The board of directors of Sprint Corp. formally amended a stock-option plan allowing accelerated vesting of stock options upon shareholder approval of a merger, according to a recent Securities and Exchange Commission filing.
Lawyers representing investors suing the telecommunications company over the original plans said the change reversed a policy allowing Sprint’s top five executives to pocket $600 million in stock options after shareholders approved an eventual failed merger proposal between Sprint and WorldCom Inc. last year.
“The change in policy is, in essence, an admission that Sprint’s executives used the change-of-control provision to make millions for themselves at the expense of shareholders and the company-and they knew what they were doing was wrong,” said Bill Lerach, partner at Milberg Weiss Bershad Hynes & Lerach L.L.P., the firm representing investors of Amalgamated Bank’s LongView Fund. The fund holds more than 600,000 shares of Sprint stock in retirement funds for thousands of investors.
Robin Carlson, group manager of national media issues and corporate issues for Sprint, said the filling with the SEC was just part of the company’s yearly filings, and had nothing to do with the lawsuit. Carlson noted Sprint was filing to have the lawsuit dismissed due to factual and legal errors.
The lawsuit, filed last December in Jackson County Circuit Court in Missouri, accuses Sprint management of a “breach of fiduciary duty, waste of corporate assets, unjust enrichment and fraud.” The lawsuit claims Sprint Chief Executive Officer William Esrey, Chief Operating Officer Ronald Lemay, former Sprint PCS President and COO Andrew Sukawaty, WorldCom CEO Bernard Ebbers and 20 other Sprint executives withheld information about Sprint’s proposed merger with WorldCom from shareholders prior to the shareholders voting to approve the merger.
The suit claims Sprint executives “secretly altered” company rules in 1998 to create new terms for an early acceleration of their options. The alteration allowed accelerated vesting of stock options if shareholders only voted to approve a proposed merger, irrespective of the eventual outcome. The lawsuit claims this was done when Sprint executives were faced with not being able to realize the value of their options, which were due to vest over several years.
Ned Holland, vice president at Sprint, told the Associated Press the idea of tying options to shareholder approval of a merger “was and remains common in the industry.”
Although the value of the options had increased substantially since they were sold to the executives at below-market levels, the suit alleges the defendants feared a severe downturn in prices would leave them with less return unless they could shorten the waiting period.
The lawsuit noted that after the reworded definition was put in place, Sprint and WorldCom announced plans for what would have been the largest merger in corporate history at the time. While the lawsuit acknowledges WorldCom’s Ebbers did not benefit financially from the proposed merger, he so “desperately wanted to get Sprint’s wireless unit” that he went along with merger announcement even though he had earlier declared at a PainWebber Inc. investor conference that he expected U.S. and European antitrust regulators to oppose the merger.
The lawsuit also claims that during this time, both WorldCom and Sprint knowingly altered financial results to show positive growth for both companies in an attempt to soothe investor fears.
Even though the Federal Communications Commission gave Sprint management “a clear sign the merger was in trouble” by putting a procedural hold on the application, according to the lawsuit, Sprint executives went ahead with the shareholder vote eight months before required under terms of the deal.
Sprint’s shareholders overwhelmingly approved the merger proposal last April.
Carlson said the vote went ahead at an accelerated rate at the request of WorldCom to shut out any competing bids for Sprint.
According to the lawsuit, Sprint employees received more than $1.1 billion from the plan, above and beyond the $600 million gained by the top five executives. In addition, more than 200 Sprint employees left the company after the accelerated stock plan took effect, placing a “brain drain” on the telecom operator.
Sprint’s recent filling also granted Esrey 3 million additional options in exchange for signing a new employment agreement.
“Reinstating the old change of control language is a victory for the working men and women whose retirement money we invest,” said Dail St. Claire, spokesperson for Amalgamated Bank. “But Sprint executives and directors continue to trample shareholder rights by setting themselves up to further dilute shares with cheap options and keeping the money they got from accelerated options for the sham WorldCom merger.”
