On Wednesday, Novartis AG announced the completion of its acquisition of eye-care company Alcon Inc. The development would have ordinarily not concerned Indian investors, but for a peculiar turn of events.
In 2008, Novartis had agreed to buy 77% of Alcon from Nestle SA in two phases, with the first one concluded in July 2008, giving it a 25% stake, and the balance acquired in August 2010. Novartis had also decided to buy out Alcon’s minority shareholders, who owned 23% of the company, to get full control. But Novartis offered them a deal that would have left them with $153 (Rs6,946 today) a share, compared with the $180 a share that Nestle received. That set off a battle over price between minority shareholders and Novartis.
This is not an unusual development. But what makes it truly unusual is what happened next. A committee of independent directors was acting on behalf of Alcon’s minority investors, under Swiss laws. They opposed the consideration, challenging its basis and and even set up a $50 million trust using company funds, to go to court, if necessary.
Eventually, Novartis agreed to pay a higher price of $168 a share, in shares and cash, that was accepted by the committee, narrowing the price differential from 15% to 7%.
Setting an example: The Novartis headquarters in Basel, Switzerland. Peter Frommenwiler / Bloomberg
This is a good example of how an empowered set of independent directors can actually go about their job and proactively protect minority shareholder interests. In India, often cases surface of acquisitions, in which a non-compete fee is paid to the selling shareholder, but not to the minority. The acquisition of Cairn India Ltd by Vedanta Resources Plc is one recent example. There can also be situations where minority shareholders are hoping for a company to be sold, but the promoter decides to sell the business instead, and use the sale proceeds to enter a new line of business. The former outcome is a more desirable one for a shareholder as it results in an open offer due to change of control.
In the past, there have also been situations where family splits have been done by splitting listed companies, which also affects minority shareholders.
There may be nothing illegal about these transactions nor are they always detrimental to the minority. But the presence of an active body of independent directors, acting on behalf of the minority, ensures that they are not being short-changed in the board room. The Alcon-Novartis case demonstrates how to effectively safeguard the interests of minority shareholders.