When the management of Equitable General Corp. of McLean paid $32.50 a share in January to buy back a large block of the company's stock, some of the major shareholders were outraged.

The stock, then trading near its book value of $26.50 a share, wasn't worth $32.50, they complained in a lawsuit seeking to unseat the company's top executives. Rather than waste the company's money on its own stock, the dissidents contended, Equitable General should be buying another insurance company.

But instead of that, Equitable General Chairman Charles Phillips decided to sell the insurance company he has headed for 42 years.

The result has been a bidding war in which potential merger partners have offered $40, $45, $47 and now $50 a share.

Stock prices have soared to $46 bid, $48 asked, giving investors and speculators real and paper profits of about 80 percent since January. There is still money to be made by risk arbitrageurs willing to pay "chicken" with large amounts of cash.

The premium offered for Equitable General shares are the highest in recent years, said Levering Cartwright who heads L. Cartwright, a Chicago firm specializing in insurance stocks.

The $50 offer is almost 190 percent of book value, he points out, when 150 percent is considered the usual standard in such sales.

Phillip's decision to sell when everyone else in the insurance business was buying is one reason that has happened, say business people, familiar with the Equitable General situation.

Other factors are the company's reputation for efficient management, it's relatively liquid investment portfolio and its steadily growing profits.

The terms under which Phillips and other insiders want to sell have also pushed up the price, by forcing potential buyers to offer preferred stock which actually costs buyers less than its equivalent in cash.

Ever since a merger with People's Life Insurance fell through in 1970, Equitable General has been considered a potential partner. Last year, American General Insurance Corp., a Texas Company, acquired almost 10 percent of Equitable's stock. To avoid an unwanted takeover, Equitable bought, the shares back for $32.50, prompting the shareholder suit.

In mid-April, a long-rumored deal was announced, a $40-a-share merger with Great Southern Corp., a Wilmington Del., holding company that runs Great Southern Life of Houston.

Within a week, Great Southern had been forced to raise its bid to $45 to match an offer from Liberty National Life Insurance Co. of Birmingham, Ala.

Then last Monday, Gulf United Corp. of Houston jumped into the bidding with a $45 offer that was raised the next day to $47, producing a $50 counteroffer from Liberty.

Equitable General's position is that it has a deal at $45 with Great Southern, although the higher bids have not been rejected.

Insurance industry sources say one reason for the rapid escalation of prices was the insistence by Equitable General on a merger that would be accomplished at least in part by a tax-free exchange of stock.

Many company insiders hold shares purchased for as little as $1, so a cash purchase price would subject them to capital gains taxes that would wipe out about 45 percent of their profits.

Both Great Southern and Gulf United have offered to buy about 1.2 million of the 2.8 million shares of Equitable General for cash, and to trade convertible preferred stock for the rest.

The preferred stock may carry the same face value as a cash offer, but will in really cost the buyer substantially less. "It's just paper," said one observer, "how much it actually costs them is hard to tell."

Among, the beneficiaries of the stock exchange is expected to be George Washington University. Phillips is chairman of its board of trustees and reportedly has placed large blocks of shares in trust for the school.

Including that stock, Phillips controls about 450,000 shares. Other large blocks include 266,000 shares owned by Dorothy Winchcole, daughter of the company's founder, and 200,000 shares owned by Marshall Garrett, son of the company's long-time general counsel, Clyde Garrett.

Securities and Exchange Commission reports show the company had 898 shareholders as of Dec. 31, but that figure reportedly includes several trust accounts of Washington banks, which hold shares for many funds in a single name.

Although no final merger agreement has been made, profit takin in Equitable General shares has already started, said Patric Ryan, vice president and regional trading director or Dean Witter Reynolds Inc. in Washington.

Buyers who bought the stock at $6 "are asking, why wait for the possibility of $50 when you can take the $46? he said.

The outside chance of a $50 buy, however, has brought in the affluent, steel-nerved speculators who practice risk arbitrage, Ryan said. They're willing to buy the stock at $48 and hope for a quick move to $50. THe potential profits is slim, when commission and interest on money are figured but some speculators thrive on such deals.

As for the shareholders who sued Phillips claiming the company's stock wasn't worth buying at $32.50 - their lawyer won't comment while the suit is still pending.