Should Merck Reimburse Its Smaller Stockholders, If The Remicade Arbitration Clanks?

There has been some grumbling, of late -- on the Yahoo! stock chatboard for "New" Merck. It seems many Old Merck stockholders are upset that their brokers have charged them a $20 exchange processing fee. We all know the brokerage firms are plainly entitled to assess this charge, because the way the transaction was structured, Old Merck stockholders do not keep their original shares. They got shiny new shares, with a new CUSIP number (CUSIP No. 58933Y105, in fact), and even, for a moment, a new name. The new company (which was a sub of Old Schering-Plough, before the reverse merger) is now simply called Merck, once again, though. Why did CEO Dick Clark do this?

Well, in order to argue to Centocor/J&J that the Remicade and Simponi distribution rights, outside the US, remain vested in what was Schering-Plough, and is now New Merck, CEO Clark needed to establish that no "change of Control" event had occured -- otherwise, J&J's Bill Weldon might be entitled to take back two franchises worth over $4 billion in annual non-US revenue.

Much more, on the mechanics of the relevant agreements may be found here and here, but J&J is now in final, binding arbitration with Merck over these issues. So, while the $20 exchange fee may not seem like much to the executives at Whitehouse Station, it is true that these Old Merck stockholders will have a pretty good claim for reimbursement from Whitehouse Station, if the arbitration results in a clear win for J&J/Centocor. This is simply money these holders should not have had to pay.

How so? Well, there may be upwards of 25,000 individual holders of Merck, and all their shares -- "New Merck" shares -- bear a new CUSIP number. If the legal manuevering works to keep J&J from winning back the rights to Remicade and Simponi outside the US, I suppose CEO Clark would argue (pretty persuasively, too) that he "preserved value" for them, by choosing this goofy reverse merger structure.

If, on the other hand, that gambit fails, and Remicade/Simponi rights revert back to J&J/Centocor anyway, per an arbitrators' binding decision, I'd scream to high heaven -- and hire a lawyer, were I an Old Merck stockholder. And I think Merck ought to reimburse, as a class, all these $20 reorganization fees, assessed by the brokers.

Why?

Because, if Merck had conducted the Schering-Plough wipe-out merger in the more common, usual and customary way, Old Merck stockholders would still be holding shares in the original, and "surviving" entity -- not old Schering-Plough, renamed as Merck -- and thus there would have been no change in CUSIP Numbers (from the "Old" Merck CUSIP Number 589331107), for Merck stockholders -- and thus no $20 reorganization fee, per account. If there are maybe 25,000 individual holders of Merck, times $20 -- then the class action would be worth at least $500,000 -- give or take (as some retail brokerages assess a $50 reorg fee, and some assess only a $15 fee). If there are 50,000 individual holders, the class looks like at least a cool $1 million.

And that will be worth looking into -- should the arbitration come out badly, for Merck. The amount is small to Merck, either way, in the face of the Simponi/Remicade battle, but it would seem equitable -- if Merck's lawyers so completely misjudged the agreements, and cost the small holders $20 or $50 per account, that these holders shouldn't have had to pay -- then Merck, or its lawyers, ought to pony up.

Of course, if Merck gets a good result out of the arbitration, I'll be the first to salute these very same clever lawyers. We shall see.