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Judge rules on breakup fee for Caremark Rx

SHARE Judge rules on breakup fee for Caremark Rx

WILMINGTON, Del. — A Delaware judge on Friday refused to invalidate a $675 million breakup fee aimed at protecting the proposed acquisition of pharmacy benefits manager Caremark Rx Inc. by drugstore giant CVS Corp.

Chancellor William B. Chandler III nevertheless ordered that a Caremark shareholder meeting to vote on the deal not be held until at least 20 days after Caremark properly informs shareholders about several issues. These include their "appraisal rights" regarding a $6 cash dividend offered by CVS and the fact that $35 million in payments to Caremark's investment bankers were contingent on the bankers initially issuing favorable recommendations about the merger.

"At this stage, however, no broader injunction is necessary," the judge wrote in a 38-page opinion.

CVS, which is based in Woonsocket, R.I., and is the nation's largest retail pharmacy chain, announced Nov. 1 that it planned to acquire Nashville-based Caremark for about $21.2 billion in stock.

Attorneys for rival benefits manager Express Scripts Inc. of Maryland Heights, Mo., and two Caremark institutional shareholders, a Pennsylvania Masons lodge and a Louisiana police pension fund, challenged the CVS deal in court.

They argued that directors of Caremark had failed to negotiate the best deal for their shareholders and that the proposal contained unfair protection measures aimed at dissuading other bidders for Caremark.

Opponents also said the CVS deal instead was designed to benefit Caremark executives and board members by giving many of them lucrative positions at the combined company and allowing them to avoid possible civil liability resulting from a Securities and Exchange Commission investigation into backdating of stock options.

"Only in extraordinary circumstances will this court substitute its business judgment for that of directors, or usurp the rights of shareholders to make their own informed decisions," Chandler wrote in denying a preliminary injunction sought by the plaintiffs. "Although plaintiffs allege facts concerning the process by which the deal was negotiated that trouble the court, very few of their arguments suggest that I am in a better position than Caremark's shareholders to make the ultimate decision."

Chandler was careful to note that he was ruling only on the "extraordinary remedy" of a preliminary injunction, suggesting that he was concerned by the alleged conduct of Caremark officials.

"No party should infer from the fact that I am denying plaintiffs an injunction that the existence of appraisal rights and the disclosure of all material information to informed, disinterested shareholders somehow excuses violations of fiduciary duties under Delaware law," he wrote.

Health care analyst Andrew Speller of A.G. Edwards & Sons said appraisal rights determining the value of the deal for Caremark shareholders will be a key issue going forward, and that denial of the injunction does not necessarily spell bad news for Express Scripts.

"They potentially lost the battle, but might win the war," Speller said, adding that Caremark shareholders are going to see higher bids as a result of the ruling.

Plaintiffs' attorney Stuart Grant praised the judge's decision.

"Absolutely brilliant," Grant said. "He did everything that he should do."

Grant said the judge agreed with the plaintiffs that Caremark shareholders should be fully informed before they vote on the deal, and ensured that Caremark would provide additional disclosures.

"He did all this without knocking out either bidder," the plaintiffs attorney said.

Chandler's determination that Caremark shareholders are due appraisal rights means they can seek court intervention if they don't think they're getting fair value for their holdings. The result, Grant said, is that CVS will be pressured to match Express Scripts in making an attractive offer.

"That puts a tremendous amount of pressure on them to bump," Grant said.

Caremark spokeswoman Brandy Bergman said it was not clear how long it would take the company to comply with the disclosures ordered by the judge.