Kerkorian Investment Vehicle Plans
To Sue DaimlerChrysler Over Merger
By JEFFREY BALL and SCOTT MILLER
Staff Reporters of THE WALL STREET JOURNAL
In the first major crack in shareholder support for DaimlerChrysler AG
Chairman Juergen Schrempp, the auto maker's third-largest shareholder, Kirk
Kerkorian, sued the company and its top executives, alleging they committed
fraud in claiming that the 1998 deal creating the company was a "merger of
equals."
Tracinda Corp., the investment company owned by Mr. Kerkorian, seeks about
$8 billion (9.5 billion euros) in damages in its lawsuit, which it filed in
U.S. District Court in Delaware. The suit also seeks to break up
DaimlerChrysler, which was created when Germany's Daimler-Benz AG bought
Chrysler Corp. in 1998. The Tracinda suit also asks that Chrysler be
returned to its former shareholders. DaimlerChrysler officials had no
immediate comment on the lawsuit.
Deeper Troubles
Legal experts were doubtful that the suit can succeed, but the bitter
accusations in Mr. Kerkorian's suit add to Mr. Schrempp's troubles as he
and his lieutenants struggle to fix problems at the Chrysler unit that
appear to be far deeper than the German executives realized just a few
months ago.
The company's shares have lost about two-thirds of their value since
reaching a high of $108 in January 1999. Shares were up 1.8% to $40.95 in
New York.
The Chrysler subsidiary posted a loss of $512 million in the third
quarter -- its first quarterly loss in nine years -- and is expected to
post a loss again in the fourth quarter. Scrambling to stanch the bleeding,
Mr. Schrempp dismissed Chrysler boss James Holden this month and replaced
him with a lieutenant from DaimlerChrysler's German headquarters, Dieter
Zetsche.
Join a discussion: What will it take to get struggling Chrysler back on
track?
* * *
DaimlerChrysler's Chairman Says Results Will Not Show for a Year (Nov. 27)
Daimler, UAW Discuss Chrysler Pact as Pressure to Cut Costs Increases (Nov.
24)
New Chrysler Chief Is Likely to Bring Broad Cutbacks (Nov. 22)
Mr. Zetsche is considering a host of cost-cutting moves, including building
stripped-down versions of Chrysler cars and trucks and laying off workers.
On Monday he met with United Auto Workers' Stephen Yokich, according to a
person familiar with the situation. The two were expected to discuss the
idea of changing the 1999 labor contract between DaimlerChrysler and the
union to help rescue the auto maker. But it was far from clear that Mr.
Yokich, who sits on DaimlerChrysler's supervisory board, would agree to any
change in the contract, which was widely seen as a rich one for workers.
The tumble in DaimlerChrysler's stock comes as a particular blow to Mr.
Kerkorian, who has a history of dueling with Chrysler's management. He
tried unsuccessfully to buy out Chrysler in 1995, when he was the company's
largest investor. Now his Tracinda owns about 4% of DaimlerChrysler, a
stake exceeded only by Germany's Deutsche Bank AG and the Kuwaiti
Investment Authority.
In his lawsuit, Mr. Kerkorian asserts that the stock's slide is due
primarily to mismanagement by Mr. Schrempp and his team of German
executives, who have "fired almost all of Chrysler's top executives" since
they bought Chrysler. Citing a recent Financial Times interview in which
Mr. Schrempp is quoted as saying that he always intended Chrysler to be a
mere unit of the former Daimler-Benz, the suit says Mr. Schrempp "blatantly
lied to all concerned" when he described the deal with Chrysler two years
ago as a "merger of equals." "Had Mr. Kerkorian known the truth, Tracinda
would never have agreed to vote all of its shares for the merger," the
lawsuit says, and "Chrysler's board would never have approved the merger
without Tracinda's approval and the transaction would never have closed."
Because the company used the "merger of equals" description in
merger-related filings with the U.S. Securities and Exchange Commission,
Mr. Kerkorian's lawsuit alleges, Mr. Schrempp's "scheme" constituted a
violation of U.S. securities laws.
Terry Christensen, the Los Angeles lawyer representing Tracinda, said Mr.
Kerkorian "has been increasingly unhappy over the last few months" with
DaimlerChrysler's performance, but didn't inform DaimlerChrysler officials
of his intent to file the suit. The investor hasn't spoken with Mr.
Schrempp since the merger, said Mr. Christensen, who explained that the two
had been scheduled to meet at one point in the past two years but that Mr.
Schrempp canceled the meeting to travel to his ranch in South Africa.
Mr. Christensen acknowledged that a breakup of Chrysler is "probably the
least likely result" of the lawsuit. As for Tracinda's claim for about $8
billion, including about $2 billion in lost stock value, he said: "Do we
think it's realistic? We don't know. But we think it's fair." Referring to
the recent Financial Times interview, Mr. Christensen added: "The hardest
part of establishing a lawsuit, Mr. Schrempp decided to hand us on a
platter. He not only said he lied, he said why."
But legal experts doubted that Mr. Kerkorian's suit will succeed. Lawrence
A. Hamermesh, a professor specializing in corporate law at Widener
University School of Law in Delaware, says soft assurances about the fate
of managers and the whole concept of a "merger of equals" are probably too
vague to rise to the same level to prompt court action. "It would surprise
me, honestly, to find a Delaware court to say that would be the kind of
material representation that would justify relief," he said.
As a general principle, state laws in the U.S. prohibit managers soliciting
votes in favor of mergers from misstating "material" facts or omitting key
information. On that ground, courts have unwound mergers or ordered damages
in cases where an acquiring entity, in setting terms, undervalued assets or
concealed plans to maximize the target company's worth. "The question is,
to what extent representations or characterizations made in connection to a
vote were hard enough to be considered material, and whether they were
misstated or misleadingly omissive enough to justify some kind of relief,"
Mr. Hamermesh adds.
To establish fraud, "you have got to show that, at the time the statement
was made, that they knew it to be fraudulent and had a different policy in
mind," says John Coffee, a professor and business-law expert at Columbia
Law School. "These weren't contractual promises. This was a statement of
current intentions based on the facts that you then had in your possession,
which were necessarily incomplete," he says. "Management doesn't tie its
hands to the future by expressing its current philosophy towards handling
an acquisition."
Getting Support
DaimlerChrysler's other big shareholders don't appear to be as impatient
with Mr. Schrempp as Mr. Kerkorian does. Deutsche Bank owns about 12% of
DaimlerChrysler, and earlier this month, Deutsche Bank Chief Executive Rolf
Breuer reaffirmed his backing of Mr. Schrempp, even if he didn't like the
share price. "I am deeply confident that DaimlerChrysler will get the
situation under control," he said at a Frankfurt conference. A Deutsche
Bank spokesman said Monday that the institution's attitudes about
DaimlerChrysler haven't changed since those remarks.
The Kuwait Investment Authority, which owns about 7% of DaimlerChrysler's
shares, expressed similar support for the company. Yousef Alawadi,
president and chief executive of the Kuwait Investment Office, said in late
October that he was a long-term investor in DaimlerChrysler and had no
interest in selling any of its shares. "Management is doing the right
things," he said.
--Richard B. Schmitt contributed to this article.
Write to Jeffrey Ball at jeffrey.ball@wsj.com and Scott Miller at
scott.miller@wsj.com
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