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Rocket Companies’ deal to acquire real estate brokerage Redfin has run into a potential snag in the form of a lawsuit filed on behalf of Redfin shareholders claiming they should be provided with more information on a potential conflict of interest on the part of the deal’s financial advisor.
The lawsuit seeks a court order preventing Redfin shareholders from voting on the merger until they’ve received more details on Redfin deal advisor Goldman Sachs’ dual role as a lender to Rocket.
Redfin shareholders are currently scheduled to vote on the deal on June 4. The window for antitrust regulators to weigh in with questions or objections to the deal closed on May 8. Reporting earnings that day, Rocket executives said they expected to close the deal as soon as this quarter, which ends June 30.
Attorneys representing Redfin shareholder Jason Morano filed a lawsuit the next day, seeking class action certification to represent shareholders they claim were left in the dark by a “materially incomplete and misleading” deal proxy statement.
The May 9 complaint seeks more information on the nature of the lending relationship between Goldman Sachs and Rocket, and how much Rocket has paid Goldman over the last two years.
Redfin’s deal advisor is the investment bank Goldman Sachs & Co. LLC. A Rocket SEC filing shows that Goldman Sachs Bank USA is one of several banks providing its subsidiary, Rocket Mortgage, with access to a $1.15 billion revolving credit facility.
Redfin’s May 5 proxy statement — a prospectus explaining the background and terms of the deal to investors — does disclose that “Goldman Sachs Investment Banking has an existing lending relationship with Rocket and/or its subsidiaries.”
But attorneys for Morano argue that disclosure is vague and lacks details that should have been provided to Redfin shareholders — such as how much of the $1.15 billion credit facility is provided by Goldman Sachs, and how much Rocket has paid the bank in interest and fees.
The lawsuit also seeks “key inputs” used to prepare a discounted cash flow analysis (DCF) used to support the valuation of Redfin and the board’s recommendation that shareholders approve the merger.
(Although structured as a merger, Redfin will be a wholly owned subsidiary of Rocket if the deal goes through.)
Rocket and Redfin did not respond to Inman’s requests for comment on the lawsuit.
Law firms often get involved in big mergers and acquisitions, sometimes winning settlements or better terms for shareholders.
Since Rocket announced its plans to acquire Redfin, at least seven law firms have publicized that they’re investigating the terms of the deal on behalf of Redfin shareholders: Halper Sadeh LLC; Ademi & Fruchter LLP; Kahn Swick & Foti LLC; Johnson Fistel LLP; Rowley Law PLLC; Brodsky & Smith and Monteverde & Associates PC.
Morano, who certified to the court that he owns 25 shares in Redfin purchased in March 2020, was previously the plaintiff in an unrelated 2022 lawsuit challenging Take-Two Interactive Software’s $12.7 billion acquisition of mobile games platform Zynga.
Attorneys for Morano urged the Seattle-based U.S. District Court, for the Western District of Washington to expedite the case by requiring opposition to their motion to be filed by May 14, and for a decision by May 15.
“With the shareholder vote a mere four weeks away, good cause and exigent circumstances exist warranting an order granting plaintiff’s requested relief of a shortened briefing schedule and an expedited hearing on plaintiff’s forthcoming motion for a preliminary injunction,” they said in a May 9 motion.
But Judge Richard A. Jones recused himself from the case on Thursday without holding a hearing, reassigning it to Judge Marsha J. Pechman.
Redfin recounts the long road to the deal
Challenges to mergers and acquisitions often seek to demonstrate that the company being acquired has been undervalued.
Redfin’s deal prospectus revealed that it has been in talks to be acquired since 2022, signing a non-disclosure agreement with Rocket in 2022 and with two other potential suitors in 2023.
Rocket submitted a non-binding proposal on Jan. 16 to acquire Rocket at an implied value of $10.45 per share — a 35 percent premium at the time.
Redfin’s board decided to hold out for a better offer, and on Jan. 30 entered into a confidentiality agreement with a fourth company interested in acquiring the brokerage.
Rocket upped its offer in an all-stock deal that valued Redfin at $12.50 per share, and a deal was signed on March 9.
In voting to approve the deal — and recommending that shareholders do the same — the board noted that Redfin had $812 billion in debt coming due over the next three years, including $74 million in October.
Redfin “had engaged in discussions with three other strategic parties that the Redfin board believed were most likely to have an interest in an acquisition of Redfin and would have the ability to consummate a transaction of this size and nature,” the prospectus stated. “No potentially interested counterparty other than Rocket submitted an offer.”
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