Shares in MacMahon Holdings face pressure after the mining services company denied receiving an offer for its construction business before entering into a sale agreement with its major shareholder Leighton Holdings.
Indian-based firm Sembawang Australia - a wholly-owned subsidiary of engineering and construction group Punj Lloyd - says it has instructed its lawyers to file a suit against MacMahon after being denied access to conduct due diligence on the Australian company.
Last week it emerged Sembawang Australia had made an offer to buy Macmahon's construction operations for $25 million, but MacMahon has said it cannot provide Sembawang due diligence access without the permission of Leighton.
Analysts believe the company's share price, which has risen 23 per cent since the start of the year, could fall back to more moderate levels of around 25 cents last experienced on January 2.
Shares in MacMahon Holdings fell 0.5 cents to 29 cents at 1254 AEDT before steadying to 29.5 cents later in the day.
Leighton and MacMahon executed an asset purchase agreement in December, as MacMahon looks to divest its construction business and become a dedicated full service mining contractor.
Sembawang chief executive Richard Grosvenor said his company approached MacMahon on November 26 about joint ventures and the potential purchase of its construction business.
But MacMahon has denied the allegation, saying the only offer it had received from Sembawang was its unsolicited, non-binding proposal received on January 3.
"At the time of this announcement, Macmahon has not received any formal notice of legal proceedings having been initiated against it by Sembawang," MacMahon said in a statement on Tuesday.
The company is continuing preparations for an extraordinary general meeting to be held in February, where shareholders will vote on the deal with Leighton.
IG Markets strategist Evan Lucas said the potential deal with Sembawang had been in the wings for around two weeks before the stock shot up following takeover speculation.
"It has been a bit of a disappointing year for Macmahon and that looks set to continue with the withdrawal of this possible bid," Mr Lucas said.
"MacMahon looks certain to move back to where it was before, around that 25 cents, 26 cent mark."
MacMahon has previously said it expects to make just $2 million on the sale of its construction business to Leighton Holdings due to $12 million in redundancy costs following the axing of about 50 jobs.
The announcement of an earnings downgrade in December came after Macmahon shocked investors in September with news that its annual profit would be about half the $56.1 million reported in 2011/12.