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Shareholders challenge Google deal to buy On2

* Suit seeks to block Google’s acquisition of On2

* Says 60 cents/share well below recent On2 level

* Seeks class action status for On2 shareholders

SAN FRANCISCO, Aug 12 (Reuters) - Google Inc's GOOG.O deal to buy video compression software company On2 Technologies Inc ONT.A is being challenged in court by On2 shareholders unhappy about the $106.5 million price and the terms of the deal.

Google declined on Wednesday to comment on the suit, filed in Delaware Chancery Court on Monday and seeking class action status, as well as a permanent injunction blocking the deal. The suit also called on the defendants to account for all damages caused.

The move comes a week after Google announced the deal -- the first acquisition of a public company in its history. [ID:nN05225804]

The deal would give Google valuable technology as it seeks to reduce the cost of operating its YouTube video site and to foster the spread of video on the Internet.

Google’s offer of 60 cents a share represents a 57 percent premium from the closing price of On2’s stock on the last trading day before the announcement. According to the suit, however, the price is well below the level where On2’s stock traded in the few months prior to the proposed transaction.

The suit alleges that, on May 13, On2’s stock traded at 65 cents. The shares reached $1.16 in 2008, according to the suit.

According to Reuters data, On2’s shares began the second quarter at about 30 cents and ended it at above 40 cents.

The complaint also notes that On2 reported its best quarterly financial results in six quarters the day after the deal was announced.

“Defendants rushed to announce the proposed transaction at $0.60 per share on August 5th ahead of the positive earnings results announced the next day, thereby placing a cap on the company’s stock price,” the suit read.

According to the complaint, the deal contained various provisions -- including a “no shop” clause and a $2 million termination fee if On2’s board accepts a superior deal -- to ensure that no competing offers emerge.

On2 was not immediately available for comment. (Reporting by Alexei Oreskovic; editing by Andre Grenon)