(CN) - Knology Inc.'s shareholders claim in a class action that the proposed buyout of the company by WideOpenWest Finance is the "result of a tainted process."
"The proposed transaction reflects an effort by the individual defendants to aggrandize their own financial position and interests at the expense of and to the detriment of Knology's public shareholders," the complaint states.
WideOpenWest will acquire all of the outstanding shares of Knology for $19.75 per share in cash, according to the complaint, and the company is valued at approximately $1.5 billion, including debt.
Knology's own financial adviser, Merrill Lynch valued shares as high as $22.25 each. Calling the proxy statement "false and misleading," the class claims that the company also failed to disclose important information to its stockholders and that the company's financial advisors, Credit Suisse Securities and Merrill Lynch, had "a material conflict of interest" when they were working with the board on the sale.
"The proxy statement fails to provide the company's shareholders with material information and/or provides them with materially misleading information thereby rendering the shareholders unable to make an informed decision on whether to approve the proposed transaction," the complaint states.
Shareholders question why the board decided to pursue the deal when the company was experiencing its biggest revenue gains in two years.
WOW is a controlled affiliate of Avista Capital Partners, L.P. and both Merrill Lynch and Credit Suisse, according to the lawsuit, are invested in or have long term business relationships with Avista.
"Credit Suisse had an incentive to ensure that WOW purchases the Company for the lowest price possible," the complaint states. "Credit Suisse will receive approximately $28.1 million in fees for providing a portion of the debt commitment and serving as joint lead arranger in the proposed transaction ... Merrill Lynch has a substantial business relationship with Avista Capital, having provided at least five substantial services to Avista Capital . . . and earning approximately $17.1 million for such services."
The standard deal protection devices are attached to the sale including a "no solicitation" clause, a three day window to match any offer and a $25 million termination fee. There is also an amendment to the company's poison pill eliminating it as a barrier to the sale while leaving it in place as a barrier to any potential competing acquisition offer.
According to the proxy statement, "Knology's directors and executive officers have interests in the merger that are different from, or are in addition to, the interests of (its) stockholders generally."
The Delaware company is a provider of interactive communications and entertainment services to both residential and business customers in the Southeast, upper Midwest and Kansas and offers digital cable TV, local and long distance digital telephone service and high-speed Internet access. Its principal offices are in Georgia.
"Our two companies have much in common. We share similar beliefs in how employees and customers should be treated, and we both know how to succeed in competitive environments," Knology Chairman and CEO Rodger L. Johnson said in a press release announcing the sale.
The complaint, filed in Delaware Chancery Court names Johnson as well as the rest of the board members as well as WOW.
Shareholders are represented by Seth D. Rigrodsky, Brian D. Long and Gina M. Serra of Rigrodsky & Long in Wilmington, Del. and Shannon L. Hopkins and Allen Schwartz of Levi & Korinsky LLP in New York.