Seat Holder Files to Block NYSE Merger

A seat holder on the New York Stock Exchange (search) filed suit Monday to block the merger between the NYSE and all-electronic stock market Archipelago Holdings Inc. (search), claiming a breach of fiduciary responsibility.

William Higgins (search), who heads a long-standing group seeking changes at the NYSE, is the lead plaintiff in the suit. The lawsuit also names NYSE Chief Executive John Thain (search), the entire NYSE board, and Goldman Sachs Group Inc. (GS), which advised both the NYSE and Archipelago in merger talks, claiming a conflict of interest, according to the suit.

Jay Eisenhofer, Higgins' attorney and a partner at the law firm Grant & Eisenhofer, said he would likely file for an injunction against the deal once a final merger date is announced. However, he said his client was not ultimately interested in blocking the merger — just getting a better deal.

"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," Eisenofer said. "It's the terms that my client thinks are objectionable."

The NYSE issued a statement Monday afternoon blasting Higgins' lawsuit. "The New York Stock exchange has reviewed Mr. William Higgins' complaint and found that it is completely without merit. We are proceeding with the merger as proposed," the statement said. An NYSE spokesman had no further comment.

According to the lawsuit, filed Monday morning in New York state court, Thain and the exchange's board of directors violated their fiduciary duties by "grossly undervaluing" the exchange and agreeing to terms with Archipelago that were unfavorable to NYSE seat holders.

Under the proposed merger agreement, seat holders will receive 70 percent of the stock in the merged company, along with $400 million in cash to be divided among the 1,366 seats. Archipelago shareholders will retain 30 percent of the combined company.

While the suit does not advocate any options for revaluing the deal, it quotes a Wall Street Journal story in which an expert said NYSE seat holders should receive 90 percent of the company.

The suit also claims Goldman Sachs "aided and abetted" the NYSE's breach of duty by advising both sides of the deal — a rarity in merger agreements but not unheard of — "in an effort to obtain an undue proportion of the value of the post-merger NYSE, at the expense" of seat holders, the suit alleged.

Goldman Sachs (search), which underwrote Chicago-based Archipelago's initial public stock offering last year, owns 15.6 percent of Archipelago and holds a total of 29 seats on the exchange. It would be the largest single shareholder of the combined company. Archipelago was not named in the suit.

The exchange's handling of the merger — especially Goldman Sachs' involvement — has been criticized by a number of seat holders since the deal was announced April 20. A group of seat holders led by former NYSE director Kenneth Langone (search) and former Credit Suisse First Boston CEO John Mack held a meeting April 25 with representatives of a number of Wall Street firms who were reportedly angry with the terms of the deal and Goldman's involvement.

Mack said the group simply sought more information about the merger, though earlier reports had Langone interested in scuttling the deal or launching a counterbid for the exchange.

Eisenhofer said the suit was not connected to Langone's effort. A call to Mack was referred to his spokesman, who did not immediately return a call seeking comment.

Higgins has been a longtime critic of the exchange as president of the Association of NYSE Equity Members Inc., a group that has pushed for the NYSE to do more to increase the value of members' seats.

Higgins has claimed strong support for his views, which include a more active role for seat holders in running the exchange. However, his attempts to push through change in the NYSE's governance structure — including adding two seat holders to the NYSE board and the repurchase of 366 seats in order to boost lagging seat prices — were defeated at last month's NYSE annual meeting.