in 2008.

The lawsuit also alleges that On2's board agreed to provisions that prohibit the company from entertaining other offers.

The deal, which is expected to close in the fourth quarter of this year, still needs the approval of On2 shareholders, but the board has yet to announce a date for the vote.

On2's video-compression technology is used in Adobe's Flash software and the Hulu video site, among others. The company licenses various "codecs"--the software used to encode video so it's compact enough to squeeze down a narrow Internet pipe, then to expand it at the other end.