NEW YORK, May 10 – LAWFUEL – The Law News Network — A longtime owner of a seat on the New York Stock Exchange has brought a class-action suit against NYSE directors and Goldman Sachs, seeking an injunction to stop the NYSE’s proposed historic merger with electronic exchange Archipelago Holdings, Inc.
The suit, filed in New York State Supreme Court, alleges that the deal is
grossly skewed in favor of Archipelago to the detriment of the 1,366 seat
holders who collectively own the NYSE. The seat holders charge the directors
with a breach of fiduciary duty for failure to act in the best interests of
NYSE members, while accusing Goldman Sachs of a conflict of interest in acting
as financial advisor to both parties.
The action was brought jointly by prominent securities law firm Grant &
Eisenhofer, P.A. teamed with the Philadelphia trial and appellate firm Raynes
McCarty.
Announced last month, the proposed merger would create a new entity called
NYSE, Inc, with a value of approximately $4 billion. Current seat owners of
the non-profit NYSE would receive shares in the newly formed company, ending
the old-fashioned system of limited trading seats but creating a market in
NYSE shares for the first time in history. Under the terms of the merger,
70% of the equity would go to current NYSE members and 30% to shareholders of
Archipelago.
“You only have to do the math to understand the unfairness of this deal,”
said Jay Eisenhofer, a name partner of Grant & Eisenhofer. “The proposed
merger values the NYSE at less than $3 billion, which is obviously
significantly undervalued, considering that this is the world’s largest
exchange, accounting for an average daily trading volume of some 1.63 billion
shares representing nearly $56 billion in securities. Compare that to the
projected valuations of other major exchanges and you see an immediate red
flag that something is wrong with this picture.”
“This case is about fundamental fairness to the NYSE seat holders,” said
Arthur Raynes, senior partner of Raynes McCarty. “Many of the seat holders
have held their seats for decades. They are entitled to realize the true
value of their investment. The proposed deal does not do that.”
The lawsuit notes the Chicago Mercantile Exchange is currently valued at
$7 billion, though it has far less trading volume and a much smaller market
capitalization. Similarly, the Toronto Stock Exchange is valued at $1.7
billion dollars, with barely one-tenth the daily trading volume of the NYSE.
Even NASDAQ is valued as $1.2 billion, more than a third of what would be
attributed to the NYSE in the Archipelago deal, even though the equities
represented on the exchange are not even 20% of the global market value of the
NYSE.
The Wall Street Journal reported that Benn Steil, a senior fellow in
international economics at the Council of Foreign Relations who does
consulting work for Archipelago, recently concluded that NYSE seat holders
should receive as much as 90% of the combined company.
“We are not opposed to the merger in principal,” said William Higgins, the
NYSE seat holder who is acting as lead plaintiff in the class action. Mr.
Higgins, who has held his seat since 1974, is president of the Association of
NYSE Equity Members, Inc. “In fact,” he added, “it makes good business sense
for the NYSE to seek a technology-based trading partner that can move the
exchange forward into new platforms and advance new efficiencies.”
“What I — and many of my fellow seat holders — object to are the terms
of this deal and the ways in which the exchange’s directors breached their
duty,” continued Mr. Higgins. “And we take particular umbrage at the way
Goldman Sachs has manipulated the deal to its own advantage as a substantial
Archipelago stakeholder that will own 5% of the new company.”
In addition to the million of dollars in investment banking fees the firm
will be earning, including a $3.5 million advisory fee from Archipelago,
Goldman Sachs has seen the value of its holdings in Archipelago increase by
more than $80 million.
The suit alleges three causes of action against the NYSE directors and
Goldman Sachs for breach of fiduciary duty based upon myriad facts, including
the following:
* Goldman Sachs, which is underwriting the merger, holds 21 seats on the
NYSE and also owns 15% of Archipelago. Under the terms of the merger,
Goldman will emerge owning 5% of NYSE Inc. The suit alleges that this
gave Goldman Sachs an incentive to overvalue Archipelago and a conflict
of interest in the transaction. Since the announcement of the merger on
April 20, trading in Archipelago stock has jumped from $16 per share to
more than $35.
* John Thain, CEO of the NYSE, previously served as Chief Operating
Officer and President of Goldman Sachs. Remarkably, Thain did not
recuse himself from the decision to retain Goldman Sachs, and instead
agreed to allow the firm to advise both sides of the transaction.
* The merger terms include unfair “lock-up” provisions for NYSE members.
Post-merger, shareholders who formerly were NYSE seat holders will
receive new shares subject to sale restrictions of up to five years. In
contrast, the vast majority of former Archipelago shareholders will be
free to sell their shares immediately without restrictions. The suit
alleges that the lock-up provisions unfairly favor Archipelago
shareholders – most notably Goldman Sachs – and the inclusion of the
provisions was a breach of fiduciary duty by NYSE directors.
* As unfair as the 70/30 split of equity is between the NYSE and
Archipelago, it gets worse: NYSE seat holders might actually get a
smaller piece of the new company. Under the terms of the deal, the NYSE
could hold back 5% of its shares in the new company to allocate to
executive employees of the NYSE. This would include senior NYSE
executives who structured the merger. The suit alleges that including
this deal term was a breach of fiduciary duty by the NYSE board of
directors.
“We were shocked when we learned the terms of the deal,” Mr. Higgins said.
“The NYSE is a not-for-profit corporation and an important public institution
with a huge vital role in American life. And yet the executives charged with
overseeing the exchange have abandoned their duty to its membership in
striking this lopsided deal with Archipelago Holdings. We have spoken with
many other seat holders who are as dismayed as we are by the inequity of this
merger and we expect a groundswell of support for our action.”
Wilmington and New York-based Grant & Eisenhofer represents institutional
investors in securities litigation. The firm, which has recovered more than
$2 billion for shareholders in the last five years, is currently lead counsel
in securities actions against Global Crossing, Tyco, Parmalat and most
recently, Marsh & McLennan. For more on the firm, go to http://www.gelaw.com.
Philadelphia-based Raynes McCarty is an internationally renowned trial and
appellate firm securing landmark results for its clients for over 35 years.
For more on the firm go to http://www.raynesmccarty.com.
To arrange an interview with Jay Eisenhofer or to obtain a copy of the
complaint in this case, please call Allan Ripp 212-721-7468 or Carla Main
212-721-7421
Web Site: http://www.gelaw.com http://www.raynesmccarty.com
