Bear investors may challenge JPM buyout provisions

By Martha Graybow

NEW YORK (Reuters) - JPMorgan Chase & Co appeared to have a near guarantee on getting its takeover of Bear Stearns Co Inc approved by shareholders under a sweetened deal announced on Monday, but that doesn't mean the pact will be free of legal challenges.

It's not yet clear whether JPMorgan's new $10-a-share bid -- up from $2 a share initially -- will appease Bear Stearns shareholders who say the financially strapped company is being sold for a song. With the stock trading above $11 on Monday afternoon, some investors were betting a higher offer could emerge.

For shareholders who oppose the takeover and believe the company can command a higher price, there may be some legal avenues they can pursue to try to nix the deal or change its terms, corporate law experts say. Still, they say, it would likely be an uphill battle.

"The prospect of stopping this with an injunction is very difficult," said Michael Kelly, a partner at law firm McCarter & English who specializes in corporate litigation.

One thing shareholders may scrutinize is a so-called "deal protection" device in the revised bid that allows JPMorgan to buy 39.5 percent of newly issued Bear Stearns' common stock at $10 a share.

Together with a 3.6 percent stake held by Bear Stearns' board members, that would give JPMorgan more than 43 percent of the vote when the deal is put to shareholders -- greatly increasing the likelihood that it will win majority approval.

Legal experts say deal challengers could try to argue that Bear's board, by agreeing to sell this large chunk of stock, is now essentially barring any other viable bidders from coming on the scene, said Gordon Smith, a corporate law expert and professor at Brigham Young University's law school.

Such a move could raise questions about whether the board is performing its fiduciary duty to get the best offer for the company, from either JPMorgan or another entity.

"What the plaintiffs would have to show is that the board has acted in a way that precludes the other shareholders from accepting a third-party offer, or coerces them to accept this offer," he said.

If there are legal challenges, Smith said, JPMorgan would likely argue that the deal protection provision was needed to get the agreement done, and that it was part of the negotiations that led to the increased purchase price.

The New York Stock Exchange typically requires shareholder approval before a company can issue stock that is convertible into more than 20 percent of the outstanding shares, but there is an exception in cases when a company's financial viability is at stake. Bear Stearns' audit committee recommended, and the full board "has unanimously concurred with, Bear Stearns' intended use of the exception," the two companies said on Monday.

While there could be court challenges to the proposed buyout and share sale agreed to by Bear Stearns' board, corporate directors typically are given wide latitude by the courts with judges reluctant to second-guess their decisions, Kelly said.

In this case, it would be hard to argue that Bear Stearns' board had many other options, given that the deal won financial backing from the Federal Reserve as the company faced possible collapse because of a credit crunch.

Legal experts said there was a threat of litigation but did not know of any lawsuits challenging the deal. JPMorgan said it expects to complete the purchase of the new shares by April 8. The date of the vote by Bear's shareholders has not been set.

Also, Kelly said, no other bidders have emerged that a court could look to in the event of deal challenges, when it weighs the best alternatives for Bear Stearns.