Alcon shareholders file suits

March 1, 2010

Minority shareholders of Alcon stock have filed 12 class-action lawsuits protecting Novartis' decision to pay them less than it will pay Nestle for its Alcon shares.

Key Points

New York-Minority shareholders of Alcon stock have filed 12 class-action lawsuits protesting Novartis' decision to pay them less than it will pay Nestle for its Alcon shares.

The lawsuits-most of them filed in the United States District Court for the Southern District of New York-accuse Novartis, Nestle, and Alcon's Boards of Directors of breaching their fiduciary duties to the minority shareholders.

In a consolidated class-action complaint that merges the federal cases, lawyers representing the plaintiffs said the deal is a "coercive merger" that denies investors "their most basic contractual, legal, and equitable protections."

The federal cases are assigned to Judge Victor Marrero. They were filed on behalf of institutional investors, including the Oklahoma Firefighters Pension & Retirement System, City of Monroe (MI) Employees' Retirement System, City of Westland (MI) Police & Fire Retirement System, Massachusetts Bricklayers and Masons Trust Funds, Boilermakers Lodge 154 Retirement Plan (based in Pennsylvania), and the Erica P. John Fund Inc. (formerly known as the Archdiocese of Milwaukee [WI] Supporting Fund).

On Jan. 4, Novartis, which owns 25% of Alcon, announced its intention to buy Nestle's 52% minority stake in Alcon for $180 cash per share, for a total of about $28.1 billion.

Novartis said it would issue Novartis stock-then with a cash value of about $153 per Alcon share, but that number fluctuates-to the minority shareholders, and argued that it could pay Nestle more because its shares would give Novartis control of the Alcon board.

Novartis said it could push the takeover through once it holds 77% ownership and controls the board, although minority shareholders say the move would violate Alcon's minority shareholder protections.

The combined federal complaint alleges that "the senior executives of two foreign corporations that control Alcon are trying to 'squeeze out' Alcon's public minority shareholders." The complaint argues that, because the public shares were issued on the NYSE, primarily to American investors, minority shareholders' rights should be protected by Alcon's organizational regulations, which state that a sale must be approved by the independent committee representing minority shareholders.

"Investors relied on these contractual and equitable obligations and would never have rationally purchased Alcon shares on the NYSE if they had been told these commitments could disappear at the whim of Novartis Chief Executive Officer, and Alcon director, Daniel Vasella," the complaint states. "While many corporate executives would seek to justify or defend actions that strip public shareholders of their rights, Vasella has shown no compunction about abusing investors and reneging on binding obligations."

Alcon's minority shareholders stand to lose more than $2 billion if Novartis is successful, the complaint states. The investors seek a declaratory judgment, an injunction against Novartis and Nestle from taking any action, and monetary damages.

Spokesmen for Novartis, Nestle, and Alcon said their companies do not comment on pending litigation.

A lawyer representing the Oklahoma Firefighters Pension & Retirement System said the Nestle, Novartis, and Alcon boards are attempting to "squeeze out minority shareholders at a grossly inadequate price."

"The Alcon Board of Directors' regulations require that the independent directors approve any merger with the majority shareholder, and Novartis has made it very clear that it has no intention of abiding by the regulations," said Sid Liebesman, a partner at Labaton Sucharow. "Indeed, even the independent directors who have looked at this deal have recently stated their agreement with the minority shareholders that the price being offered is grossly inadequate."