Shareholders Sue To Block Google's On2 Acquisition

Google Inc.'s (GOOG) acquisition of video compression software maker On2 Technologies Inc. (ONT) has been challenged in court by On2 shareholders who claim the deal's $106.5 million price tag is "unfair."

The complaint, filed in Delaware Court of Chancery on Monday, seeks class action status and a permanent injunction blocking the deal. The plaintiffs also demand that the defendants, which include On2's board as well as Google, account for all damages caused.

The Mountain View, Calif.-based search giant announced the deal last week in a bid to buttress its video operations, most notably YouTube. On2's video-compression technology would enable Google to boost the speed and lower the cost of transferring large video files across the Web.

Clifton Park, N.Y.-based On2 also produces software that helps make high-definition video playback possible on mobile devices. That technology could make its way into Google's Android mobile operating system and its Chrome operating system for PCs.

Google declined to comment on the complaint. On2 wasn't immediately available for comment.

Under the terms of the deal, each On2 share will be converted into 60 cents in Google stock, representing a 57% premium over the closing price for On2's shares on the day before the deal was announced.

The complaint argues that prior to the transaction, On2's stock had been trading "well in excess" of 60 cents, hitting 65 cents as recently as May 13, 2009, and reaching $1.16 in 2008.

The complaint alleges that ON2 management and Google rushed to announce the deal just one day before the small software company reported its best quarterly financial results in six quarters.

"Defendants rushed to announce the proposed transaction at $0.60 per share on Aug. 5 ahead of the positive earnings results announced the next day, thereby placing a cap on the company's stock price to the detriment of On2 shareholders," the complaint said.

The complaint also alleges that various terms of the agreement, including a "no shop" provision and a $2 million termination fee if On2's board accepts a superior offer, all but ensure that no competing offers will emerge.

On2 last week announced a loss of $224,000 for the quarter on $5 million in revenue. The company would have reported a profit if not for $420,000 in legal fees associated with the Google transaction.

-By Scott Morrison, Dow Jones Newswires; 415-765-6118; [e-mail]