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. . . .
(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.