M&A

Lawsuit Seeks to Stop NYSE Merger

Alleges that NYSE directors breached their fiduciary duty by agreeing to a deal that favors Archipelago, and accuses Goldman Sachs of a conflict of...
Stephen TaubMay 10, 2005

The $4 billion merger deal between the New York Stock Exchange and Archipelago Holdings hit a speed bump that could delay or even derail the agreement.

William Higgins, a longtime owner of a seat on the New York Stock Exchange, has filed a class-action lawsuit that seeks an injunction to stop the merger. The suit, filed in New York State Supreme Court, alleges that NYSE directors breached their fiduciary duty by agreeing to a deal that favors Archipelago at the expense of NYSE members, and accuses Goldman Sachs of a conflict of interest in acting as financial advisor to both parties.

The action was brought jointly by securities law firm Grant & Eisenhofer P.A. and trial and appellate firm Raynes McCarty.

“I think everybody agrees that converting the exchange to a for-profit entity is a good idea, and I think everybody agrees that merging with Archipelago is probably a good idea,” Jay Eisenhofer, a partner at Grant & Eisenhofer, told the Associated Press. “It’s the terms that my client thinks are objectionable.”

Under the merger deal, the Big Board’s 1,366 seat owners would receive shares in the newly formed company, which will be publicly traded; 70 percent of the equity would go to current NYSE members and 30 percent to Archipelago shareholders.

“We are not opposed to the merger in principal,” said Higgins, who has held his seat since 1974 and is president of the Association of NYSE Equity Members Inc. “In fact, it makes good business sense for the NYSE to seek a technology-based trading partner that can move the exchange forward into new platforms and advance new efficiencies,” he added in a statement.

He also stated, however, that “we take particular umbrage at the way Goldman Sachs has manipulated the deal to its own advantage as a substantial Archipelago stakeholder that will own 5 percent of the new company.” Higgins pointed out that not only will Goldman earn millions of dollars in investment banking fees, including a $3.5 million advisory fee from Archipelago, but it has also seen the value of its holdings in Archipelago increase by more than $80 million.

The suit alleges a breach of fiduciary duty for at least three reasons:

• Goldman Sachs, the underwriter, holds 21 seats on the NYSE and owns 15 percent of Archipelago; under the merger deal, Goldman would own 5 percent of the combined NYSE Group Inc.

• NYSE chief executive officer John Thain did not recuse himself from the decision to retain Goldman Sachs even though he previously served as that firm’s chief operating officer and president.

• After the merger is completed, the former NYSE seat holders will receive new shares subject to sale restrictions of up to five years, added Higgins, while most former Archipelago shareholders — including Goldman Sachs — would be free of these “lock-up provisions” and could sell their shares immediately.

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