Carl Icahn vs. Forest Labs: CEO Took $300M While Stock Fell
Activist investor Carl Icahn appears to have won the first skirmish in his proxy battle to place four of his own directors on the board of Forest Labs (FRX), the troubled maker of antidepressants such as Lexapro. As predicted, CEO Howard Solomon is the weak point in Forest's defense of itself; Icahn's initial arguments against Forest centered almost entirely on Solomon's legal troubles and hardly at all on the fact that Forest stock has dropped from almost $76 in February 2004 to $38 today.
Formally, Icahn wants to examine Forest's books. But he is also conducting an investigation of the company, and wants documents regarding the decision by the Department of Health and Human Services to exclude Solomon from doing business with the federal government due to Forest's $313 million settlement of charges it illegally marketed Lexapro and Levothroid, a thyroid drug.
Solomon and his board have vowed to fight the exclusion -- which would force Solomon out of the company and the drug business entirely -- in court. Solomon also wrote another short message to employees that says they should ignore all these inconvenient facts and concentrate on their jobs.
If Icahn wins and gets four directors on the nine-person board, Forest could end up being sold off. That's Icahn's way. If Solomon wins, he may end up being ignominiously kicked out of the pharmaceuticals business by the feds. The stakes couldn't be higher.
'Mr. Solomon's Curious Board'
Icahn points out that the board's defense of Solomon is reflexive, at best:
Why did the board immediately back Mr. Solomon? The press release that stated that the board was backing him was issued only one day after the Corporation purportedly was informed of the issue, which implies either that the Corporation was already aware of the possibility that the Government might take action against Mr. Solomon but did not disclose that to the stockholders or that the board acted with very little information and even less time to consider the import of what it was doing in publicly backing Mr. Solomon.The answer, Icahn suggests, is that the Forest board consists of a longtime Solomon fan club that has no hope of viewing his performance objectively. Under the heading "Mr. Solomon's Curious Board," Icahn notes that of Forest's nine directors, two are septuagenarians, three are octogenarians, and the average tenure is 23 years.
Moreover, the board owns only 3 percent of Forest's stock, most of which they received in grants. "The directors have invested very little of their own cash in the Corporation," Icahn writes. Icahn owns 6.5 percent.
$300 million in compensation
It gets worse. While Forest's stock fell, the board rewarded Solomon as if he were, well, King Solomon:
According to the Corporation's disclosures, Mr. Solomon received almost $50 million in total compensation from 2004-2010. And that number is conservative. In 2004-2005 the Company reported two possible values for options grants, and the $50 million number uses the lower of the two values for those years. If the higher figures were used, the reported compensation amount would increase to almost $70 million.In 2007, Solomon sold $226 million in shares, and the board replaced them with grants of new ones, meaning that Solomon himself has little of his own money invested in Forest stock, Icahn adds. In sum, Solomon appear to have pocketed nearly $300 million in stock and compensation from Forest in the last decade.
Untrue statements
Solomon's defense was meager. In a letter to employees consisting of just a few sentences, Solomon managed to make two statements that were untrue.
He said, "I have not been accused of any wrongdoing by the government," even though he was accused personally by the FDA in 2003 of illegally selling Levothroid despite prior warnings.
And he said, "the HHS-OIG's notice of its intention to consider excluding me is an unprecedented action," even though it has been done before against the former CEO of Purdue Pharma and criminal charges have been brought against several senior drug executives at different companies that have drummed them out of the business.
Forest insisted the exclusion would be unprecedented in an email to BNET:
... the potential HHS-OIG exclusion would, in fact, be unprecedented. Never before has a pharmaceutical executive been excluded where they have not plead guilty (either pre or post-exclusion) to a crime. That has not been the case with Mr. Solomon, nor will it, given that he has not been accused of any personal wrongdoing.These, of course, are merely the opening shots in what will likely be a months-long process, so it is premature to make judgments yet (we haven't even reached the dueling PowerPoint stage!). But if a measure of robust management is how well they respond to a proxy fight, then at Forest there is room for improvement.
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