Sydney-based merger arbitrage firm Harvest Lane Asset Management has cried foul over Dropsuite (ASX: DSE) shareholder Topline Capital Management selling off around $44.7 million worth of stock ahead of a May vote over a $420 million takeover offer from US IT automation giant NinjaOne.

Merger arbitrage firms like Harvest Lane invest in companies that have struck takeover deals, capitalising on the tendency for share prices to fall just short of offer prices to accommodate the risk of agreements falling through.

If agreements materialise the investor makes a profit, but can cop heavy losses in the minority of cases when they don't. 

When Melbourne-headquartered backup, recovery and protection software company Dropsuite announced it had entered a scheme implementation deed (SID) to be bought by NinjaOne in a 100 per cent cash transaction at $5.90 per share, it highlighted support from key shareholder Topline.

At the time Topline held 31 per cent of shares in the company, but over the course of the ensuing 10 days - including the day of the takeover announcement - Topline sold off shares to wind its stake down to 19.7 per cent.

In a further twist, Dropsuite reports today that it has received written communication from Topline Capital this morning advising its shareholding has been reduced further to 10.47 per cent. 

In lodging forms relating to the share sales, Topline noted they "were made because of an [unforeseen] need for liquidity and because the position became a large percent of the portfolio", but asserted it intended to hold its remaining shares through the close of the transaction and vote in favour of the transaction.

In an application filed to the Australian Government's Takeovers Panel, Harvest Lane claims the on-market sales indicate that the intention statement in Dropsuite's announcement may have been given on a knowingly misleading basis.

Harvest Lane also submits that intention statement did not indicate that Topline had reserved the right to sell Dropsuite shares before voting in favour of the scheme.

"Therefore, a reasonable investor would have concluded that Topline intended to maintain its 31 per cent interest and vote that interest in favour of the proposed scheme," the investor submitted.

"Even if the On-Market Sales were contemplated in the Intention Statement, Topline failed to disclose those transactions within the time required by section 671B of the Corporations Act 2001 (Cth), creating a false market in Dropsuite shares to Topline’s benefit."

The merger arbitrage firm has sought orders from the panel to make Topline return to a 31 per cent shareholding "in favour of the scheme of arrangement at the relevant scheme meeting, in line with paragraph 12a and 12d of Takeovers Panel Guidance Note 23, such that it remains compliant with the intention statement provided to the market".

No sitting panel has been appointed at this stage and the Takeovers Panel has not made a decision whether to conduct proceedings, nor has it made any comments about the merit of the application.

Harvest Lane managing director and chief investment officer Luke Cummings declined to comment on the matter whilst proceedings are afoot.

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