Very rarely will a chief executive publicly accuse his company's biggest external shareholder of acting in a way that "defies common sense." Nor will a CEO typically allege that the shareholder plans to railroad the company and other investors into a merger that none of them want–but then it's not every day that a company has to take its biggest shareholder to court either. The company in question is Multi-Fineline Electronix (or M-Flex for short)–a fast-growing maker of circuit boards in Anaheim, Calif.–and the shareholder, hedge fund Stark Investments. On Oct. 11, M-Flex sued Stark over the hedge fund's plans to vote in favor of a proposed $500 million deal for M-Flex to buy its Singapore-based competitor, MFS Technology.

According to statements accompanying the lawsuit, which was filed in the federal district court for the Central District of California, M-Flex management initiated the merger at the end of March, but after MFS published disappointing third-quarter results in August, M-Flex had a change of heart.

Unfortunately for the U.S. company, the Singapore stock market regulator insisted that M-Flex submit the proposal to a shareholder vote. Vexing to be sure, but the vote should have been almost a foregone conclusion with both the M-Flex management and board opposing the deal. That is, until Stark, which owns 18% of the U.S. company, stated that it planned to vote for the deal. Stark's support might be hard to understand, given that the fund's holdings in NASDAQ-listed M-Flex would certainly fall in value if the merger were to be forced on the company. However, in statements discussing the court action, M-Flex asserts that Stark also holds 32 million shares in MFS and "stands to benefit substantially" on that investment with the merger. Moreover, M-Flex also claims that Stark has entered into agreements regarding M-Flex call options–derivatives that could be used either to hedge Stark's exposure to M-Flex or acquire more shares in the company ahead of the vote. Of course, a hedge of its M-Flex exposure essentially would remove the deal's M-Flex-related downside and leave Stark to enjoy only the return on its MFS holdings.