Jonathan Bilyk Jun. 10, 2016, 10:07am

A shareholder in Northbrook-based Nanosphere Inc., a company specializing in high-tech single-sample tests to detect a range of infectious diseases and other health problems, has challenged a merger deal the nanotech company reached a month ago with Texas-based competitor Luminex, saying the deal was not the best Nanosphere’s leaders could have made for its shareholders.

On June 8, Nanosphere shareholder Brahim Zafraoui filed his class action in Cook County Circuit Court against Nanosphere, its president and CEO Michael McGarrity and others in leadership at the north suburban company.

Zafraoui is represented in the action by attorney Jeffrey M. Salas, of the Chicago firm of Salas Wang LLC, and attorney Shane T. Rowley, of Levi & Korsinsky, a New York firm which advertises a focus on litigation involving securities fraud and mergers & acquisitions.

The June 8 filing centered on a deal announced in May between Nanosphere and Luminex, under which the larger biological test maker Luminex would acquire the 18-year-old Nanosphere for $58 million. According to information published at the time of the deal announcement, Luminex logged $238 million in annual sales, compared to just about $21 million for Nanosphere.

In recent years, Nanosphere’s revenues have increased annually, and were projected to rise as high as $30 million in 2016, according to financial documents cited in the class action complaint. Nanosphere’s growth has been driven largely by its so-called Verigene system, a lab test which allows health care professionals to detect a range of infectious diseases, including Norovirus, from a single patient blood sample. According to the complaint, citing an article published in the Chicago Tribune, the Verigene test has given Nanosphere a “clear advantage” and “has allowed Nanosphere to market its products to such hospital systems as the University of Illinois at Chicago Hospital, Lurie Children’s Hospital, NorthShore University HealthSystem, Evanston Hospital and Northwest Community Hospital.”

The complaint said “despite (Nanosphere’s) poise for future success,” Nanosphere’s leadership has pursued a merger deal with Luminex Zafraoui characterized as “inadequate,” potentially depriving him and other shareholders of greater profits from the sale of the company.

Under the deal announced May 16, Luminex agreed to help Nanosphere retire $25 million in debt, and offered shareholders a price of $1.35 per share, which the companies claimed was a 57 percent premium over Nanosphere’s share price at the time the deal was announced. The company later raised the per share offer to $1.70, after other unsolicited bidders purportedly inserted themselves into the negotiations.

However, Zafraoui has alleged Nanosphere’s corporate leaders did not properly “maximize shareholder value.”

Zafraoui specifically alleged Nanosphere’s stock should have been valued more highly by Nanosphere’s leaders, saying the company could have received a higher price from other potential suitors.

The class action argued corporate disclosures reveal a “sales process … tilted in favor of Luminex with the (Nanosphere) Board going out of its way to ignore or respond to competing bids at inopportune times.”

“Notably, (Nanosphere’s leadership) were somehow able to come to the conclusion that the initial $1.35 per share in cash Merger Consideration was ‘fair, from a financial point of view’ to Company stockholders, despite the fact that two days previously a third party had offered $1.65 per share in cash for the Company (Nanosphere,)” the complaint said.

Zafraoui alleged disclosures issued by the company lacked a number of details he claimed would have been beneficial to Nanosphere shareholders, and would have helped him and others like him “make an informed decision” on the merger and acquisition deal.

The class action asks the court to block the transaction, and order Nanosphere and its officers and directors to “account … for all damages caused by them and account for all profits and any special benefits obtained as a result of their breaches of their fiduciary duties.” The complaint also requested attorney fees and other unspecified damages.

Levi & Korsinsky is among a group of attorneys involved in similar actions challenging other mergers and acquisitions locally, including a recently settled shareholder challenge to the merger of retail pharmacy giants Walgreens and Alliance Boots. The settlement ending that shareholder class action has been challenged by a shareholder and the Competitive Enterprise Institute’s Center for Class Action Fairness, who recently argued the $370,000 awarded in fees to the group of plaintiffs’ attorneys was not proportional to the “trivial” informational disclosures Walgrees solely agreed to provide shareholders to end the legal challenge to the merger.

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