Harman Kardon 2007 Annual Report Download - page 30

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Item 3. Legal Proceedings
Litigation Related to the Merger
On May 8, 2007, Helen Rodgers Living Trust filed a putative class action lawsuit against Harman and all
of its directors in the Superior Court of the District of Columbia. The lawsuit purports to be brought on
behalf of all common stockholders of Harman and alleges that Harman’s directors breached their
fiduciary duties to Harman stockholders by entering into the merger agreement. The original complaint
alleged that the consideration to be offered to Harman stockholders under the merger agreement is
“inadequate” and that the merger agreement “inequitably favors . . . insiders” of Harman. The complaint
also alleged that the termination fee in the merger agreement was excessive, that Harman’s directors
purportedly would not “fairly and adequately” evaluate any alternative bids, and that the provision in the
merger agreement that allowed Harman to solicit proposals for alternative bidders during a 50-day period
ending in June 2007 was “illusory.”
On June 20, 2007, Parent filed a registration statement on Form S-4 with the Securities and Exchange
Commission that included a proxy statement/prospectus related to the proposed merger. Shortly
thereafter, plaintiff filed its first amended complaint on June 29, 2007. While the first amended complaint
continued to raise the allegations made in the original complaint, the new focus of plaintiff’s case was that
the merger agreement “inequitably favors . . . insiders” of Harman by allowing such insiders to exchange
otherwise worthless “underwater” options (options with an exercise price over $120 per share) for Parent
shares on a “one option for one Parent share basis,” and by allowing them to separately negotiate with
Parent for more favorable treatment of their options. The first amended complaint also alleged that the
disclosures contained in the proxy statement/prospectus were inadequate. Among other things, the first
amended complaint sought to enjoin the merger and the conversion of the “underwater” options into
Parent shares, as well as “declaratory judgments” that said “underwater” options may not participate in
the merger election process and that Harman insiders may not separately negotiate with Parent “for the
exchange of their [Harman] equity interests in the Acquisition.” In addition, the first amended complaint
sought, among other things, unspecified damages, an order rescinding the merger agreement and a
declaration that Harman’s directors have breached their fiduciary duties to Harman.
On June 29, 2007, plaintiff filed a motion for preliminary injunction. The motion sought to enjoin the
conversion of the “underwater” options into Parent shares, and also sought to “unw[i]nd or otherwise
cancel” the challenged options. In the motion, plaintiff did not seek to enjoin the stockholder vote or the
merger itself. After defendants filed their opposition to the motion for preliminary injunction on July 23,
2007, plaintiff agreed to voluntarily withdraw its motion.
Thereafter, on August 15, 2007, plaintiff filed its second amended complaint, which substantially narrows
plaintiff’s claims by eliminating, among other things, the vast majority of its disclosure claims and the
allegations relating to “underwater” options.
We believe the lawsuit is without merit and intend vigorously to defend against it.
At June 30, 2007, we were involved in several additional legal actions. The outcome of these legal actions
cannot be predicted with certainty; however, management, based upon advice from legal counsel, believes
such actions are either without merit or will not have a material adverse effect on our financial position or