It is 30 months since Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) was forced to admit bribery in Russia, Mexico, and Ukraine in promoting sales of Copaxone. The company reached a settlement with the US authorities in which it paid a fine of over $500 million. It is 18 months since Teva signed a settlement with the Israel Ministry of Justice in which it paid NIS 75 million in the same affair. Another compromise agreement was submitted yesterday to the Tel Aviv District Court. This involved Teva and Teva shareholder Shlomi Talmor, who filed a request for access to documents before submitting a petition for approval of a derivative claim against the company for its bribery.
As part of the settlement, which still requires approval from Judge Khaled Kabub, the insurance companies of the officeholders in Teva sued by Talmor will pay $50 million in return for final and absolute elimination of any liabilities for the existing lawsuits filed against Teva's officeholders and directors in the bribery affair. The settlement submitted for Kabub's approval does not state for which officeholders who served during the relevant period the insurers will pay.
The arrangement in which Teva's officeholders will pay the company $50 million through the insurers was reached in negotiations conducted between an ad hoc claims committee established by Teva and the party seeking approval of the derivative claim, and was approved by Teva's board of directors.
As other public companies have done in recent years, following the request for approval of the derivative claim, Teva set up an independent claims committee to examine, among other things, the allegations raised against it. According to the decision by Teva's board of directors, the committee's purpose was "to examine whether Teva should institute legal proceedings against directors, officeholders, and employees on its behalf and on behalf of its subsidiaries, or any other party, following the signing of the settlements with the US authorities and the acts described in them."
According to the claims committee, $50 million is a "proper sum, taking into account the risks and probabilities involved in the filing of a lawsuit by Teva against directors and officeholders, in which the committee believes that Teva's chances of winning are far from substantial."
Claims committee: The claim's chances are poor; a compromise is preferable
The committee was headed by former acting Supreme Court Justice Joseph Elon; other members were Teva independent director Chemi Peres and Hebrew University Prof. Gideon Parchomovsky. US Judge and Federal Prosecutor John Gelson was also initially a committee member, but later resigned, saying that the committee's work was too much of a burden for him.
At the joint request of the server of the derivative claim and Teva, the committee "acted independently, setting its own work arrangements, appointing its own advisors, deciding how it would establish and assess the facts in the case, and held all of its substantive hearings in the offices of its external legal advisors." In this framework, the committee hired Adv. Aaron Michaeli from the Goldfarb Seligman law firm, Dr. Asaf Eckstein from Ono Academic College, and a US law firm.
After two years, during which the committee examined documents presented by Teva and current and former directors and officeholders in Teva appeared before it, the committee presented its conclusions and found that the chances that a possible lawsuit filed by Teva against its officeholders were poor, and "it would not be good for the company."
Concerning the assessment of the changes of claim on the grounds of breach of trust by the officeholders, the committee found that "no claims that the directors and officeholders acted out of person interest contrary to the company's interests or for the sake of a personal or external purpose could be established." The committee therefore concluded that "the chances of a lawsuit on these grounds of breach of trust were low."
This finding was also important from the insurance standpoint, because had it been found that Teva's officeholders committed a breach of trust against the company, they would have had to pay the cost of the settlement themselves.
As for a claim of breach of the duty of caution, against the directors and officeholders, the committee found, "A claim defined on these grounds cannot be dismissed as unfounded or unrealistic." The committee nevertheless stated, "Such a claim is difficult and complicated, and its chances of being accepted are lower than its chances of being rejected."
The committee's recommendations to Teva therefore stated, "In such circumstances, the good of the company in the broader sense requires careful consideration of the option of refraining from difficult and complex legal proceedings by pursuing a settlement with the insurers of the personal liability of the directors and officeholders." This paved the way for negotiations on a compromise settlement.
The settlement stipulated that payment of the compromise sum would terminate the insurers' liability under the insurance policies with respect to any lawsuit filed by the company or in its name involving the bribery affair, unless another investigation is begun outside Israel pertaining to the affair, or if allegations are made about the affair that were not raised before the agreement was reached.
In addition, the parties agreed that Adv. Yuki Shemesh and Adv. Amit Manor, who filed the petition for a derivative lawsuit, would be paid $1.6 million in legal fees. Manor and Shemesh were not the only ones to file derivative lawsuits against Teva in respect of the bribery affair. In the past two years they had to conduct legal campaigns against other parties, until the Supreme Court ruled that their lawsuit had priority and the best chances.
Parties to the court: Approve the compromise also because Teva's board approved it
Together with the compromise settlement, the two sides petitioned the court for its approval, listing the reasons that they held justified this. Among other things, the petition argued that the compromise settlement should be approved because Teva's board of directors had approved it.
The parties told the court, "The 'business-judgment rule' applies to the board of directors' decision whether to endorse, through a compromise with the parties that allegedly caused damage to Teva, a demand by a shareholder that the company be reimbursed by those parties. According to this principle, as long as the decision by the authorized parties in the company was informed, in good faith, and free of conflicts of interest, the court will not intervene in it, and will not substitute its judgment for that of the authorized parties in the company."
The parties further asserted that the claims committee appointed by Teva "in contrast to the usually case in which a company appoints a claims committee exclusively from its board of directors," was an independent external committee. The parties therefore argued that great weight should be given to "the good faith and sincerity of the company's efforts to assess the liability of the directors and officeholders for the possible damage caused to the company as a result of the bribery affair.
Published by Globes, Israel business news - en.globes.co.il - on July 25, 2019
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