The billion-dollar acquisition of Mentor Corp. has run into legal opposition from disappointed shareholders.

Drug giant Johnson & Johnson on Dec. 1 offered to buy the Santa Barbara-based breast implant maker for $1.07 billion in cash, or $31 a share. The proposed acquisition was the largest deal involving a tri-county company in 2008.

Within days, however, two lawsuits filed in Santa Barbara County Superior Court alleged that the price was too low and that Mentor’s directors weren’t straight with shareholders about the company’s long-term value. The complaints, since consolidated into one case, ask Judge James W. Brown to issue an injunction to prevent the deal from going forward.

Johnson & Johnson’s bid represented a 92 percent premium over the $16.15 a share Mentor traded at the day before the offer’s announcement. On news of the proposed acquisition, shares quickly shot up to almost $31 and have since hovered near there.

“Our view is that the transaction, as currently constructed, undervalues the company,” said David Wissbroecker, a San Diego-based attorney representing one of the plaintiffs, a union pension fund.

The shareholders’ complaints point out that Mentor’s stock traded for more than $40 less than a year before Johnson & Johnson’s offer. The lawsuit argues that Mentor had potentially lucrative forthcoming products that would have pushed its value far above what the complaint calls an “artificially depressed” stock price.

Among Mentor’s bright prospects, the lawsuits claim, was the approval of a pain-reducing dermal filler in March. But most promising were strong test results for PurTox, a potential competitor to Botox. Botox is produced by Allergan, Mentor’s Irvine-based chief rival in the cosmetics market.

“Obviously in a down economy, people aren’t spending money on cosmetic surgery,” Wissbroecker said. “Our concern is that those assets have a lot more long-term value than the stock market is giving the company.”

Wissbroecker said his side is after information and wants to “make sure shareholders know what they’re giving up in selling to Johnson & Johnson for $31 a share right now.” Specifically, Wissbroecker wants more details about the Mentor’s top officials’ views on the company’s “intrinsic” value versus its market value – an especially important question after Johnson & Johonson offered to let top Mentor brass continue with the new company.

“Unless shareholders know how much that differential [between long-term value and market value] is, they’re not really prepared to make a fully intelligent decision about whether they want to make that call [to sell],” Wissbroecker said.

Tom Hopkins, a mergers and acquisitions lawyer with the Santa Barbara office of Sheppard Mullin Richter & Hampton, said shareholder lawsuits have become routine when one public company acquires another, even when the buyer offers a hefty premium on shares. Hopkins is not involved with either side in the Mentor suit.

“It’s rarely the case that these suits are the result of somebody doing something wrong,” Hopkins said. “It’s just kind of greenmail.”

Hopkins said such suits rarely derail a deal and are often resolved quickly.

“The real legal test is, What’s the value of the company today?” Hopkins said. “If the market is saying the value is ‘X’ today, and Johnson & Johnson is paying a slight premium to that market price, the board hasn’t broken its fiduciary duty.”

Hopkins – who has represented, among others, Boeing Co. in its $1.7 billion acquisition of Aviall – is critical of such shareholder lawsuits overall.

“There’s something still flawed in the system,” Hopkins said. “It’s not really protecting anybody. It’s benefitting the plaintiffs’ bar. Maybe in one out of 100 deals there’s a legitimate claim.”

Officials at Mentor did not return repeated requests for comment for this story. But when the Johnson & Johnson offer was announced, in December, Mentor President and Chief Executive Joshua Levine said he was pleased because the proposed terms let Mentor retain its Santa Barbara headquarters and act as a standalone company reporting to Johnson & Johnson subsidiary Ethicon.

“We’ve been in the aesthetic medical space for really quite a long time – 30-plus years – and this is an opportunity for us to really, in my mind, end up with the best of both worlds,” Levine told the Business Times.
He added that he had “very excitedly” accepted Johnson & Johnson’s offer to stay on as Mentor’s president.

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