KARACHI, Feb 11: The merger of two US-origin multinational pharmaceutical companies, and its impact on the minority shareholders, who are objecting on grounds of valuation, is being argued in the Sindh High Court.
The case stems from the merger of Pfizer Laboratories Limited (PLL) and Parke Davis & Co Limited (PDL).
When the matter came up before Justice Shabbir Ahmed on Friday, counsel Shahenshah Husain concluded his submissions on behalf of the minority shareholders.
The PLL and the PDL filed a petition on May 30, 2001 with the SHC for the amalgamation of their businesses in Pakistan.
Some of the minority shareholders of the two companies have objected to this amalgamation and they have filed their objections with the court.
Pfizer Incorporated USA is the ultimate parent company of both the PLL and the PDL. The merger of the two companies in Pakistan is being undertaken because Pfizer Inc acquired Warner Lambert (parent of Parke Davis) in USA in June 2000.
The PDL’s minority shareholders objecting to the merger include four public-sector financial institutions — the National Investment Trust, State Life Insurance, Pak Libya Holding Co. and Investment Corporation of Pakistan. Together they own 19% of the PDL and Pfizer Inc. owns 76% of the Company.
The PLL had 39 minority shareholders at the time of filing of the merger petition but their number was reduced to 30 as Pfizer Europe has bought their share holdings. The remaining shareholders are individuals of which eight are objecting to the scheme of amalgamation. Pfizer Inc owns over 98% of the PLL having increased their stake from 76% in 1995.
The advocates appearing in the court are Qazi Faiz Issa for the PLL and the PDL, Kazim Hasan for the minority shareholders of the PDL and Shahenshah Husain for the PLL minority shareholders.
Kazi Issa had contended that the merger would benefit shareholders and cut cost of production. His contentions were based on economy of scales.
Kazim Hasan, while rejecting the petition, contended that:
- the two companies had effectively merged already and this petition had been submitted as a mere formality. What they were seeking was really a “post- facto” approval. Also both the companies had the same chief executive and company secretary.
- the PLL was a loss-making company whereas the PDL was a highly profitable company. Merger of the PLL will therefore had disastrous consequences for the minority shareholders of the PDL.
- Proper procedure had not been followed in calling of meetings of the shareholders, etc. for consideration of the merger scheme. Such a meeting had to be called by the court.
- The Memorandum of Association of the PDL did not permit amalgamation.
- The rationale for the merger in Pakistan was the international merger of the respective parent companies in the USA. This reason was not good enough as the two companies were separate legal entities having different minority shareholders who would be adversely affected if the scheme was allowed to go through.
He contended that the petitioners were attempting to circumvent the law and deviously procure the amalgamation of the two companies without complying with the legal requirements.
The merger would result in serious losses to the minority shareholders of the PDL and the action of the management constituted oppression of the minority shareholders.
Counsel Shahenshah Husain, appearing for the minority shareholders of the PLL, is not opposed to the merger per se, but he has pleaded that the swap ratio of 264:1, that has been offered to the PLL shareholders, is grossly inadequate and does not reflect the true worth of the PLL. The proposed swap means that at Rs10 a share of the PLL is being valued at less than 4 paisa a share. In other words, the PLL shareholders have lost over 99.5% of their investment.
He contended that the business of the PLL had been conducted for the benefit of the parent company only and at the cost of the minority during the past 10 years. Moreover, the valuation of the PLL had not been done properly.
In this connection the following arguments have been advanced:
- Incorrect valuation affects the minority shareholders of the PLL more than the majority as they stand to lose much more. This is because of the fact Pfizer owns 76% of the PDL and over 98% of the PLL, therefore the maximum loss cannot be more than 22% for the majority shareholder of the PLL whereas the minority stands to lose all.
- This level of valuation cannot be taken seriously as the Company offered these very same shares in November 2000 at Rs10 a share as part of a Right Issue to its minority shareholders. These shares are deemed to be worth a mere 4 paisa a share as of December 31, 2000 - just a few weeks later.
The valuation itself suffers from definition problems as it does not include all the assets of the PLL, ignores the “going concern” concept.
- The net worth of the PLL has been reduced by the accumulated losses amounting to Rs68 crore in the books of the PLL. These are not losses at all.
To illustrate the point of the extent of “transfer pricing,” reference was made to a ministry of health report on the subject of “transfer pricing.” It was found that the main compound for the three of the main Pfizer products - norvasc, feldene and vibramycin - called amlodpine besylate, piroxicam and doxycycline, respectively, were imported by the PLL from its parent at USD 30,000 a kg, USD 7,500 a kg and IJSD 700 a kg when the same raw material could have been imported from the US Government (FDA)-approved suppliers at USD 500, USD 50 and USD 60 a kg, respectively. The extent of excessive payments on this account have been staggering.
The PLL has taken the plea that losses have been due to price control by the government. To counter this, it was revealed that Pfizer in India markets the very same drugs at much lower prices. Norvasc tablet costs over Rs10 a tablet in Pakistan whereas it costs less than Rs2 in India (marketed as amologard in India), feldene [dolonex in India] costs Rs9.50 a tablet in Pakistan and Rs3 a tablet in India.
It was also revealed that the PLL imported almost Rs300 crore worth of raw materials from its parent company - much more than any other pharmaceutical company in Pakistan - in the past 10 years. The affect of this on the gross profit that accrued to the parent company has been estimated by the PLL objectors at Rs230 crore.
The ratio of gross profit has been on the basis of the Financial Statements of Pfizer Inc. USA. It has been argued that while this level of benefit accrued to the parent company the local company has accumulated losses of Rs68 crore.
The matter has been put off to Feb 26 when counsel for the multinationals are expected to rebut the contentions of the other party.