Can Dictaphone Corp. hit the rewind button and extricate itself from the sinking Lernout & Hauspie Speech Products NV?
Legal experts say the chances are slim.
Earlier this year, Dictaphone, the venerable Stratford, Conn., maker of dictation systems agreed to sell out to L&H, the Belgian-American maker of speech-recognition software. This week, L&H filed for bankruptcy amid mounting financial irregularities.
Just prior to that filing, the former controlling shareholder of Dictaphone went to court to seek an extraordinary step: an annulment of the marriage between the two companies.
In its lawsuit filed in Delaware Chancery Court, Stonington Partners Inc., a New York investment firm that owned 96% of Dictaphone, claims it was defrauded and seeks to have the acquisition rescinded. Stonington received about nine million shares of L&H stock -- valued at about $500 million at the time of the transaction -- for its ownership in Dictaphone.
In its suit, Stonington claims that it was wooed with promises of L&H's "leading edge technology that was poised to transform computing and personal communications and generate huge revenues and earnings."
But Stonington added, "This was a lie." In recent weeks, L&H admitted "errors and irregularities" in its past financial statements. L&H is the subject of investigations by the U.S. Securities and Exchange Commission and Belgian authorities.
Elizabeth Warren, a professor at Harvard Law School who specializes in bankruptcy law, said Stonington was "very unlikely" to prevail after L&H's bankruptcy filing, which freezes pending litigation. Under bankruptcy law, shareholders like Stonington line up behind creditors in bankruptcy flings.
By rescinding the merger agreement and awarding Stonington the Dictaphone assets, a judge would then be favoring Stonington above banks and other creditors who generally get paid first, she said. Prof. Warren and other experts said Stonington was likely using the lawsuit to jockey for position in bankruptcy court, rather than expecting to win there. "Part of it is probably a negotiating strategy," said Paul Daley, a senior partner at Hale & Dorr LLP in Boston who specializes in bankruptcy.
A Stonington official declined comment and an L&H spokesman couldn't be reached.
Also yesterday, L&H filed for a concordat -- the Belgian equivalent of Chapter 11 bankruptcy protection -- in the commercial court of Ieper, the small Belgian town where the company has its main headquarters.
In its U.S. Chapter 11 filing in a federal court in Wilmington, Del., L&H listed consolidated assets of $2.37 billion, short-term debts of $255.3 million and long-term debts of $234.3 million as of June 30. A separate Chapter 11 petition by Dictaphone lists consolidated assets of $1.02 billion and debts of $389.7 million as of June 30.
L&H shares, which peaked at $72.50 in March, briefly giving the company a market capitalization of $10 billion, last traded at $6.22 on Nasdaq and around $3 on Easdaq, Europe's equivalent of Nasdaq.
Christian van Buggenhaut, a lawyer hired by Belgian shareholder consulting firm Deminor to represent the interests of thousands of individual L&H investors, said he didn't believe the company will be able to emerge from bankruptcy as an operating company.
He said the filing "will buy L&H's management time to organize a sensible and fair auction of its assets."