Nov. 5 (Bloomberg) -- American International Group Inc. violated shareholders' rights and Delaware law by accepting the federal government's bailout in exchange for a majority stake in the insurance company, an investor claimed in a lawsuit.

AIG's board violated Delaware corporate law by refusing to allow existing shareholders to vote on a key part of the bailout proposal, which gives a 79.9 percent stake to the government in return for $85 billion in loans, investor Wilma Walker said in a complaint filed yesterday in Delaware Chancery Court in Wilmington. New York-based AIG, the nation's biggest insurer by assets, is incorporated in Delaware.

``All AIG shareholders stand to be disenfranchised and diluted out of existence as a result of the conduct of AIG's board of directors,'' Walker, a New York City resident, said in the complaint.

AIG got the $85 billion in loans on Sept. 16 to stave off bankruptcy, company officials said. AIG needed cash after credit downgrades forced the insurer to post more than $10 billion in collateral to clients who purchased guarantees on bonds that lost value as the U.S. economy declined.

The company also got access Oct. 8 to an additional $37.8 billion from the federal government to shore up its securities-lending program. As part of the overall bailout package, senior AIG managers, including Chief Executive Officer Robert Willumstad, agreed to step down.

$180 Billion Losses

The deal, backed by the U.S. Treasury Department, was designed to avoid wider chaos that threatened other financial companies. Industry losses could have totaled $180 billion if AIG had collapsed, according to RBC Capital Markets.

Nick Ashooh, an AIG spokesman, said in an e-mail that the company wasn't aware of the lawsuit and declined to comment on it.

AIG fell 35 cents, or 15 percent, to $2.06 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has declined 96 percent this year.

Under AIG's deal with the government, a trust will hold shares of convertible preferred stock that represent the 79.9 percent stake, Joel Friedlander and Andre Bouchard, Walker's lawyers, said in the complaint. The government can vote those shares as if they are common stock to exercise control of the company, according to the suit.

AIG officials plan to issue the preferred shares and let them vote with existing common shareholders, according to the complaint.

``Absent judicial intervention, the transaction approved by AIG's board will be crammed down on the company's common stockholders in violation of basic principles of corporate law,'' Walker said in the complaint.

Shareholder Vote

Under Delaware law, common shareholders get to vote separately whenever a company seeks to increase its authorized shares of common stock, according to the complaint. Delaware judges ``assiduously safeguard the voting rights of stockholders,'' Walker said in the complaint.

AIG's board also violated its legal duties to shareholders by agreeing to the bailout package without having common shareholders vote on the move, according to the complaint.

Walker seeks to have a judge throw out the conversion of the preferred shares into common stock without a shareholder vote, and find that AIG directors erred by agreeing to the deal.

AIG officials said earlier this year that they would consider selling the insurer's assets to repay the $85 billion in loans and fees imposed by the bailout deal.

Maurice ``Hank'' Greenberg, AIG's former chief executive officer and one of its largest shareholders, said the government should consider revising the terms of its bailout package to reduce the need for quick asset sales.

`Crippling Combination'

``The crippling combination of declining asset values and extremely poor market conditions make it difficult to consummate any sale of assets at an acceptable price,'' Greenberg said Oct. 30 in a letter to new CEO Edward Liddy.

Greenberg owns about 10 percent of AIG through personal holdings and two closely held investment firms, according to data compiled by Bloomberg. He sold about 40 million shares of the insurer for more than $125 million earlier this year.

The 83-year-old Greenberg stepped down as AIG's top executive in 2005 amid accounting probes by state and federal officials. AIG officials later restated profit by $3.9 billion.

The company also agreed to pay more than $1.6 billion to settle allegations by former New York Attorney General Eliot Spitzer and the U.S. Securities and Exchange Commission that it misled shareholders and cheated workers' compensation programs.

The Delaware case is Wilma Walker v. American International Group Inc., CA4142 Delaware Chancery Court (Wilmington).

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net.

Last Updated: November 5, 2008 18:13 EST