Dana Herra Aug. 31, 2015, 12:17pm

A shareholder in Chicago-based medical imaging company Merge Healthcare has filed suit in Cook County Circuit Court in an attempt to stop the company’s pending merger with IBM.

Andrei Savu claims Merge’s board of directors acted against shareholders’ best interests when they agreed to the merger. Under the terms of the billion-dollar deal, holders of Merge’s common stock will receive $7.13 per share – which, the lawsuit claims, is just a penny more per share than the stock’s recent 12-month high. However, if the merger goes through, while shareholders will earn less than he believes they could, Savu alleges the board members stand to make millions of dollars for themselves through a series of questionable deals.

According to a news release about the merger, IBM plans to incorporate Merge’s imaging technology into its Watson system, a cognitive computing system that understands natural language and has the capacity to learn. With Merge’s imaging technology, health care applications of Watson will also be able to “see,” according to IBM. Watson’s so-called “health cloud” could analyze and cross-reference the images against a trove of lab results, electronic health records, clinical studies and a patient’s own past images.

In his lawsuit, Savu claims Merge’s value to IBM is worth far more than shareholders were offered. He also pointed to the company’s financial statements, which indicate it has not only experienced substantial revenue growth in recent quarters, but is poised for future growth and success that could benefit shareholders.

In claiming the board breached its fiduciary duty, Savu’s lawsuit says the merger is “rife with conflicts of interest.” If the merger is completed, the complaint specifically alleges Merge consultant Merrick Ventures LLC stands to receive $15 million under the terms of its consulting agreement. Merrick CEO Michael W. Ferro, who is named as a defendant in the lawsuit, is the chairman of the board of Merge; between his personal holdings and the Merge stock held by Merrick, the complaint asserts he controls nearly 30 percent of Merge’s total stock.

Some of Merge’s other directors also have interests in Merrick, the suit claims, and some of its executive officers have already entered into employment agreements with IBM once the merger goes through. Merge’s president and CEO Justin C. Dearborn is a former employee of Merrick, the suit claims, and has worked for Ferro in his last three executive-level positions. Other Merge directors named as defendants include Matthew M. Maloney, Michael P. Cole, William J. Devers Jr., Richard A. Reck and Neele E. Stearns Jr. The suit quotes a 2012 article in Crain’s Chicago Business which notes Ferro and Merrick had, at that time, benefited from more than $9 million in side deals transacted through Merge that had minimal, if any, benefits to Merge.

Savu also claims the terms of the merger agreement favor IBM, which is named as a defendant charged with abetting breach of fiduciary duty. The agreement purportedly includes a “no solicitation” provision that prohibits Merge officials from soliciting alternative bids and limits their ability to negotiate with any potential buyer who submits an unsolicited bid. The agreement also limits the circumstances under which the board could pull out of the merger and grants IBM the right to match any other company’s superior offer for Merge. If, after all that, the board still decided to pull out of the merger, Merge would have to pay IBM a $26 million termination fee, according to the lawsuit.

The lawsuit was filed by attorneys Edward T. Joyce and Rowena T. Parma, of Edward T. Joyce & Associates, of Chicago, as a class action on behalf of all Merge stockholders, excluding the defendants and any entities connected with them. Savu is also represented in the action by the firm of Bottini & Bottini Inc., of La Jolla, Calif.

The plaintiffs are asking the court to block the merger unless Merge implements an open bidding procedure and obtains the highest possible stock price. If the merger goes through while the litigation is pending, the plaintiffs ask that the court rescind it. They also request an accounting from the defendants for damages sustained and a recovery of their court costs. They have requested a jury trial.

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Organizations in this Story

Edward T. Joyce & Associates P.C.
135 S LaSalle St
Chicago, IL 60604

Bottini & Bottini Inc.
7817 Ivanhoe Ave
San Diego, CA 92037

Merge Healthcare Inc.
350 N Orleans St
Chicago, IL 60654

1 New Orchard Rd
Armonk, NY 10504

Cook County Circuit Court
50 W Washington St
Chicago, IL 60602

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