Merck/Schering-Plough Reverse Merger Seeks To Cut Out J&J
This article was originally published in The Tan Sheet
Executive Summary
The complicated reverse merger arrangement between Merck and Schering-Plough includes some impressive legal maneuvering
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The complicated reverse merger arrangement between Merck and Schering-Plough includes some impressive legal maneuvering. The $41.1 billion deal announced March 9 is structured to give Merck control over a partnership between Johnson & Johnson and Schering-Plough for a blockbuster rheumatoid arthritis franchise. A 1998 deal between Schering and J&J's Centocor unit over rheumatoid arthritis drug Remicade and the investigational follow-up golimumab, currently pending at FDA includes a change-of-control clause that could return rights to J&J in the event of a Schering-Plough takeover. Merger agreement documents filed with the Securities & Exchange Commission March 10 outline the intricate plan Merck laid out to acquire Schering without triggering that change of control provision. "Project Solar" Aims To Keep J&J Out Of Orbit Dubbed "Project Solar" and referencing Merck as "Mercury" and Schering as "Saturn," the arrangement is a reverse merger in which Schering will remain as the surviving company - despite the fact it will be redubbed Merck, headed by Merck CEO Richard Clark, and that Schering shareholders will own only a 31 percent stake. "We believe the transaction is structured so that Schering's rights are not affected by the merger and we will retain distribution rights to the [anti-TNF] products," Clark proclaimed during a March 9 conference call, announcing the proposed acquisition. Under the plan outlined in the filing, Schering would create two subsidiaries, Blue and Purple. Blue will merge with Schering, which will continue as the surviving corporation. Purple will then merge into Merck, with Merck the surviving company operating as a wholly owned subsidiary of Schering. At the time of the Schering/Blue merger, each share of common stock of the current Schering will be converted into 0.5767 shares of common stock of Schering and $10.50 in cash. At the time of the Merck/Purple merger, each share of common stock of Merck will be converted into one share of common stock of Schering. At the "effective time" following the mergers, Schering will change its name to Merck & Co. Currently, Schering has marketing rights to the anti-TNFs outside the U.S. - excluding Japan and some Asian markets - and J&J has U.S. marketing rights. Remicade is Schering's top revenue generator with sales of $2.1 billion, so maintaining ex-U.S. rights is certainly critical to Merck, though management played down its importance during the March 9 call. J&J Arbitration Clause J&J can seek arbitration after 20 days notice if it considers there has been a change in control at Schering, according to the original 1998 agreement. That document asserts a change of control constitutes "any merger, reorganization, consolidation, or combination in which a party to this agreement is not the surviving corporation." In this case, J&J could argue Schering is not the surviving corporation. The J&J/Schering contract has other definitions of what might trigger a change of control, including a clause related to alterations in the board of directors. Effectively, if representation in the "incumbent board" - Schering in this instance - no longer constitutes a majority, that might be grounds for J&J to challenge ownership rights to Remicade and golimumab. Indeed, Schering's board representatives will be in the minority. The board of the newly merged entity will include the existing Merck board and three representatives from the Schering board deemed "satisfactory" to Merck, according to the filing. To wiggle around the contract terms with J&J, however, the Merck directors will be elected by the directors of Schering before they resign. One lawyer familiar with change-of-control clauses says Merck's tactics appear to successfully get around the various prongs of the clause, though "they are probably right on the edge with each of them." While acknowledging the proposed structure "seems a little devious," the lawyer pointed out merger structures are often convoluted and this one "isn't anything that is not contemplated by the original agreement." The reverse merger also includes a $1.25 billion breakup fee Schering would be required to pay Merck if the agreement is terminated. However, that is unlikely to be a dissuading factor to prevent J&J from stepping in with a counter offer. - Jessica Merrill ([email protected]) |