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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
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AMRITA SINHA, Derivatively and on behalf of :
Digex, Inc., :
:
Plaintiff, : CIVIL ACTION NO. 18391-NC
:
v. :
:
DAVID C. RUBERG, PHILIP A. CAMPBELL, :
JOHN C. BAKER, GEORGE F. KNAPP, :
MARK K. SHULL, ROBERT M. :
MANNING, AND INTERMEDIA :
COMMUNICATIONS, INC., :
:
Defendants, :
:
and :
:
DIGEX, INC.; :
Nominal Defendant. :
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DERIVATIVE COMPLAINT
Plaintiff, by her attorneys, allege upon personal knowledge as to her
own acts and upon information and belief as to all other matters, as follows:
1. Plaintiff brings this action derivatively on behalf of Digex,
Inc. ("Digex" or the "Company") for injunctive and other relief. Plaintiff seeks
injunctive relief herein, inter alia, to enjoin the implementation of a
transaction whereby WorldCom Inc. ("WorldCom") has agreed to buy defendant
Intermedia Communications, Inc. ("Intermedia"), the 54% owner of Digex, for
approximately $6 billion in stock and debt in order to gain control of Digex
and to enjoin the agreement to waive Section 203 of Delaware General
Corporation Law. Intermedia had put Digex up for sale and had received several
offers, including one offer from Exodus Communications, Inc.
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("Exodus") to purchase Digex for $120 per share, representing a significant
premium for Digex stock, which had been trading in the mid-$80 range. However,
Intermedia refused to sell Digex alone and insisted that buyers acquire
Intermedia instead, thereby usurping Digex's corporate opportunity for itself.
Intermedia and Digex's Board of Directors, half of whom are also Intermedia
Board members, suffer from a conflict of interest and divided loyalties and have
breached their fiduciary duty of loyalty to Digex by permitting Intermedia to
usurp Digex's corporate opportunity, approving the WorldCom transaction and
approving a waiver of Section 203 of the Delaware General Corporation Law
against the recommendation of Digex's special committee.
PARTIES
2. Plaintiff is a shareholder of Digex and has been a shareholder during
the period when defendants breached their duties and committed the acts alleged
herein.
3. Nominal Defendant Digex is a Delaware corporation with principal
executive offices located at One Digex Plaza, Beltsville, Maryland 20705. Digex
provides website hosting services to businesses and organizations implementing
complex, interactive websites and web-based applications.
4. Defendant Intermedia is a Delaware corporation with principal
executive offices located at One Intermedia Way, Tampa, Florida 33647.
Intermedia provides integrated communications services, including local, long
distance, high-speed data and Internet services, to business and government
customers. Intermedia owns approximately 54% of Digex's outstanding shares and
controls approximately 94.2% of the voting interest in Digex. Intermedia also
controls the Digex Board of Directors through its ownership and voting interest.
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5. Defendant David C. Ruberg is the Chairman of Digex's Board of Directors.
He is also Chairman of Intermedia's Board of Directors and Intermedia's
President and Chief Executive Officer.
6. Defendant Philip A. Campbell is a Director of Digex and a Director of
Intermedia.
7. Defendant John C. Baker is a Director of Digex and a Director of
Intermedia.
8. Defendant George F. Knapp is a Director of Digex and a Director of
Intermedia.
9. Defendant Mark K. Shull is a Director of Digex and the President and
Chief Executive Officer of Digex.
10. Defendant Robert M. Manning is a Director of Digex and the Chief
Financial Officer of Intermedia.
SUBSTANTIVE ALLEGATIONS
11. Digex provides storage for corporate websites, and its clients include
Ford Motor Co., J.P. Morgan & Co., and Martha Stewart Living Omnimedia Inc.
Intermedia sells basic phone and Internet services, and faces stiff competition
from BellSouth Corp. in its primary markets.
12. In July, 1997, Intermedia bought Digex for approximately $150 million
cash, and thereafter sold Digex stock to the investing public in July, 1999 and
again in February, 2000. Intermedia currently owns approximately 54% of Digex's
outstanding shares and controls approximately 94.2% of the voting interest in
Digex. As the majority shareholder of Digex, Intermedia owes a fiduciary duty of
loyalty to Digex and its minority shareholders.
13. Digex stock has significantly outperformed Intermedia. As recently as
August 3, 2000, Digex stock jumped 13% after Digex raised revenue projections
for 2000 and 2001.
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Specifically, Digex announced that second quarter 2000 sales more than tripled,
and Digex raised its 2000 sales projections by 10% to $165 million for 2000 and
$300 million for 2001, compared to less than $60 million in 1999 sales.
Intermedia stock, by contrast, has dropped 41% this year, and it announced in
July that its 2000 sales would be 10% to 15% lower than analyst expectations.
Intermedia stock dropped again after that announcement, trading in the high
teens for most of August 2000. Intermedia was privately considering several
options, including filing for bankruptcy.
14. As a result of the decline in the market price of Intermedia's stock
and the upswing in the market price of Digex stock, as well as Intermedia's
approximately $2.4 billion in debt, the market capitalization of Intermedia as a
whole ($1.2 billion), was significantly less than Intermedia's stake in Digex
($3.3 billion).
15. Intermedia hired investment banker Bear, Stearns & Co. to explore
options for Digex, including a sale, and thereafter put up Digex for sale.
During the auction, Directors Reich and Jalkut were named to a special committee
to protect the rights of Digex's minority shareholders. By late August 2000,
Digex began receiving bids, at least one of which valued Digex at approximately
$8.5 billion. Exodus offered about $120 per share and Global Crossing Ltd. made
a three-way bid for Intermedia and Digex. Intermedia had sold stakes in itself
to various entities, including Kohlberg Kravis Roberts & Co. which purchased a
12.7% stake in Intermedia. These outside investors in Intermedia stood to lose
virtually all of the value of their investments if Intermedia sold Digex to a
third party.
16. Intermedia's Board rejected all of the offers for Digex. To rescue
Intermedia from its financial woes and to provide its investors with the benefit
of the value of Digex, Intermedia refused to sell Digex alone and insisted that
buyers acquire Intermedia instead. WorldCom wanted to buy Intermedia but needed
Digex's Board to approve the transaction, including an agreement to
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waive Section 203 of Delaware General Corporation Law -- "Business combinations
with interested stockholders" ("Section 203"). Section 203 is intended to
protect minority shareholders by discouraging acquisitions of control by anyone
without the approval of the issuer's Board -- in this case, Digex's Board.
Without this waiver, WorldCom would not be able to do certain transactions with
Digex for a three-year period, including combining assets with Digex. Digex's
special committee of Directors Reich and Jalkut recommended against and voted
against granting the waiver of Section 203. Prior to the vote on the waiver,
Directors Reich and Jalkut had made a recommendation to the Digex Board that
any sale to WorldCom be delayed and that Digex solicit bids from other
companies. Although the special committee's recommendation on whether to waive
Section 203 is usually accepted because the special committee provides an
independent and objective opinion, in a highly unusual move, the Digex Board
went against the advice of the special committee and agreed to waive Section
203, clearing the way for WorldCom's acquisition of Intermedia and ending the
chance of the sale of Digex and a takeover premium for Digex's minority
shareholders. Digex's Board's rejection of the special committee's
recommendation is an extremely rare occurrence and as a matter of practice, a
special committee's recommendation is virtually always followed.
17. On September 5, 2000, Intermedia and WorldCom jointly announced that
the Boards of Intermedia, WorldCom and Digex has each approved a definitive
merger agreement whereby WorldCom would acquire all of the outstanding shares
of Intermedia common stock for $39 in WorldCom common stock, subject to a
collar (the "Merger"). The Merger represents a 70% premium for Intermedia
shares based on the closing price before the announcement.
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18. Following the announcement of the Merger agreement with WorldCom --
which the Digex Board had approved -- the media reported that Intermedia had
rejected Exodus' $120 per share offer for Digex alone.
19. The Merger offers no benefit for Digex or its shareholders but strips
Digex of its true value and corporate opportunity to sell itself for its true
value. Digex's minority shareholders will remain minority shareholders of
Digex. Upon the Merger announcement, Digex common stock fell from $84.50 per
share to $67.875 per share on September 5, 2000.
20. Kohlberg Kravis Roberts & Co., which had a 12.7% interest in
Intermedia acquired for a $200 million investment, which was convertible at $36
per share, will break even in the WorldCom acquisition of Intermedia.
21. Intermedia, acting through and/or with the support of the individual
defendants, has appropriated for itself the true value of and corporate
opportunity belonging to Digex and reaps the benefits of a transaction that, in
reality, represents WorldCom's acquisition of control over Digex, all at the
expense and to the detriment of Digex and its minority shareholders. The only
reason for WorldCom to do the Merger at all is to acquire Digex.
CLAIM FOR RELIEF
22. The individual defendants, as directors of Digex who hold their
positions only at the pleasure of Intermedia, and Intermedia, as the majority
shareholder of Digex, have a fiduciary duty of loyalty to Digex and are
required to maintain and preserve Digex's corporate opportunities for the
benefit of Digex alone. Defendants, however, suffering from disabling conflicts
of interest and divided loyalties, have breached their fiduciary duty by (1)
permitting Intermedia to usurp Digex's corporate opportunity by requiring
WorldCom to buy Intermedia instead of Digex when
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Digex was the acquisition target and was itself up for sale; and (2) by
agreeing to waive Section 203 against the advice of Digex's special committee.
DERIVATIVE ALLEGATIONS
23. Plaintiff brings this action derivatively for the benefit of
Digex to redress injuries suffered and to be suffered by Digex as a direct
result of the breach of fiduciary duty of loyalty by defendants.
24. Plaintiff has owned Digex common stock during the wrongful course
of conduct by defendants alleged herein and continues to own Digex common stock.
25. Plaintiff will adequately and fairly represent the interests of
Digex and its shareholders in enforcing and prosecuting their rights and have
retained counsel competent and experienced in stockholders' derivative
litigation.
DEMAND ON THE DIGEX BOARD IS EXCUSED AS FUTILE
26. Plaintiff has not made demand on the Digex Board to bring suit
asserting the claims set forth herein because Intermedia controls the Board of
Digex whose members sit on the Board solely at the pleasure of Intermedia and
Intermedia has obtained the benefit of the improper conduct alleged herein. In
fact, in order for Intermedia's wrongful conduct to succeed Intermedia caused
the Digex Board to agree to waive Section 203 against the advice of the special
committee. A majority of Digex's directors suffer from conflicts of interest and
dividend loyalties which preclude them from exercising independent business
judgment. Four of Digex's directors -- defendants Ruberg, Campbell, Baker and
Knapp -- are also directors of Intermedia. Defendant Ruberg is Chairman of both
Intermedia's Board and Digex's Board. Defendant Shull is a director of Digex and
the Chief Financial Officer of Intermedia. Demand on defendants would be futile
and useless because the Digex Board approved the WorldCom merger and agreed to
waive Section 203,
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permitting their loyalty to Intermedia to supersede their fiduciary duty of
loyalty to Digex. Such action, motivated by conflict of interest and divided
loyalty was not the product of sound or independent business judgment and is
not protected from judicial scrutiny. Under these circumstances, defendants
could not be expected to sue Intermedia or themselves.
WHEREFORE, plaintiff prays for judgment and relief as follows:
A. Declaring that the individual defendants, as directors of Digex, and
Intermedia, as majority shareholder, have breached their fiduciary duty of
loyalty to Digex;
B. Preliminarily and permanently enjoining defendants and their counsel,
agents, employees, and all persons acting under, in concert with, or for them,
from proceeding with or implementing the Merger;
C. Rescinding the Digex Board's waiver of Section 203 and ordering the
appointment of an independent Board of Directors for Digex;
D. In the event the Merger is consummated, rescinding it and setting it
aside and/or imposing a constructive trust upon the proceeds received by
Intermedia;
E. Awarding Digex its damages caused by defendants' breach of fiduciary
duty and Intermedia's usurpation of Digex's corporate opportunity;
F. Awarding Digex the benefits defendants received from their improper
conduct;
G. Awarding plaintiff her costs and disbursements and reasonable
allowances for plaintiffs' counsel's and experts' fees and expenses; and
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H. Granting such other and further relief as may be just and proper.
Dated: October 4, 2000 CHIMICLES & TIKELLIS LLP
/s/ PAMELA S. TIKELLIS
________________________________
Pamela S. Tikellis
Robert J. Kriner, Jr.
Timothy R. Dudderar
One Rodney Square
Wilmington, Delaware 19899
(302) 656-2500
Attorneys for Plaintiff
OF COUNSEL:
Wolf, Haldenstein, Adler, Freeman & Herz, LLP
270 Madison Avenue
New York, NY 10016
(212) 545-4600
Law Offices of Bruce G. Murphy
265 Llwyds Lane
Vero Beach, Florida 32963
(561) 231-4202
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