Knight Buyout: Lawsuit Material?

Matt is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Is the potential buyout of Knight Capital (NYSE: KCG) worthy of a lawsuit?

I hadn't thought so, especially because no deal has taken place and the board is still considering a lot of possibilities, including snubbing both deals and keeping the company independent. But apparently one Wall Street law firm does:

Faruqi & Faruqi, LLP ... is investigating the Board of Directors of Knight Capital Group ... for potential breaches of fiduciary duties in connection with their conduct related to the proposed sale of the Company to Getco LLC in an all-cash deal valued at approximately $1 billion. Under the terms of the proposed transaction, Knight Capital’s stockholders will receive $3.50 in cash for each share of Knight Capital’s common stock they own.

Say what? 

I'm no lawyer, but I've got to wonder how "breaches of fiduciary duties" could have taken place in the absence of any sort of action by the board. But maybe that's one of those lawyerly things that I'll never understand.

More importantly, unless I missed something, it appears that Faruqi & Faruqi isn't even clear on what Getco's proposed deal is. For one thing, it's not an all-cash deal. It's a cash and stock deal that would involve Getco coming public via a reverse merger with Knight. Second, it's questionable to refer to it as a "deal valued at approximately $1 billion." If we were to take an overly simplistic look at the deal, and take the $3.50 that Getco's proposed paying for some shares and multiply that by currently-outstanding shares (assuming conversion of the preferred shares), that would value the company at closer to $1.3 billion. 

I will say that research is slightly complicated by the fact that the link to Getco's proposal letter on the SEC's website is broken, so at the moment we don't have access to the key primary document. And, like I said, maybe Faruqi & Faruqi knows something that I don't. But if that's the case, then they also know something that The Wall Street Journal doesn't know. From a WSJ article on Friday:

Chicago-based Getco, an electronic market-maker, disclosed in a filing Wednesday an offer for Knight that would pay $3.50 a share for about half of Knight's outstanding shares, with further compensation in the form of stock in a combined, publicly traded company. That offer values Knight at between $1.4 billion to $1.8 billion, including debt, depending on the value of shares in the combined entity.

It'd also be something that Reuters doesn't know. On Wednesday, Retuers reported: "Getco proposed a $1.4 billion cash and stock deal that would see it merge into Knight as a public company."

I'm often willing to give the benefit of the doubt, but as far as I can tell, this looks like one of those classic face-palm moments for the folks at Faruqi & Faruqi.


TMFKopp has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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