Alcon Committee weighs legal steps ahead of Novartis closing on minority stake

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A number of legal steps may be carried out by Alcon (NYSE:ACL) as it continues to lobby against Novartis’ (NYSE:NVS) proposed acquisition of the 23% stake it does not already own in the Switzerland-based vision care products group, sources familiar with the situation told dealReporter.

Since the Swiss drug giant proposed a fixed exchange ratio offer of 2.80 for each remaining Alcon share - a 12% premium to the unaffected Alcon share price of USD 137 - Alcon’s Independent Director Committee has reaffirmed its task of protecting the minority holders.

As the committee mulls over its options, steps it could turn to include injunctive relief from enjoining a merger, or the ability to stop a merger from occurring; a declaratory judgment and/or an appraisal process, according to a first source close. The source said Alcon has the right for injunctive relief presently and prior to effectiveness of a deal. “It basically would be contending that the board action that was taken was invalid in connection with the merger,” the source said.

The deal will require both shareholder and board approval. Novartis has stated that its representatives on the Alcon Board, after it exercises its call option at USD 180 per share and takes 77% control, would be free to vote on whether the merger is fair. Meanwhile, Alcon has called this strategy a “unilateral action,” indicating that it would be inconsistent with the minority protection principles within its Organizational Regulations.

Alcon’s Article V of Section 5 in the Organization Regs looks to give the committee control over any merger proposal. Moreover, this source and a second source familiar with the situation said Alcon’s position is further supported and not superseded by Section 717 of the Swiss Code of Obligations which provides that in situations where an interested director is involved or conflicted those directors are required to recuse themselves.

”It is then assumed that they cannot vote on the transaction with themselves or someone they represent,” the second source said. He said he was confident that the conflicted directors would have to recuse themselves.

The first source added, “What you end up with is the independent directors having to be the final arbiters of the transaction.”

When asked whether these provisions can be changed by a newly-appointed board, the first source pointed to numerous “spots” in the Regs that provide that any amendments affecting Article V of Section 5 has to be approved by the committee. “There is a good safeguard built into the Regs,” against attempted change to these provisions, he said.

In addition, the first source said Novartis, in its capacity as a shareholder, owes no fiduciary duties and can vote its shares as it would like in a merger. However, he reiterated that the merger needs board approval before it can even be put before shareholders.

Nestlé, which is selling the remaining 52% stake it owns in Alcon to Novartis, has submitted its notice that it will be abstaining from participating in any vote while it remains on the board, noted a third source close. In terms of the makeup of the 11-person board, the five Nestlé directors will become Novartis directors after the stake sale closes in June or July, as previously reported by this news service. There is one additional Novartis director, two Alcon executives and three independent directors on the board.

If Novartis has more than two-thirds of the vote at any meeting, which it will have when it closes on its 77%, it can force a merger.

In the event Novartis does force a merger, the first source said independent or “disinterested” directors have the right to challenge the resolution. “That is how [Alcon] believes [it] has a strong case,” he said, adding, “and then there is certain appraisal action, which is a dangerous action because you can bring it and you don’t even have to pay the court fees.”

The first source did not want to detail too closely the strategy Alcon could utilize, though he said the company has legal rights which can have the effect of enjoining the merger.

The committee has said the Novartis proposal to minority shareholders would “inequitably and unfairly” distribute value to its largest shareholders, citing Alcon employees as one of the largest minority shareholders. Novartis states that it can close the merger and that the only challenge to “equitable fairness” would be a post-closing judicial review.

The second source close to the situation said ”equitable fairness” is not a term of art under Swiss law. However, he said there are some concepts in Swiss merger law that refers to how the price of an offer is determined, but it is used as an overall description.

A US industry attorney not affiliated with the deal commented that the standards for extraordinary equitable relief requires Alcon to prove irreparable harm. If the party can prove the latter, the US attorney said the deal could be stopped. Without the deal moving forward there is an incredible incentive for Novartis not to drag out the process and to come to some kind of resolution much more rapidly, he said. “That, I think, is going to be strategy number one.”

In a declaratory judgment versus injunction, the bar is pretty high for both of them, the US attorney said. Historically, neither have been tested and in fact, where it relates to the Swiss Law, local regulators have been very protective of Swiss companies.

But, he said a declaratory judgment is technically easier. “You have to, in the case of an injunction, show irreparable harm unless the commercial agreement between the two parties otherwise has expressed provision to the contrary, lowering the bar,” he noted.

If Alcon proceeds with a declaratory judgment, the US attorney said the party will go to court and claim: ”I’m right… this matter should be settled as a matter of law in my favor.” Alternatively, in the event of an injunctive relief case, Alcon does not have to prove the definitive legal case. Instead, the attorney said the party just has to show sufficient harm that this matter should be stopped as it stands and then go to trial.

In an appraisal situation, the US attorney explained Alcon will claim it has been put into a situation where the only way to resolve a dispute is to go to an independent appraiser or an independent process.

“As a matter of law in Delaware an appraisal is a right; that’s not the case in Switzerland,” the US attorney said.

There are currently no other US protections for Alcon to use as leverage, noted the US attorney. He said most of the protections in the context of acquisitions come as a matter of state law not as a matter of federal security laws.

Even Article 33 of the Swiss Stock Exchange Act – regarding standards for squeeze outs - does not apply in this instance, as the company must be listed on a stock exchange in Switzerland, noted the sources familiar.

A post-closing judicial review, in theory, can block a merger under Section 717 of the Swiss Code of Obligations, noted a Swiss attorney claiming familiarity with the situation. In practice, however, there has been no such precedent to compare the Alcon case as the law was only enforced five years ago, the second source and the US attorney said.

But if enforced, the judicial review would benefit all shareholders as part of the merger consideration and not just those that “opt out,” said the second source. He added that a timeframe for such a review, if it goes through all the applicable courts, could take up to two to three years.

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