Tag Archives: Cain v. Hassan Becherer ENHANCE stock options 2008 gran

Impertinent Question Department: When is “Performance-Based Pay”. . . Um, NOT?

Or, “What did the board say about compensation, just a few months ago?

Regular readers will recall that, in May of 2008, Schering’s Board, and Compensation Committee (chaired by Hans Becherer), told us — in breathy tones, no less — that the Top Six at Schering would receive “no payments” under the Long Term Performance Incentive Plan, for the five years ended December 31, 2008 — if Schering’s stock price was the same on December 31, 2008 as it was on March 31, 2008. That was a nice piece of public relations, at the time. It suggested that executive compensation at Schering was truly linked to performance. See this, from the most-recent Schering proxy statement (at page 22):

. . . .The outstanding five-year transformational incentive (with a performance period ending in 2008) uses total shareholder return (both actual and relative to the Peer Group) as a performance metric. Stock price declines often adversely impact total shareholder return. As a result, named executives Hassan, Bertolini, Cox, Sabatino and Saunders may lose future compensation with respect to the transformational incentive if the stock price does not increase prior to the completion of the performance period. For example, had the performance period ended March 31, 2008 (rather than December 31, 2008 as provided in the plan), the payout would have been zero for each of them based on performance metrics of actual and relative total shareholder return. . . .

Unless, apparently, your name is “Tom” — as in Koestler, or Sabatino.

So, it now seems that the reality varies from the PR, in several significant cases — and especially if your name is “Tom”.

What has happened since the proxy was mailed? Well, Chief Science Officer, Dr. Koestler, and General Counsel Tom Sabatino, have each received significant, unscheduled interim payments — not contemplated by their original employment contract terms — and, in the case of Mr. Sabatino, in cash, and without regard to Schering’s performance. In fact, Mr. Sabatino received $500,000 in cash, just last week. No strings attached.

Schering’s stock stands at $16.70 tonight — it was $14.40 on March 31, 2008. It was $32 in the Summer of 2007. By way of comparison, when the Transformational Plan was adopted, Schering stock was trading around $17.10, in late December 2003, to early Janaury 2004:

I cannot understand, given today’s unwelcome news that Vyotrin/Zetia continued to swoon, and swoon badly, in November 2008 — despite Mr. Hassan’s predictions to the contrary on November 24, 2008, how the $500,000 cash payout can be squared with these vaunted proxy-promises.

To be clear, the cash payout is lawful — it is just a very cynical way to do business. Cash — without any earnout, is simply not paying for improved shareholder returns. They (shareholders) simply have had none, of late. So, niether should the two Toms — in my view.

Schering in-house lawyer apparently wrote a “nasty-gram” — before checking the ACTUAL facts — in Cain v. Hassan, et al.

The plaintiffs in Cain v. Hassan, et al. (though Schering calls this case Cain v. Becherer, et al. — Heh!) have answered Schering’s motion to dismiss. And it is a doozey.

As is often the case with larger filings, the juiciest part appears at the end — on pages 28 and 29 — when it is revealed that in August, a Schering in-house lawyer (see letter at right — click image to enlarge) tried thwart a statutory shareholder right-to-inspect official books and records of the company (a company this shareholder owns, at least in part, BTW!) — saying that compliance by Schering, with the portion of the statute governing corporate records access, would allow an “end run” around “the court’s discovery order“. The problem is that the federal district court in Newark entered no such order. Oops! Do take a look:

. . . .Schering’s Efforts To Thwart Plaintiffs’ New Jersey Statutory And Common Law Rights To Inspect Schering’s Books And Records Further Evidences Defendants’ Bad Faith

On July 22, 2008, Plaintiffs invoked their right under N.J. S. A. 14A: 5-28(4) and common law to inspect the books and records of Schering. This “inspection statute” is common in most states and is an expansion of the common law right of shareholders to protect themselves by keeping abreast of how their agents were conducting corporate affairs. See, e.g., Drake v. Newton Amusement Corp., 123 N.J.L. 560, 562-63, 9 A.2d 636 (N.J. 1939) (“This common law right has not been abridged by statute.”). Use of inspection statutes is recommended in many shareholder derivative cases as a means to investigate management wrongdoing. See, e.g., Melzer v. CNET Networks, Inc., 934 A.2d 912 (Del. Ch. 2007); Wood v. Baum, 953 A.2d 136 (Del. Supr. 2008); Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961, 1057 n.52 (Del.Ch.2003), aff’d 845 A.2d 1040 (Del. 2004). Despite Plaintiffs having satisfied every requirement of the statute, Schering nonetheless refused to permit Plaintiffs to inspect the records. Incredibly, Schering informed Plaintiffs that to comply with the books and records request would constitute “an end-run around this Court’s discovery order.” (See Scolnick Decl., Ex. D).

Obviously, this Court issued no such order, and it is apparent Defendants have directed Schering to thwart Plaintiffs’ statutory and common law rights to inspect corporate records. As a result, Plaintiffs have been forced to initiate an Order to Show Cause in Union County Superior Court (Docket No. UNN-C-134-08) seeking to compel Schering to comply with the statute and produce the requested records (Board and Committee minutes). The return date is October 2, 2008. (See Scolnick Decl., Ex. E). Plaintiffs expect to learn facts from the inspection that will allow them, in an amended complaint, to particularize in even greater detail precisely what the Board and its various committees actually knew about the suppression of the ENHANCE trial results and the false advertisements and when they knew it, rather than having to guess at whether the directors’ refusal to take corrective action was due to actual knowledge, or a reckless failure of oversight. In either event, the facts alleged in the Amended Complaint compel the conclusion that at the least eight, and more likely eleven, Board members failed to satisfy the requisite disinterest due to a substantial likelihood of liability. Nevertheless, based upon the information which Plaintiffs expect to learn through limited discovery in this case and inspection of the corporate records they may well wish to amend the complaint. Accordingly, Defendants’ request that this complaint be dismissed with prejudice to amend is wholly inappropriate. . . .

[Footnote: The law is clear that leave to amend should be “freely given when justice so requires.” Fed. R. Civ. P. 15(a). The Third Circuit has consistently held that “leave to amend should be granted freely, and court[s] should use ‘strong liberality’ in considering whether to grant leave to amend.” Dole v. Arco Chemical Co., 921 F.2d 484, 486-87 (3d Cir.1990) (citations omitted). “The United States Supreme Court stated that amendments to pleadings should be granted under Rule 15(a) except in certain limited circumstances- ‘such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.’” Ikelionwu v. Nash, No. 06-625, 2008 WL 762864, at *3 (D.N.J. Mar. 19, 2008) (quoting Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)).]

Well — it seems, once again (as Zen philosophy would have it), Schering’s in-house lawyers are pushing so hard for a certain result, they are likely to acheive the precise opposite of that result.

More on this, if time permits.