Hortonworks faces sueball over Cloudera merger

Disgruntled investor says shareholders are being 'misled' on finances

Hortonworks is facing a sueball over its uneven merger with competitor Cloudera, as a proposed class action takes aim at the company's claims to shareholders.

The companies revealed their intention to merge back in October, a move that valued the combined company – to be named Cloudera – at $5.2bn.

The deal, which will see Cloudera stockholders hold 60 per cent of the fully diluted shares of the final company and Hortonworks shareholders the remaining 40 per cent, still needs to be approved by shareholders of both companies.

But one such stock owner, Alex Victor, is now alleging that Hortonworks has misrepresented and omitted information from documents that call on investors to approve the deal.

The suit (PDF), filed in the Northern District of California last week, names Hortonworks and seven directors at the firm, including CEO Rob Bearden, as defendants.

The plaintiff's aim is to gather fellow disgruntled shareholders – there are about 83 million shares of Hortonworks common stock held by hundreds to thousands of people – in order to launch a class action at the company.

Broadly, it alleged that Hortonworks shareholders – who will receive 1.305 common shares of Cloudera for each share of Hortonworks stock owned – are being sold short.

The terms are almost 16 per cent less than Hortonworks' 52-week high of $26.22, the lawsuit claimed, adding it appeared that the company was "well-positioned for financial growth" – and so, presumably, the shareholders should be getting more bang for their buck.

The suit claimed that an S-4 filing made with the Securities and Exchange Commission at the start of November – which calls on shareholders to vote for the proposal – "contains materially incomplete and misleading information" on the financial projections for the company and the sale process leading up to the proposed transaction.

The S-4 filing "misrepresents and/or omits both required and material information", the plaintiff said, adding that this means stakeholders don’t have enough details on which to make a decision.

"It is imperative that the material information that has been omitted from the S-4 is disclosed to the Company's shareholders prior to the forthcoming shareholder vote, so that they can properly exercise their corporate suffrage right."

Among the complaints about the document handed to shareholders are that it provides values for non-GAAP operating income or loss and free cash flow, but fails to provide the line items used in the calculations, or offer comparable GAAP measures.

As such, the financial projections "are materially misleading" and offer an incomplete picture of the company's future prospects, the lawsuit said.

The complaint said the issues it claims to have identified in the S-4 filing violate SEC rules, and the directors named in the suit would have reviewed and authorised the document but failed to disclose the necessary information.

The plaintiff is seeking a jury trial, and asked for the company to hand over the material in question.

We've contacted Hortonworks for comment. ®