Thursday, May 28, 2009

The Rules Favor Compromises -- in AAA-Governed Arbitrations

UPDATED -- 05.28.09 @ 2:12 PM EDT: The AP is now updating its reports with this reaction, from Steve Brozak of WBB Securities: "J&J has a history of basically sticking to its guns," he said. "You'll probably see more give by Merck-Schering-Plough," with them offering Johnson & Johnson a bigger share of the revenue to settle the dispute. . . . Indeed.


Overnight, Johnson & Johnson announced that it filed a demand for arbitration on May 27, 2009. The key new piece of information here is that it did so, with the American Arbirtation Association. If the rules of that body, now in effect, are to govern this dispute, it is marginally more likely that Schering-Plough and Merck will have to surrender some part of the Remicade® and Simponi™ rights -- or, at least agree significantly enhanced royalties payable to J&J on all sales, ex-U.S. . . . I'll explain why, after we look at the J&J press release:
. . . . In an arbitration demand filed today with the American Arbitration Association, Johnson & Johnson has requested a ruling that the agreement and plan of merger between Merck & Co., Inc., and Schering-Plough Corporation constitutes a change of control that would permit the termination of the agreements between Schering-Plough and Johnson & Johnson’s subsidiary Centocor Ortho Biotech Inc., regarding the product REMICADE® (infliximab), a well-established biologic product for inflammatory/immunological diseases, and SIMPONI™ (golimumab), a next-generation treatment. The termination of the agreements would return full rights to Johnson & Johnson for the distribution of these products in markets outside the United States where Schering-Plough currently has the rights to distribute these products.

"As its public statements have made clear, Merck is acquiring Schering-Plough," the company said. "The acquisition constitutes a change of control that triggers the right of our Centocor Ortho Biotech subsidiary to terminate the agreements. . . ."

Now, here are the rules of commercial arbitration, from the American Arbitration Association, which rules will presumably govern this demand by J&J. Note particularly Rules 30, and 31:
R-30. Conduct of Proceedings

(a) The claimant shall present evidence to support its claim. The respondent shall then present evidence to support its defense. Witnesses for each party shall also submit to questions from the arbitrator and the adverse party. The arbitrator has the discretion to vary this procedure, provided that the parties are treated with equality and that each party has the right to be heard and is given a fair opportunity to present its case.

(b) The arbitrator, exercising his or her discretion, shall conduct the proceedings with a view to expediting the resolution of the dispute and may direct the order of proof, bifurcate proceedings and direct the parties to focus their presentations on issues the decision of which could dispose of all or part of the case. . . .

R-31. Evidence

(a) The parties may offer such evidence as is relevant and material to the dispute and shall produce such evidence as the arbitrator may deem necessary to an understanding and determination of the dispute. Conformity to legal rules of evidence shall not be necessary. . . .

Note the portions I have bolded -- the arbitrator(s) "shall. . . expedite resolution of the dispute". This rule reflects a bias against overly formalistic, lawyerly arguments, and a bias toward finding compromises both parties can "live with".

Moreover, Rule 31 provides that the strict rules of evidence need not be adhered to, thus J&J may submit "common sense based", and obvious public record data, as to whether Fred Hassan and Dick Clark are treating this transaction as a "change of control" transaction. Indeed, they are.

So, J&J is in particularly good shape here -- as all it arguably need do is show that Schering-Plough's reverse merger structure is an overly-formalistic, "cute-lawyering" attempt to avoid the obvious.

The "obvious" here comprising the "Change of Control" payments Mr. Hassan and the other Top Five EMT members intend to take, once the deal closes. "Ya' cannah' have it both ways, Mr. Hassan. . . .

More later -- if I find time.


Anonymous said...

While I don't think it will happen, if the arbitrator says "full return to J&J" what is the impact to the merger? Will Merck cancel and/or how does it play into the stock ratio exchange you talked about?

Condor said...

The merger goes forward -- unless Merck demands to renegoiate. Merck has no automatic right to do so, though.

Separately, the board of Merck might come to the conclusion that paying the same merger ratio -- without any Remicade rights, is a breach of that board's fiduciary duties to all Merck shareholders -- and again, demand a renegotiated deal be struck.

Not likely -- but possible.

Time will tell.


Anonymous said...

Agree on the stoppage.

This over on:

"And they say that that arbitration won't prevent their merger from wrapping up as planned, because the deal expressly excludes the Remicade partnership from the "material adverse effect" provisions that could negate the deal or mess up any financing arrangements."

Condor said...

Right -- but the board has duties -- fiduciary duties, that transcend the simple terms of the merger agreement.

Still unlikely -- but a possibility -- that the board feels it is "overpaying" for Schering-Plough -- should Schering-Plough lose all rights to Remicade/Simponi in the arbitration.

Moreover, the arbitration rules favor J&J -- because Schering's argument is an "all or nothing" legalistic approach. [Good for courts -- perhaps not so good in arbitration.] Either J&J wins completely, or it gets nothing -- that is the way the Kenilworth lawyers are laying this one out.

AAA arbitrators tend to reject all or nothing approaches -- on balance.

And so, as ever, we shall see.


Condor said...

The widely-revered (and deservedly-so) Professor John Coffee, of Columbia University's Law School weighs in, tonight -- via a Rueters Wire Service news report pull-quote:

. . . ."Arbitrators have a bit more leeway than a judge. They can look at what the parties' intention was at the time, they can look at what various drafts of the contract said, and delve into what the language intended or meant," Columbia University Law School Professor John Coffee said. . . .

Pretty much confirms what I've been saying for almost three months, now.


Anonymous said... is very informative. The article is very professionally written. I enjoy reading every day.
fast cash loan
payday loans online

Anonymous said...

Hey, I found your blog in a new directory of blogs. I dont know how your blog came up, must have been a typo, anyway cool blog, I bookmarked you.