Stryker's PST Acquisition Raises Specter of Litigation

Stryker has been on a buying spree lately. It recently acquired Mako Surgical for nearly $1.7 billion and bought arthroscopy firm Pivot Medical Inc. in an all cash offer.

The company's plans to purchase Kalamazoo, MI-based Patient Safety Technologies (PST), however, have been complicated by threats of class-action litigation.

In order to quench several impending investor class-action suits over its announced acquisition by Stryker Corp., PST has agreed to make a number of additional disclosures concerning its current state of affairs. These new disclosures were set forth in a Form 8-K filing with the Securities and Exchange Commission (SEC) dated March 11.

The acquisition, which was announced on December 31, stipulated that Stryker would pay about $120 million, or $2.22 per share. This news was greeted by a clamor of lawyers, with at least a dozen law firms saying they were beginning investigations into possible breaches of fiduciary duty and other lapses. The noise became three lawsuits filed in the State of California and one in Delaware, all seeking to be given class action status.

On February 25, prior to the scheduled March 21 special shareholder meeting to vote on the sale, PST filed a Definitive Proxy Statement with SEC describing the conditions surrounding the deal to shareholders. The plaintiffs in the cases then added the disclosures in the Definitive Proxy Statement to their lists of grievances.

On March 11, PST management and the complainants in the four cases reached an agreement in principle providing for settlement of the actions. Terms and conditions for the settlement were set forth in a Memorandum of Understanding (MOU). In the MOU, PST management agreed to make certain supplemental disclosures and amend some of the disclosures in the Definitive Proxy Statement.

In addition to setting out some of the terms of the MOU, the Form 8-K makes numerous amendments, additions, and alterations to the original Definitive Proxy Statement.

While many of these are intended simply to clarify existing verbiage, some sentences and phrases stand out. For example, "Cardinal indicated that it valued Patient Safety below Patient Safety's market capitalization and as a result did not intend to make an offer for Patient Safety or otherwise pursue an acquisition."

Regarding two more companies approached by deal broker BofA Merrill Lynch, "Neither of the potential partners expressed interest in pursuing a transaction at that time."

Another potential suitor backed out, "expressing concerns over strategic fit and an inability to reach a valuation that would be acceptable to Patient Safety." Then two more paragraphs were amended by the new Form 8-K. Both of which subject companies were described as "expressing an inability to reach a valuation that would be acceptable to Patient Safety."

The company and other defendants in the proposed lawsuits vigorously deny any wrongdoing or dereliction of duty and say the only reasons they're agreeing to the settlement are to avoid the burden and expense of litigation, to put the matter to rest, and to not impede the consummation of the proposed sale.

While all the parties still have to sign off on the agreement, it now looks as though the shareholder vote will go off as planned, without a cloud of litigation hanging over the proceedings.

Stephen Levy is a contributor to Qmed and MPMN.