Investors in Scientific-Atlanta have filed a lawsuit to stop the proposed sale of the set-top box maker to Cisco Systems, the leading maker of enterprise networking devices (see Cisco Grabs Scientific-Atlanta).

The two companies held a joint press conference last Friday to announce the purchase of Scientific-Atlanta by Cisco for $6.9 billion in cash. Cisco said it would pay $43 per share in cash. Scientific-Atlanta’s shares closed at $41.45 the day before the deal and at $42.33 on Tuesday.

But investor Kalford Fadem sued in state court in Atlanta, charging that the company was not offered on the open market and may not have received the best of all possible deals.

The lawsuit also charges that Jim McDonald, CEO of Scientific-Atlanta, did not live up to his fiduciary responsibility to the company’s shareholders.

“The individual defendants intentionally placed an artificial lid on the market price of the company's stock so that the market would not reflect Scientific-Atlanta’s potential, thereby purporting to justify an unreasonably low price,” said the lawsuit filed Monday by Mr. Fadem, according to Bloomberg News.

Scientific-Atlanta and attorney Stuart Davidson, who is representing Mr. Fadem, did not immediately respond to calls.

The deal between Scientific-Atlanta and Cisco was generally well-received in both the financial and technology communities. Scientific-Atlanta was seen as a strong player in the video market, but the core of its market—serving the set-top box needs of the cable operators—was maturing.

On the other hand, Cisco needed to strengthen its profile as a triple-play equipment supplier. It was one of only a handful of companies with the wherewithal to pull off the deal (see TechSpin: Cisco Slides Home).

Spinning the Rumor Mill

Rumors about the possible sale of Scientific-Atlanta began circulating about three weeks ago. The set-top box maker filed a statement with the U.S. Securities and Exchange Commission in which it said it was not going to repurchase its stock because it had insider information that would become public by year’s end (see Sizing a Set-top Sell-off).

The reported poor health of Mr. McDonald, 65, added fuel to the sale rumor, along with the fact that a successor had not been named (see TechSpin: Cisco's Video Shot).

Atlanta-based Scientific-Atlanta is the second-largest maker of set-top boxes in the United States, after Motorola. The company is a major supplier both for Time Warner Cable and Cablevision.

While its primary market has matured to some extent in the face of new competition, Scientific-Atlanta has made some adjustments by spreading its influence to the phone companies that are moving into the video arena.

Scientific-Atlanta recently won a contract with AT&T, formerly SBC, to assist with the construction of that company’s Project Lightspeed video capabilities. But the sale to Cisco helps open up new distribution avenues and a first-class support organization for Scientific-Atlanta.