The shareholders, mainly Wall Street arbitrageurs who took large hedged positions in MCI and BT shares in the hope of cashing in on price and currency fluctuations, are angry that MCI acquiesced to a 20 per cent cut in the price BT will pay to take over MCI to form Concert plc.
The new terms of the merger, which value the 80 per cent of MCI that BT does not already own at $17bn (pounds 10.5bn), were announced on Friday and were greeted with consternation by US investors, who were expecting the value of the deal to be cut by 10 per cent at the most.
"We are taking legal advice," said one New York-based shareholder. "We expect to be in a position to act early next week."
The class action suit will contend that MCI and BT should have stuck to the original deal, and that the company's filings to the Securities and Exchange Commission 10 days ago indicating that the deal would go ahead unchanged was misleading to investors. They are expected to demand compensation from MCI for losses incurred.
Shareholder annoyance has intensified this weekend as analysts pointed to the fact that a delay in the timing of the merger will mean that MCI shareholders will not qualify for BT's 1998 dividend. Analysts estimate it will save the British company pounds 640m, and reduce the value of the deal by a further $1 a share for US investors.
But another arbitrageur, who did not want to be named, said: "We have to take our medicine here. The important thing is that the merger is still on."
Both BT and MCI this weekend dismissed the threat of US shareholder lawsuits to their revised merger agreement and expressed hope that the approval process would not drag on beyond January 1998.
"The merits of the merger remain as compelling now as they did last November," BT chief executive Sir Peter Bonfield said on Friday. A BT spokesman added: "We would be surprised if some shareholders do not sue, but this will not delay the merger. The response we have received so far is overwhelmingly positive."
A number of issues still need to be resolved. Questions remain over how Concert plans to tackle the difficulties in the US local telephone market, which were the cause of the deal's revision after MCI said it would lose $800m in that market this year.
The two companies also need to get approval from both sets of shareholders for the revised deal, which the company expects will take place in November or early December.
According to Blake Bath, telecoms analyst at Lehman Brothers, the deal will likely be delayed until end of the year by new shareholder votes and the inevitable lawsuits that will ensue. "MCI shareholders would have been better off if management had focused on delivering strong base (long distance) business performance in the near term, de-emphasizing the money- losing initiatives that hold future growth," he said.