Novartis cannot force Alcon merger

The merger Novartis has been trying to unilaterally impose on Alcon cannot go ahead without the approval of Alcon’s Independent Director Committee (IDC), according to a legal expert, and at the moment the IDC still believes that Novartis’s offer is vastly inadequate.

Novartis purchased a 25% stake in Alcon from Nestle in April 2008, and also exercised its rights to purchase Nestle’s remaining 52% stake in Alcon in a deal worth approximately $28 billion. With it eyes on the remaining shares in the hands of minority shareholders, Novartis offered 2.8 Novartis shares for each Alcon share in January 2010, which valued the shares at approximately 18% less compared with what Novartis had paid Nestle.

Despite Alcon’s claim that the offer was “grossly inadequate”, Novartis expressed its view that if it were unable to obtain the required approval of the Alcon Board of Directors and the IDC, it would simply wait until it owned 77% of Alcon to then “unilaterally impose the terms of the proposed merger on the minority shareholders”, according to an Alcon press statement.

In a statement released at the end of June, however, Professor Hans Caspar von der Crone, a leading Swiss legal and corporate governance expert, explained that the IDC’s recommendation of the merger is crucial. “The Alcon board will not be able to validly decide on Novartis’s merger proposal without the IDC’s prior recommendation of that proposal,” he explained.

According to von der Crone, who has confirmed the IDC’s rights and obligations under Swiss law, Alcon’s board is “clearly conflicted with respect to a merger” because it will include members appointed by Novartis. As such, “a merger agreement signed on the basis of the decision of a conflicted board will not be legally effective if the counterparty to the agreement was aware of the conflict of interest at the board level”, according to Von der Crone’s legal opinion.

The decision of a conflicted board is only valid if specific measures are put in place, which was why the board introduced the requirement for a prior recommendation from the IDC.

Novartis, however, maintains that the nominated directors are well-qualified and experienced to act in the best interests of Alcon shareholders, and has confirmed this week in a press statement that it expects to achieve 77% majority ownership of Alcon in late third quarter or fourth quarter of 2010.

In Alcon’s June press statement, the Chairman of the IDC, Thomas G. Plaskett, said: "While we continue to hope that we can reach a negotiated deal, Professor von der Crone's legal opinion makes clear that, regardless of Novartis' ultimate course of action, the IDC's recommendation is a mandatory step prior to the consummation of Novartis' merger proposal.”

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