By Tom Hals
(Reuters) - Quest Software Inc's new chief executive rushed to sell the company to head off a possible investigation by regulators, according to a shareholder lawsuit that shines a light on the technology company's accounting.
The lawsuit claims the maker of backup software agreed to sell itself to private equity firm Insight Venture Partners for $2 billion in cash after a year of maneuvers to undermine Quest's value and set up a merger that enriches the CEO.
Quest has said it is still looking for better offers.
At least four shareholders quickly filed lawsuits after the deal was announced last month, arguing it undervalued Quest. Such lawsuits are typical after merger deals.
The new lawsuit, which was filed on Monday in Delaware Chancery Court, expands earlier allegations and claims the deal was struck in part to shield CEO Vinny Smith from being sued for a second time by the U.S. Securities and Exchange Commission.
The shareholder who sued asked the court to block the merger.
A spokesman for the company, which is based in Aliso Viejo, California, and competes with Oracle Corp and Symantec Corp, declined to comment.
The acquisition was announced on March 9, just over a week after Quest disclosed a "material weakness" in internal controls over its financial reporting, according to its annual report.
The lawsuit suggests that Smith, who had been serving as executive chairman, replaced former CEO Doug Garn in February because Garn was reluctant to certify the company's annual report.
"On information and belief, Garn's February 14, 2012 resignation as president and CEO for 'personal health reasons' was related to the need for the president and CEO to sign and certify the 10-K," the lawsuit said.
Smith did certify the company's annual report and the lawsuit claims he wanted to take Quest private to avoid an SEC lawsuit.
Smith had been sued by the SEC in 2008 over the backdating of Quest stock options, according to securities filings. He agreed to pay part of $300,000 to settle the litigation and stepped down as CEO in 2008 to become executive chairman.
A spokesman for the SEC did not immediately return a call for a comment.
Under the terms of the deal with Insight, the lawsuit said it is believed Smith will convert his roughly 35 percent stake in Quest into a majority stake after the acquisition.
Public shareholders will be cashed out, according to the terms of the deal.
As a result, Smith had an incentive to sell the company cheaply and took steps during the year leading up to the acquisition that would allow Insight to get the best deal possible, the lawsuit said.
For example, Quest spent $130 million on acquisitions over the past year and used accounting related to those deals to write down its net income and lower the value of the company, according to the lawsuit.
The lawsuit was brought by the law firms of Prickett, Jones & Elliott P.A. of Wilmington, Delaware and Kessler Topaz Meltzer & Check LLP of Radnor, Pennsylvania.
Last year, the two firms won a $2 billion award in a Chancery Court case brought by shareholders of Southern Copper Corp, which was by far the largest award in the history of the court.
The case is Eileen P. O'Brien v Quest Software Inc et al, Delaware Chancery Court, No. 7384.
(Reporting By Tom Hals in Wilmington; editing by Andre Grenon)