Johnson & Johnson (JNJ:US), the world’s biggest health-products maker, will provide more corporate oversight of its units’ drug manufacturing and marketing practices to resolve investor lawsuits alleging directors ignored wrongdoing, according to court filings today.
J&J officials agreed to create a board-level group to oversee subsidiaries’ compliance with regulatory rules and to adopt updated risk-management policies as part of the settlement of claims filed against directors in federal court in Trenton, New Jersey.
The corporate-governance changes are designed to force directors to “take responsibility for identifying and addressing problems” before they spin out of control, attorneys for J&J investors said in court papers.
J&J is in talks to resolve investigations of the marketing of its Risperdal antipsychotic drug and other medications, company officials said. The company has agreed to pay as much as $2.2 billion to settle, people familiar with the accord said on June 11.
A J&J spokesman, Al Wasilewski, said in an e-mailed statement that the settlement resolves the Trenton litigation and is subject to court approval.
He said the company “has a long commitment to compliance, quality and good corporate governance” and “continues to deny the claims” in the lawsuit while agreeing to the settlement to “eliminate the burden” of further litigation.
The U.S. government has been probing Risperdal sales practices since 2004, including allegations the company marketed the drug for unapproved uses, J&J has said in U.S. Securities and Exchange Commission filings. The company also has said in securities filings that it is negotiating with the U.S. to resolve the investigation.
J&J, based in New Brunswick, New Jersey, disclosed in August that it agreed to a settlement involving a misdemeanor criminal charge related to Risperdal marketing. It wasn’t clear from the filing whether J&J or one of its units would plead guilty.
Investors sued J&J in 2010 with so-called derivative claims that directors ignored “red flags” about the company’s marketing practices for Risperdal and other drugs and production miscues that led to recalls of products such as children’s Tylenol.
Recalls in 2010
J&J recalled more than 40 types of medicines in 2010 because of contamination and incorrect labeling. U.S. lawmakers began investigating J&J after a recall of batches of children’s Tylenol forced the company to suspend operations at a Pennsylvania plant.
“Plaintiffs filed suit in light of the tsunami of regulatory and legal difficulties overtaking J&J,” investors’ lawyers said in today’s filing. “Plaintiffs believed the J&J board and senior management should be held responsible for not stopping widespread wrongdoing that had seriously harmed J&J’s business.”
The shareholders contend J&J’s decentralized corporate setup, which allows subsidiaries such as its Janssen unit freedom to operate independently from corporate headquarters, meant directors weren’t getting information in a timely fashion on the units’ missteps.
‘Recipe for Disaster’
The “decentralized approach to compliance and quality control resulted in a lack of accountability, a structural excuse for plausible deniability among senior management and J&J’s board, and ultimately, a recipe for disaster,” investors’ lawyers wrote.
U.S. District Judge Freda Wolfson in Trenton threw out investors’ derivative claims against J&J directors in September 2011 but allowed them to refile amended suits against the drugmaker. Any recovery under derivative suits is returned to the company’s coffers rather than distributed to shareholders.
The corporate-governance settlement resulted from “good- faith settlement negotiations” and relied, in part, on policy changes vetted by Harvey Pitt, ex-head the U.S. Securities and Exchange Commission, investors’ lawyers said.
One of the changes requires the board’s new Regulatory, Compliance and Government Affairs Committee, which must consist solely of independent directors, to “provide an annual report to J&J shareholders” about the units’ regulatory compliance efforts, according to the filing.
Another benefit of the oversight changes is that “critical information will no longer be confined to the level of J&J subsidiaries,” shareholders’ attorneys added.
The provisions are designed to force directors and executives to “take ownership of regulatory and legal issues before they become major problems,” the lawyers added.
The case is In re Johnson & Johnson Derivative Litigation, 10-cv-2033, U.S. District Court, District of New Jersey (Trenton).
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