New Merial JV May Run Into Significant EU Works Council Restrictions

This morning, Merck just filed its SEC Form 8-K, disclosing the exercise of the Intervet call option, by Sanofi-Aventis -- and in it, as an exhibit, Merck makes clear that the call option agreement has been amended to take into account the possibility that the EU works councils (primarily the Dutch ones, though -- to be fair) may materially alter, or effectively scuttle the material economic incentives for doing the deal, thus:

. . . .3. Exercise

Clause 3.5.3 of the Call Option Agreement is deleted and the following is hereby inserted in lieu thereof:

“Upon exercise of the Call Right, the Parties undertake to execute the Contribution Agreement (incorporating any amendments as may be agreed by the Parties pursuant to this Agreement) in the form attached as Exhibit A as follows:

(i) If the Works Council (as defined in the Contribution Agreement and hereinafter in Amendment No. 4 also referred to as the “Works Council”)) (1) delivers an unconditional positive advice to enter into the Contribution Agreement, or (2) waives its right to invoke any remaining portion of the standstill period (as set out in article 25, paragraph 6, of the Dutch Works Council Act) ending on March 27, 2010 and its right to initiate legal proceedings before the Enterprise Chamber of the Amsterdam Court of Appeal (as set out in article 26, paragraph 1, of the Dutch Works Council Act) (the ”Enterprise Chamber”), the Parties shall execute the Contribution Agreement immediately upon receipt by Intervet International B.V. of such written advice or waiver.

(ii) If the Works Council has initiated proceedings before the Enterprise Chamber or any other Public Authority and has requested a preliminary Order (as defined in the Contribution Agreement) restraining, enjoining or otherwise prohibiting the execution of the Contribution Agreement pending completion of the legal proceedings (the “Request”), the Parties shall execute the Contribution Agreement only after the Enterprise Chamber or other Public Authority has decided to dismiss the Request such that it does not prevent the execution of the Contribution Agreement.

(iii) If the standstill period ending on March 27, 2010 expires and during this standstill period the Works Council has not delivered an unconditional positive advice nor initiated legal proceedings in accordance with Clause 3.5.3 (ii) above or has initiated legal proceedings without making a Request, the Parties shall execute the Contribution Agreement immediately upon the expiry of the standstill period.

Merck shall cause Intervet International B.V. to defend, and in the event that proceedings are initiated against Merck, Merck shall defend, against any proceedings initiated by the Works Council and Merck shall cause Intervet International B.V. to use, and in the event that proceedings are initiated against Merck, Merck shall use, commercially reasonable efforts to reduce or eliminate any adverse effects resulting from any legal proceedings initiated or otherwise prosecuted by the Works Council (including without limitation opposing any Order (as defined in the Contribution Agreement) restraining, enjoining or otherwise prohibiting the execution of the Contribution Agreement) and, to the extent applicable, seek the lifting of such Order as promptly as practicable. In the event proceedings are also initiated against Sanofi-Aventis, Sanofi-Aventis undertakes to observe the same obligation. Each Party shall inform the other Party promptly upon the initiation of such proceedings, shall keep the other Party reasonably and promptly informed of any further development with respect to such proceedings and shall consult with the other Party in respect of the defense of such proceedings prior to taking any actions with respect to such defense. Each Party hereby agrees to use all commercially reasonable efforts to assist the other Party in such proceedings.

The Parties shall comply with any Order (as defined in the Contribution Agreement) applicable to them restraining, enjoining or otherwise prohibiting the execution of the Contribution Agreement, provided, that in such event the Parties shall in good faith discuss Intervet International B.V. implementing arrangements consistent with such Order that would permit the Parties to commit to or execute the Contribution Agreement, as long as the Parties believe such arrangements would be commercially reasonable, provided, further, that Merck shall ensure that Intervet International B.V. does not implement any such arrangement without the prior approval of Sanofi-Aventis which approval shall not be unreasonably withheld or delayed. . . .

5. Covenants of the Parties

5.1 The following Section 7.2.8 is inserted after Section 7.2.7 of the Call Option Agreement:

"Merck shall reasonably consult with Sanofi-Aventis prior to accepting, or causing Intervet International B.V. or any of its other Affiliates to accept, any condition or arrangement required or proposed by the Works Council. In addition, without Sanofi-Aventis’ prior written approval (such approval not to be unreasonably withheld or delayed), Merck shall not accept, and shall cause Intervet International B.V. or any of its other Affiliates not to accept, any condition or arrangement required or proposed by the Works Council". . . .

So -- in addition to ECC, DoJ, FTC HSR, Canadian and Australian antitrust authorities' reviews, Merck is also concerned about European labor councils' reviews of the loss of jobs inherent in such a transaction.

Indeed, this deal may not close until very late in 2011, in my estimation, given this just-disclosed amendment, if it closes at all. This development also presents the possibility of a new "material adverse change" event, one that might allow either party to walk away.

Should be interesting.