Thursday, December 22, 2011

Merck Adopts "Irrevocable" Retroactive Indemnity For Os And Ds -- Now Including Legislative Investigations, As Well As Litigation

Last night, Whitehouse Station quietly amended its corporate by-laws (to take effect January 1, 2012), to take advantage of some changing (i.e., liberalized) aspects of New Jersey corporate law (as compared to current provisions of Delaware corporate law). The changes are filed with the SEC here, as required by law. The most salient clauses are bolded:

. . . .Subject to the terms and conditions of this Article V, each former, present or future Director, officer or employee of the Company or of any of the Company’s subsidiaries or the respective legal representatives of such individuals (each an “Indemnitee”) shall be indemnified by the Company, to the fullest extent permitted by the laws of the State of New Jersey as they exist as of the date hereof or as they may hereafter be amended, from and against any and all liabilities and expenses in connection with any civil, criminal, administrative, legislative, or arbitrative action, suit or other proceeding (each a “Proceeding”), or any inquiry or investigation that could lead to any such Proceeding or any appeal therein in which he or she is or was involved, or is or was threatened to become involved, by reason of being or having been a corporate agent; provided that in connection with any Proceeding by or in the right of the Company, no indemnification shall be provided as to any person adjudged by any court to be liable to the Company except as and to the extent determined by such court; and provided, further, that any indemnification pursuant to this Section 1(a) in connection with the settlement or other similar nonadjudicative disposition of any threatened or pending Proceeding shall only be granted to the extent permitted by law. . . .

[All new:] No Retroactive Repeal or Amendment. No amendment or repeal of this Article V, nor the adoption of any provision of the Certificate of Incorporation or these By-Laws inconsistent with this Article V, shall deprive any corporate agent of any rights under this Article V with respect to any act or omission of such corporate agent occurring prior to such amendment or repeal of this Article V or the adoption of such inconsistent provision. . . .

Remember that this provision grants Fred Hassan, Carrie Cox and the lot of former Schering-Plough officers and directors non-repealable new rights to reimbursment -- in all the ENHANCE matters, by way of example. Anything spent defending Senator Grassley's ENHANCE investigation (i.e., the Covington & Burling bills, for example), is now to be reimbursable from "New" Merck's corporate coffers. [There were two Congressional investigations, at the time, just to be clear.]

This Merck is, after all, the same entity that was once legacy Schering-Plough. Cozy. I don't think the change is primarily intended to benefit the Ex-Schering-Plough Ds & Os, but it clearly does just that.

More broadly, the narrative surrounding this change in law is part of what has been called "the race to the bottom", between Nevada, Delaware and New Jersey -- ostensibly to keep or retain corporate franchise tax rolls, in each state. And for my part, I don't see how the change is helpful to any affected shareholder. [Later, I'll I've attached a PDF markup of the changes to Merck's Article V, here.]


Anonymous said...

Wow. I am no lawyer (obviously), but how is it possible for Merck (or any company) to provide indemnity for criminal investigations or proceedings? & What a nice Christmas gift for Freddie and his crew.

Condor said...

I do hear you.

The way the law -- and thus, the indemnity provisions -- work here is that the company advances expenses of defending even a criminal investigation or proceeding, but the executive is required to repay those amounts if found guilty, or settles with a plea that implicates him or her in the criminal conduct.

Public policy prohibits individuals from being indemnified for conduct that is found to be criminal, by a judge or jury.

Of course, at that point, the executive rarely has the wherewithall to repay the millions advanced. So it is a rather meaningless carve-out, unless the whole board affirmatively votes to only pay expenses after a criminal outcome is known.

More troublingly, though -- to me, personally -- is the case of corporate pleas to felonies. In that case, if the "person" is a corporation -- usually no one is deld accountable.

Again and again, we see corporations plead guilty to felonies, and we see that the shareholders are unable to recover the related expenses from those individuals who were directing the felonious scheme. That is where the system seems fundamentally broken, in my opinion.

Great observation -- thanks!

Do stop back.


Anonymous said...

thank you. & I also find the pleas to felonies troubling. It seems to me that a criminal conviction is not something that companies should be so easily able to buy their way out of. Also, as a Merck employee, I feel that the company owes us a bit more explanation around this admission of criminal activity.

condor said...

I hear you, anonymous Merck employee --

There is always the proxy process, and annual stockholders' meeting Q&A session. [Get your spouse to actually ask the question!]

As a long-time Merck employees -- it is very likely you are also a shareholder, so you -- or someone you designate, could submit it as a question at the stockholders' meeting.

Ask the general counsel to explain why this latest by-law amendment actually BENEFITS the shareholders -- and not just the directors and officers, it protects from the consequences of malfeasance.

Especially former D's and O's -- like Fred. That makes no sense.


Anonymous said...

brilliant suggestion. thank you!