Throughout the 1990s, these shareholders say, their questions about Pfizer’s practices were brushed off at multiple annual meetings. Matters came to a head in 2000 when Pfizer prevailed in acquiring Warner-Lambert Co. for $90 billion in stock and the two companies agreed to merge subsidiaries worldwide.
In Pakistan, PLL was to be merged into Parke Davis & Co. Ltd, a unit of Warner-Lambert, through a share swap ratio of 264 PLL shares to one Parke Davis share, creating a company called Pfizer Pakistan that could eventually be traded on exchanges in the country.
The per-share swap value of PLL was derived based on a 2001 audit by accounting firm KPMG. At least 10 minority shareholders objected to the merger, claiming that a Rs10 share of PLL (in Pakistani rupees) had been reduced to just four paise. The remaining 20 or so minority shareholders—some scattered around the world—did not pursue legal action.
“I am surprised at how a large company can get away with it,” said Nurallah Merchant, who inherited 50,000 shares, along with his wife. “I am an actuary by profession so I understand these things. I was requested by my father-in-law to get involved.”
But the investors suffered a setback when, in 2002, the court denied their request to stop the merger of PLL and Parke Davis. But, in doing so, the court also ordered Pfizer to buy them out at a “reasonable” price. Along with that ruling, the court also ordered a second valuation of PLL, this time from auditor Ernst & Young.
It is that report—completed in 2003—which now forms the basis for the latest ruling, which was issued on 21 May and details of which have only recently come to light.
“It may be argued that the financial position of PLL is a direct consequence of the decision of its management to operate in the manner described,” the report said, citing the inflated drug prices. “…such management decisions have been in the interest of the majority shareholder, which is also its principal supplier of raw materials.”
By 2002, the E&Y report concluded, PLL’s losses amounted to more than Rs930 million—equal to more than 152% of the total value of the company.
The court concurred that the impact of transfer pricing on both the profitability of PLL and the valuation of minority shares was not adequately taken into consideration at the time of the proposed merger.
Says Mohammad Ali Sayeed, who served as the lead lawyer for the minority shareholders in the case: “Indeed, it is the first judegment of its kind considering transfer pricing as an instrument of oppression of the minority shareholders. This practice has been guarded against in the income-tax law of Pakistan.”
Sayeed is also hoping that this judgment would spur the Securities and Exchange Commission of Pakistan to initiate an investigation into the affairs of PLL. All we want is “a fair price for the shares,” says sha-reholder Zahid Hasnain in a phone interview from Karachi.