Valeant Pharmaceuticals International v. Jerney

Facts

P is a Delaware corporation with its principal executive offices in Costa Mesa, California. P manufactures and markets pharmaceutical products worldwide. Jerney (D) was a P employee since 1973 who rose through the ranks, eventually becoming President and Chief Operating Officer in 1993, positions he resigned on November 15, 2002. D was also a director of the company from 1992 until May 2002. For the end of fiscal year 2001, shortly before the culmination of the events at issue, P reported revenues of $858 million and operating income of $189 million. The company's market capitalization was roughly $2.6 billion. Activist stockholders urged the board to consider splitting the company into parts. UBS Warburg recommended that D be split into separate entities. UBS suggested that the total market value of these three entities could exceed the total market value of P by $1 billion to $1.5 billion. P bought into the restructuring plan. The first step was the IPO and spin-off of Ribapharm. Over the next two years, P increased the research staff nearly tenfold and injected $28 million to modernize Ribapharm's facilities. UBS estimated the IPO price in the range of $13 to $15 per share. The day before the IPO was scheduled UBS informed P that the IPO would have to be priced at $10 per share. The reduction was attributable to a general downturn in the biotech sector, including the negative reaction of investors to another biotech IPO. At that price, the total equity value of Ribapharm was only $1.5 billion. Ribapharm's stock increased modestly in value following the IPO, despite unfavorable market conditions in the biotech sector. P's management began planning a substantial grant of Ribapharm options as early as October 2000. There was an intention to award 8,350,000 Ribapharm options to Panic, D, and others at P, including all of its outside directors, none of whom would serve any ongoing role in Ribapharm. The majority of the options, 5 million, were to be granted to Panic. D was to receive 500,000. The outside directors were each to receive 50,000 options. Investor opposition was severe. Panic suggested that the matter be referred to the compensation committee. The compensation committee met five times in the following days to discuss the bonuses. At its final pre-IPO meeting, on April 10, 2002, the committee first confirmed its support for the option grant program but suggested as an alternative to recommend that the full board authorize the payment of $55 million in cash, in proportion to the planned option awards. The compensation committee consisted of three directors: Stephen Moses, Rosemary Tomich, and Norman Barker, the chairperson. The committee members were clearly and substantially interested in the transaction they were asked to consider with their own 50,000 share options. Tomich and Moses had been close personal friends with Panic for decades. Both were in the process of negotiating with Panic about lucrative consulting deals to follow the completion of their board service. Moses also had on many separate occasions directly requested stock options for himself from Panic. The committee did not select its own independent compensation consultant but selected a ringer to justify the payments. P now contends that the resulting report to the board was conflicted and tainted in its process and presents an irrefutable conclusion that the bonuses were unprecedented and excessive. The report concludes that the $53.7 million value of the options was a reasonable estimate and was comparable to a 2% management success fee in commensurate incubator IPO situations. The committee also hurriedly decided to propose a cash bonus as an alternative for the board to consider along with the option bonus plan and decided that $55 million was the proper amount. The board unanimously approved the cash bonus pool of $50 million to be allocated in proportion to the previously proposed option grants. In reaction to the large bonuses, a group of dissident directors was elected. The new board decided to abandon the spin-off. This decision led to litigation by the persons who bought Ribapharm in the IPO. P repurchased the outstanding shares of Ribapharm through a $6.25 per share tender offer. P suffered three straight years of net losses and a dramatic decline in its stock price.

Issues

Rule of Law

Holding and Decision

Legal Analysis

© 2007-2024 ABN Study Partner.