Update on the Schering-Plough, Merck and J&J Dispute
On May 27th, Schering-Plough and Merck provided an “update” on the status of their dispute with Johnson & Johnson over the valuable Remicade distribution agreement between J&J’s Centocor subsidiary and Schering-Plough. We previously wrote about this dispute, which centers on whether J&J has the right to terminate the distribution agreement under a “change of control” provision, and thereby capture sole rights over the international distribution of Remicade. The press release confirmed that J&J instituted arbitration proceedings under the distribution agreement, which could go on for 9 to 12 months. The deal will go ahead despite the outcome of the arbitration, as the possible termination of the distribution agreement was excluded from the “material adverse effect” condition in the merger agreement.
As others have noted, the complex reverse merger structure adopted by Schering-Plough and Merck seems specifically designed to escape one of the two competing definitions of “change of control” in the distribution agreement. Despite the merger parties’ insistence that J&J’s case “is contradicted by the clear language of the Remicade distribution agreement”, the outcome was uncertain enough to warrant a prominent risk factor in the Form S-4 registration statement filed by Schering-Plough. That disclosure includes the not-so-subtle suggestion that a settlement is likely:
“[D]ue to the uncertainty surrounding the outcome of any threatened or actual proceeding, the parties may choose to settle a dispute under mutually agreeable terms. Any agreement reached with Centocor to resolve a dispute under the distribution agreement may result in the terms of the distribution agreement being modified in a manner that may reduce the benefits of the distribution agreement to the combined company.”
Given the amount at stake ($2.1 billion annual revenue), the strangely ambiguous language of the distribution agreement, and the conciliatory nature of arbitration, it seems that a negotiated settlement is the most likely outcome.
Related Posts: Merck-Schering’s Reverse Merger: Change of Control Provisions in Material Contracts
Can Merck-Schering’s Deal Structure Avert a Change of Control?
