Caremark-CVS Deal Under Scrutiny


Shareholders are given more time to consider the merger in light of new information about the terms of the agreement

In its initial offer to acquire Caremark Rx (CMX), CVS Corp. (CVS) agreed to substantially boost premiums for insurance that would protect Caremark management and directors from charges of improper backdating of options. The disclosure, made by Caremark in a regulatory filing Feb. 12, bolstered accusations that the company accepted an inadequate takeover bid to get indemnity protection.

The revelation came as Caremark investors who filed suit against the deal persuaded a judge on Feb. 13 to postpone a shareholder vote on the merger later this month, the same day that CVS sweetened its bid for the pharmacy benefits manager by $4 a share, to $60.25, or $25.7 billion. Delaware Chancery Court Judge William Chandler agreed that investors needed more time to consider Caremark's supplemental disclosures made in the previous day's filing. The judge postponed the vote that had been scheduled for Feb. 20 until at least Mar. 9.

High Premiums

Two pension funds charged in a class action filed in January that the pharmacy benefits manager accepted an inadequate initial bid last November from CVS—and rejected a higher bid from rival benefits manager Express Scripts (ESRX)—in large part because language in the merger agreement gave Caremark executives and directors broad protection from any potential accusations of options backdating (see BusinessWeek.com, 1/26/07, "Caremark Charged with Breach of Duty"). Concern about such charges arose last May when the Justice Dept. and the Securities & Exchange Commission subpoenaed Caremark as part of a multicompany investigation into backdating and investors in two state courts filed suit against the company charging it with the practice—accusations the company denies.

In its regulatory filing Monday, which gave more details on the merger agreement with the drugstore chain, Caremark said CVS had agreed to pay annual indemnity insurance premiums up to 450% higher than the current sum paid by Caremark, to "provide officers' and directors' liability insurance in respect of claims arising from acts or omissions occurring prior to the completion of the merger." That coverage would last six years after the date of the merger, the document filed with the SEC said.

Stuart Grant, a Wilmington (Del.) lawyer representing the pension funds in the class action, says the disclosure supports the charge that Caremark's management and board accepted the low offer in part to receive the increased indemnity protection. "It solved their backdating problem," he says.

Whose Interest?

A spokesman for Caremark declined to comment; CVS officials couldn't be reached. Caremark told BusinessWeek in January that the indemnification clause in the merger agreement was customary for Delaware-incorporated companies and that it was just a continuation of "existing indemnification provisions applicable to Caremark directors and officers." At that time, Caremark hadn't made any of the insurance premium details public in its filings.

In the filing Monday, Caremark said the new insurance coverage with CVS would be "no less favorable than those of the Caremark policy in effect on Nov. 1, 2006." It added: "CVS is not obligated to pay an aggregate annual premium in excess of 450% of the current amount."

Michael Garland, a director at CtW Investment Group, which advises union pension funds and opposes the Caremark-CVS deal, says the increased indemnity protection in the merger agreement suggests that Caremark management and directors are clearly concerned about the outcome of any charges of backdating. Backdating occurs when an option's exercise price, instead of being set on the grant date, is backdated to a point when the stock price is lower. "This underscores that Caremark's management and directors pursued their own interest rather than advance the interest of shareholders," Garland says.

Berner is a correspondent for BusinessWeek in Chicago.

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