"A $72* $47 Billion Market Loss to Merck Shareholders" v. $41 Billion "Deal" for Them?

In a putative class-action that I have not reported on, or described in any detail, before today -- one called In Re Merck & Co., Inc. Vytorin/Zetia Securities Litigation (Case No. 08-2177, US Dist. Ct. NJ, Complaint Filed May 5, 2008) -- there is a dispute pending about whether the Plaintiffs -- Merck shareholders -- should be allowed to see all the documents that Merck (and Schering-Plough) have already delivered to the governmental investigators, and other plaintiffs, in other putative Vytorin class actions.

While it may seem a simple, straight-forward matter of fundamental fairness that they ought to be able to see whatever else has been delivered in other litigation and investigations, a wrinkle in the Private Securities Litigation Reform Act allows company-defendants to assert a "stay" -- delaying such information sharing -- in securities fraud cases, like this one, until a much later stage of the proceedings. The drafters of the PSLRA felt that this provision would prevent the burden and expense of "fishing expeditions" in dubious securities fraud cases -- of which there are many. A similar battle is underway in the Schering-Plough versions of these would-be class actions.

These are by no means dubious securities fraud class actions, however:

. . . .The true facts regarding Merck have resulted in a loss of more than $47 billion in market capitalization to Merck shareholders. In addition, Merck is facing other actions, including investigations by various State Attorneys General and the United States Department of Justice, the Food and Drug Administration, as well as product liability and consumer fraud actions concerning the facts and circumstances alleged in the Complaint. In connection with these ongoing governmental investigations and other private party litigation, Defendants have compiled and produced, and will continue to compile and produce, evidence to governmental regulators and investigators (collectively the “Regulators”) and to the plaintiffs in the ongoing product liability and consumer fraud litigation (collectively the “Related Action Plaintiffs”).

Lead Plaintiffs have requested specific documents that have been produced or will be produced to the Regulators and Related Action Plaintiffs. See Banko Decl. Ex. A.3 Defendants, however, have refused to produce these materials. See Banko Decl. Ex. B. As a result, Lead Plaintiffs seek an order lifting the PSLRA’s discovery stay for the limited purpose of permitting Lead Plaintiffs to obtain documents that Defendants have already produced or will produce to the Regulators and the Related Action Plaintiffs in connection with the investigations by those agencies and plaintiffs into the same facts and circumstances alleged in the Complaint, as well as transcripts of witness interviews and depositions related to those investigations and civil actions.. . .

I suspect this motion will win the day -- and a similar one will prevail in the Schering-Plough versions.

Any contrary result (ongoing delays) will unduly prejudice the rights of the Merck and Schering-Plough shareholders -- especially as attention and energy in both companies is diverted toward combining the two. Memories will fade, documents may be tossed, people will be assigned new roles and the institutional memory will cloud over. That is a fact, and there is scant reason for people injured by arguable securities fraud to have to sit at the back of the bus, and wait -- while the consumer fraud plaintiffs, RICO claims, and governmental investigations move forward -- to assert their relative interests in the documents -- and potentially deplete the assets available for recovery -- at the now-combined companies.



Above, now-rather-dated look (click to enlarge) at SGP trading prices in early 2008.

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* I wanted to close by foot-noting that a tricky reverse merger deal worth $41 billion doesn't really seem to make up for a market capitalization decline of $47 billion. . . . But then it occured to me that the $41 billion does not take into account the similar Schering-Plough declines.

Thus, the "all-in" declines will be about $25 billion steeper, when the Schering-Plough declines are added in (from $27.50 to $12; times 1.6 billion shares), post merger. So, the figure is really more like $72 billion of lost market capitalization.