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Computer Associates may face suit

A class action by Computer Sciences shareholders against the company board names Computer Associates as a nominal defendant.

Computer Sciences (CSC) is damned if they do and damned if they don't. Either way, a shareholder lawsuit is waiting in the wings.

Such is the predicament facing Computer Sciences' board of directors as it mulls over Computer Associates' ( CA) $9 billion unsolicited acquisition bid (See related story).

But before the board even had a chance to decide whether to accept the deal, it learned that both companies have been named as defendants in a class-action complaint as a result of CA's acquisition intentions.

The complaint was filed in connection with CA's offer to acquire Computer Sciences for $108 per share. Filed in the Nevada District Court of Clark County, the allegations focus on CSC and its board of directors, all of whom have been named as defendants in the lawsuit.

The complaint questions "whether the defendants have engaged or are continuing to act in a manner calculated to benefit themselves at the expense of Computer Sciences shareholders."

Brad Rock, a lawyer specializing in mergers & acquisitions at Gray Cary Ware & Freidenrich, said this kind of lawsuit is a tool by which shareholders can make a favorable change in a proposed deal.

Computer Associates' bid for CSC was nearly 20 percent premium to what the stock was trading at. Nevertheless, Rock said, "no premium is, in and of itself, enough."

Rock said that the board of directors essentially is in a lose-lose position. It could decide on a price that is a 5 percent or 500 percent premium, he said, and shareholders still can claim that they did not get the best possible value. Conversely, he predicted that, if CSC's board decides against the deal, shareholders will sue for breech of duty because it was the best deal in town.

Michael Dickerson, a CSC spokesman, said that Computer Sciences has yet to see the complaint and thus could not comment.

The complaint seeks the appointment of a special committee of the Computer Sciences board. The committee would consider the CA offer and negotiate on behalf of the CSC shareholders. The class action alleges that the interests of CSC's board differs with those of its shareholders, and that, therefore, the board cannot be expected to act in the best interest of the company's investors.

Indeed the board does have a duty to get the best possible price, and Rock said that the plaintiffs in the class action are ready claim that some stones have been left unturned, which would make the board liable. He added that it is not uncommon to have a special committee set up on the behalf of stock owners.

These kind of suits, however, often are not aimed at the deal in question, Rock said. Rather, they frequently are based on investors looking to gain monetary damages from either possible outcome.

"People race to the courthouse because lawyers realize if they want to be the ones chosen to represent the class, they have to be first in line," he said. "Basically, the suit says no matter what [the board does], we will challenge it."

He said that the reason CA was named in the suit is because if they end up buying CSC, then they will own the company and consequently inherit the lawsuit.

The complaint also alleges that CSC board members have clear and material conflicts of interest and that they are "using their positions of power and control to the detriment of the Computer Sciences common shareholders."

The suit was filed on behalf of CSC shareholder Frances Bornstein by the law firms Albright, Stoddard, Warnick & Albright of Las Vegas and Abbey, Gardy & Squitiere of New York.

Under the terms of the pending $9 billion deal, Computer Sciences shareholders would receive $108 in cash for each share of CSC common stock, according to CA. The combined companies would have revenues of more than $11 billion and employ more than 50,000 workers.

CSC said yesterday that its management, board of directors, and professional advisers will evaluate the offer and that the board's response will be issued when that evaluation is complete. Dickerson said today that CSC has no new comment on the Computer Associates bid for the company.

"Nothing has changed," he said. "Senior management continues to meet and to discuss the situation."