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SCHOELLHORN v. ABBOTT: APRIL 4 COURT HEARING SET FOR FORMER CHAIRMAN’s MARCH 9 DISMISSAL; SCHOELLHORN CHARGES DIRECTORS WITH FRAUD AND BREACH OF CONTRACT

Executive Summary

The corporate feud between former Abbott Chairman Robert Schoellhorn and the outside members of the Abbott board is slated to move into the legal ring on April 4 in Cook County, Illinois Circuit Court. The court hearing, delayed from March 28, is scheduled to address the issue of whether the company should be held in contempt for the March 9 dismissal of its former chairman, Schoellhorn's attorneys indicated. The hearing is the result of a suit that Schoellhorn filed that same day. The March 9 complaint cites as defendants the company and four of its outside directors: Quaker Oats Chairman William Smithburg, Amoco President H. Laurance Fuller, Humana Chairman David Jones, and William Weiss, the chairman of Ameritech. The four individuals were members of a special Organization and Succession Planning (OSP) Committee formed by the Abbott board in August 1989 to advise the chairman and the board on management succession planning. Schoellhorn, who was elected a non-member secretary of the OSP Committee in 1989, would have reached the mandatory retirement age of 65 in 1993. The suit charges that "completely unknown" to Schoellhorn, the OSP "became a rogue committee usurping power and undertaking to effect management through deception rather than through faithful and honest advice to the chairman." Schoellhorn asserted that he was kept in the dark about the OSP's activities. In a section of the suit melodramatically entitled "The Ambush" (see excerpts from lawsuit, p. 8), Schoellhorn said he was approached privately by Smithburg and another outside director, Arthur Rasmussen, immediately prior to a Dec. 8 board meeting. According to the suit, the two told him that the committee had decided to remove him from the office of CEO effective Jan. 1, and to require him to retire as chairman in August 1990. When Schoellhorn demanded to know specific reasons for the dismissal decision, the suit alleges that Quaker Oats' Smithburg offered only "vague generalities about supposed results of some secret survey." Schoellhorn said he was not aware of "the full extent of wrongdoing perpetrated by the OSP Committee members" until he later read minutes of the meeting, which stated that the board had unanimously adopted certain resolutions to the company's by-laws that were suggested by Weiss. Among other things, the resolutions, effective Jan. 1., allow the vice chairman, then Duane Burnham, to call special meetings, vote shares held in other companies, and have pricing, contract and borrowing authority. Burnham, 48, was promoted from chief financial officer to president of Abbott late last year ("The Pink Sheet" Dec. 11, T&G-7) and was elevated to chairman and CEO on March 9. At the time of the announcement, Burnham was scheduled to take over that job in August ("The Pink Sheet" March 12, "In Brief"). In the press release announcing Burnham's succession and Schoellhorn's early departure, OSP Chairman Smithburg said: "Our action today...is in the best interests of Abbott shareholders, employees and customers." Schoellhorn, 61, joined Abbott in 1973 as exec VP-hospital group. He was appointed to president and chief operating officer in 1979, and chairman and chief executive officer in 1981. He has drawn increasing outside criticism for his unwillingness to stick with a top management transition plan. Three times in the previous decade Abbott's number two on the management ladder reportedly was forced to leave the company. Last August, President Jack Schuler resigned suddenly; his departure was described by Abbott as being "immediately" effective. Schuler's ouster repeated a pattern previously set with the departures of current Biogen Chairman James Vincent and of Genentech President Kirk Raab ("The Pink Sheet" Aug. 21, T&G-3). In the cases of Schuler and Raab, Schoellhorn stepped in quickly to assume the chief operating post. Schoellhorn's suit maintains that the board's Dec. 8 vote on management succession "was accordingly manipulated and induced by the ultra vires [acts beyond the scope of a corporation's powers, as defined in its charter or laws] malfeasance and misrepresentation of these defendants." The complaint further alleges that "these fraudulent resolutions purport to strip the chairman of the board of virtually every power previously vested in that office, except the power to preside at board meetings and at the annual meeting of shareholders." Moreover, the complaint maintains: "These fraudulent resolutions are so demeaning and patently vicious that they ostensibly deprive the chairman of powers that even low-level Abbott executives have by standing resolution." The suit also alleges that the ousted chairman "has consistently been treated with discourtesy and disrespect" by Burnham. The "disrespect" and "discourtesy" directed at Schoellhorn reportedly took several forms. One example cited in the lawsuit appears particularly egregious. Burnham, the suit alleges, "has gone so far as to instruct secretaries to open Mr. Schoellhorn's mail for screening prior to delivery to Mr. Schoellhorn." Schoellhorn also alleges that he was "threatened" at a March 9 board meeting with "drastic economic sanctions" that included the withholding of "valuable retirement benefits" and "reduction in severance compensation to well beneath his just entitlements." Abbott shareholders are scheduled to meet April 20. The proxy for the annual meeting, dated March 12, does not include Schoellhorn in the slate of directors up for reelection but does list him as chairman and CEO. According to the proxy, Schoellhorn's cash compensation in 1989 totaled $1.6 mil.; the corporation's contribution to his stock retirement plan was $2,889; his annuity retirement plan would entitle him to between $369,977 and $419,477 in annual benefits; and he realized $2.4 mil. in options exercised and had 270,788 unexercised option shares. Schoellhorn already has had a setback in his legal pursuit of reinstatement. The Cook County Circuit Court on March 9, after a hearing on the suit, denied Schoellhorn's request that Abbott be required to retain him as chairman of the board, as an officer of the company and as a member of "certain" board committees.
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