(Reuters) - Shareholders of Amerigroup Inc AGP.N have sued the health insurer's board, contending its advisers at Goldman Sachs Group Inc (GS.N) had a "hopelessly conflicted" role in the company's nearly $4.5 billion pending sale to WellPoint Inc WLP.N
The lawsuit, filed in Delaware Chancery Court on Thursday, comes amid heightened scrutiny of the potential conflicts of interest for deal advisers in transactions. The Amerigroup shareholders also named Goldman as a defendant in the case.
The complaint said that Goldman had a financial incentive, through a complex derivative transaction with Amerigroup, to get a deal done quickly "regardless of whether the deal is good" for the insurer's shareholders.
Goldman, according to the lawsuit, pushed Amerigroup toward a quick deal with WellPoint over a more lucrative merger with another unnamed company. The deal with that other suitor, called "Company D" in the complaint, faced greater regulatory issues than a deal with WellPoint, the plaintiffs contended.
"By recommending a quick deal with WellPoint as opposed to Company D or any of the other interested suitors, Goldman kept alive its chance of receiving a windfall profit on the derivative transaction," said the complaint, filed by pension funds in Michigan and Louisiana.
Maureen McDonnell, a spokeswoman for Amerigroup, and Michael DuVally, a Goldman Sachs spokesman, declined comment Friday. Jill Becher, a spokeswoman for WellPoint, did not respond to requests for comment.
The shareholders are seeking to block the deal from closing until Amerigroup's board takes steps to improve it.
Judges on the Delaware Chancery, which handles many merger disputes, increasingly have been asked to rule on whether deals should be scrapped because of advisers' possible conflicts of interest.
Goldman was at the center of a high-profile case this year challenging its role in advising El Paso Corp in its $21 billion acquisition by Kinder Morgan Inc. (KMI.N) The bank had a 19 percent stake in Kinder Morgan.
Chancellor Leo Strine, the court's top judge, allowed the deal to go forward despite finding that "inadequate efforts" were taken to address the Goldman conflicts.
The Amerigroup deal, announced on July 9, would almost double WellPoint's Medicaid business in a large bet on the expansion of the U.S. government's health plan for the poor.
But the complaint said the process that resulted in the merger was "flawed" and didn't result in the highest available price.
Several suitors had contacted Amerigroup starting in December 2011, the lawsuit said. But following advice of Goldman and Barclays Capital Inc, its other financial adviser, Amerigroup's board agreed to exclusive negotiations with Wellpoint, according to the lawsuit.
Goldman at this time was a counter-party for a derivative transaction that would require Amerigroup to pay Goldman $233.7 million if a deal came about by August 13 and a "substantial" undisclosed amount if one was closed by October 22, the complaint said.
The shareholders contend this amounted to a conflict of interest, noting the payday would have dwarfed the $18.7 million fee Goldman stood to earn on the deal.
Amerigroup's proxy statement, filed August 7, includes a lengthy discussion of the potential Goldman conflict, though does not say how much the bank would earn if a deal closed between August and October. The company in the proxy said it expects a deal to close during the first quarter of 2013.
The lawsuit also alleges conflicts of interest by Barclays, which was not named as a defendant, and Amerigroup's management. A Barclays spokesman, Brandon Ashcraft, declined to comment.
WellPoint "effectively purchased" the loyalty of executives including Amerigroup Chief Executive James Carlson by indicating it would keep them in their jobs after the deal closed and agreeing to give them $12 million in WellPoint stock after the merger closed, the complaint said.
The lawsuit was filed by the City of Monroe Employees Retirement System in Michigan and the Louisiana Municipal Police Employees Retirement System.
The case is City of Monroe Employees Retirement System v. Capps, Delaware Court of Chancery, CA7788
Reporting by Nate Raymond; Editing by Martha Graybow and Kenneth Barry, Gary Hill