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Caterpillar Board Sued Over ERA Mining Machinery Merger

Aug, 06 2013


Caterpillar Inc. (CAT) Chairman Douglas R. Oberhelman and 13 directors failed to heed “red flags” that should have alerted them the company was overpaying for a Chinese mine-equipment maker, a shareholder said in a lawsuit.

New Jersey investor Michael D. Wolin accused Oberhelman, the directors and Chief Financial Officer Edward J. Rapp of breaching their fiduciary duties to the company in a complaint filed yesterday in federal court in Chicago.
Caterpillar, the world’s biggest maker of construction and mining machinery, took a $580 million writedown in January on its 2012 acquisition of Hong Kong-based ERA Mining Machinery Ltd. and its Zhengzhou Siwei Mechanical & Electrical Equipment Manufacturing Co.

“The red flags clearly show that Siwei was being overvalued by Caterpillar senior management, including Rapp and Oberhelman,” Wolin said in the complaint. The board “blindly acceded” to the acquisition, he said.

Among the factors Caterpillar executives should have considered were the Chinese company’s aging receivables and its need for “an immediate $50 million cash infusion” to continue operating before the deal was closed, Wolin said.

The allegations are based on documents Caterpillar provided to Wolin after his lawyers demanded on Jan. 23 to inspect the company’s books and records, according to the complaint.

Jim Dugan, a spokesman for the Peoria, Illinois-based company, declined to comment on the complaint, saying the company doesn’t comment on pending litigation.

Caterpillar acquired ERA for about HK$6.15 billion ($790 million) to gain factories that make underground coal-mining equipment in China, the world’s biggest producer of coal.

Accounting Misconduct

In a Jan. 18 statement by the company announcing the writedown, it was attributed to “goodwill impairment.” Caterpillar said it determined several Siwei senior managers engaged in deliberate accounting misconduct for several years before its acquisition.

Wolin seeks a court finding that the individual defendants failed to protect the company’s interests and an award of damages payable to Caterpillar.

Among those board members named as individual defendants are San Francisco Giants baseball team owner Peter A. Magowan, Abbott Laboratories Chairman Miles D. White and former Republican Party presidential candidate and Utah Governor Jon Huntsman.

The case is Wolin v. Oberhelman, 13-cv-05561, U.S. District Court, Northern District of Illinois (Chicago).

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