11 July 2012
On 9 July 2012, Howard Solomon, the Chairman, Chief Executive Officer and President of Forest Laboratories, sent a public letter to activist investor Carl Icahn expressing his disappointment at Icahn's plans for the company (scripintelligence. com, 4 July 2012; scripintelligence. com, 3 July 2012).
Scrip assumes that Solomon's letter must have been reviewed by Forest's lawyers. While having no inside access to Forest's corner office, Scrip has read between the lines of the final version to bring you a light-hearted take on what the first draft may have looked like… Our imagination runs rife on the left, with Solomon's actual letter on the right. .
8 July 2012(Shove this up his inbox!)
Mr Carl Icahn
New York, New York 10153
We are nice people here at Forest. Salt of the earth, homely, straightforward family-oriented business. We somehow managed for decades without your 'help'.
Then you come along with your money and your activist ways, sticking your nose in Forest's affairs. I wouldn't mind that, but you're only interested in seats on the board. Do you have any constructive suggestions or strategic insights. Strategy? Schmategy!
Well, you've pushed me too far. I don't have to just take this, Carl. So just listen up, because it's my turn now.
I've been at Forest for thirty-five years and all I've got to show for it is a bit of stock in the company (how much do I have, Larry?). Lots of other CEOs own stock and no-one bothers. So why pick on me? Its not my fault that the stock is worth a lot more than it used to be.
And then the age thing – what's that about. I am only eight years older than you, Carl. We both could be retired if either of us could think of anything better to do with our time.
Tell you what, Carl, how about coming over for a few hands of pinochle and a glass of Vivanco and we can work this thing out?
Yeah, so I sold a share or two along the way: I am not getting any younger (as you keep reminding me!) and I don't want the IRS getting it all.
But I wasn't creaming it off the top, Carl, like you said on the TV. No way. That's just trash talk.
Anyway, Jimmy the Brief will back me up (won't you, Jimmy?). He said it was OK. And everyone knew what was going down, and it wasn't just the Forest stock price.
I needed the cash from selling stock. I got taxes to pay and I wanted to buy some options. You know how it is with options: just too tempting to ignore. You gotta do it, right? I had to sell some stock.
And then there's this whole 'Lexapro-2012-patent-expiration-was-a-secret' kick that you seem to be on. Manure. Everyone knew the patent was expiring.
You didn't know? Really. Look around. Try reading Scrip. Try NewsWeek. Try Harry Potter and the Chamber of Not-at-all Secret Patent Expirations. Jeez, Carl, even the venture capitalists knew about that.
By the way Carl, on the subject of stock prices, I have question: if you held a position in a San Diego company, would you rather sell for $22 a share, or $31 per share? Yeah, me too. But the way I heard it, you wanted $22 for the longest time. (Moral: try trusting the company management one time.)
Sounds to me like jealousy. Yes, I have got a sackload of Forest shares. I got much more than I need, in truth. But you can't have any of it.
I've got more Forest than Robin Hood. I've got more Forest than Canada. I've got so much Forest that if I planted it I could solve global warming on my own. But I am not going to do that. Really, it is a lot. Did I mention that I own quite a bit of Forest stock?
And – apart from the bits I need to sell to buy more options – I plan to keep it all for many, many years.
Plus, I get other stuff, too, all fully legit. You don't seem to be on my side, Carl. But Danny, Chris, Gerry and Brent are all good faithful boys.
And the other execs do alright, too. It's all above board (not above the Board, of course).
And it's what I deserve for staying at Forest for 35 years and still being in the kind of job where you can make this kind of money.
And don't forget, I've actually got three jobs. I'm CEO in charge of the running of the company. I'm Chairman of the Board, which means I get to check that I am doing a good job as CEO. And I'm President, which means I get a big car with flags on the front. That's real responsibility.
So what happens next? Everybody seems to want to know who is coming next. I am only 84, you know. Eighty-four is the new sixty, or hadn't you noticed everyone is getting older. Twenty four years ago, I was 60 and no-one worried about that. So what's the beef?
Anyway, we have a plan. We're looking around the old CEO bullpen to see which strong arm we're going to send to the mound.
We haven't got any names yet. Well we might do, but I can't tell you. There's actually one name that stands out – but I'd be giving too much away if I gave any hints.
Don't pick on my son. I warned him it wouldn't be an easy ride joining Forest as the boss's son.. Father to father, Carl, think of how it was for your son, Brett.
David's a clever boy, always was. Good at school, got a top-notch degree, and he's a lawyer, too, so just watch out.
(Note to self: get David to help with this letter.)
Like Brett, David also worked in the film industry. But you know, Carl, the two industries aren't all that different.
They are both about trying to make people feel better, even though sometimes they might make them feel worse.
There's entrepreneurialism in both. Pitching a script is just like getting on the board of a pharma company: people have to like you first.
The management roles are similar, too.
In Hollywood, you have a Director, a Producer and Executive Producer. That's the same as my job as CEO, President and Chairman.
Then there's the infamous casting couch. We don't have that in pharma: we have Compensation Committees instead.
Carl, we are cut from the same cloth. You put your precious Brett into positions within your organization, and made him a director of public companies like Cadus, American Railcar Industries, Motricity and others where you had a controlling stock position.
What would be the difference between that and my making David my successor at Forest? (Not that I said he will be: that's down to the Succession wonks.)
Accelerated Share Repurchase Program
So here's the deal with the ASRs. We're giving money back to shareholders – and not by trickling it out into the market but by cashing in great globs of stock with a bank.
But this isn't weird or naughty.
To quote the great Cole Porter:
"That's why Express Scripts did it,Adobe did it; Even J&J did it; Let's do it, let's sell some stock."
As you know Carl, we like to mix it up a bit on the Forest's Board – don't let anyone get too comfortable, keep them on their toes. That's why we keep them moving around a bit.
I already mentioned Chris and Gerry and Brent – all good boys. But they are not just there for their pretty faces (really – could you imagine!). They help with the salary stuff and they are all working hard finding a successor for my job(or do I mean jobs?)
So we can shuffle things around a bit, Carl, and I appreciate that you are trying to help out here with your board nominations.
Question is, are your boys any better? Or are they just side-kicks. For example:
What have you go to say to that? Anything that isn't just carping? Anything?
To be honest, Carl, it doesn't really matter what you say, I don't think the Forest’s shareholders really like you and I can't see them voting any of your boys on. But, hey, good luck in the election.
9 July 2012Via Federal Express
Mr Carl Icahn
New York, New York 10153
We have consistently said that we were open to constructive discussions with you regarding how to build value for all of our shareholders. However, you have never made an effort to engage with us outside the context of a proxy contest – and your discourse thus far has shown a striking lack of strategic ideas. Instead, it has been replete with wild and baseless accusations, innuendo and distortion of the facts. It is truly unfortunate that you have seen fit to conduct yourself in such a manner, but as you have continued to do so publicly, I feel compelled to set the record straight.
As you know, I have spent more than thirty-five years of my career at Forest. Like most similarly situated executives, a significant portion of my compensation has been equity-based, which has always aligned my interests with those of the Company’s shareholders. Our tremendous long term success resulted in a multi-billion dollar appreciation in Forest’s market value and also caused the major part of my net worth to be based in Forest shares.
I find it ironic that I would have to debate publicly with a man of your age and financial sophistication the need to consider issues of asset diversification and estate planning. For these purposes, and to support various charitable causes that are important to me, I sold Forest stock and certain options between 2003 and 2007. However, contrary to your assertion during your CNBC interview on July 2nd, the vast majority of my sales were not made at $70 or "pretty close to the top" – in fact 87% of the sales occurred over a three and one-half year period at significantly lower prices.
Each of these dispositions was approved by our legal counsel, was made during acceptable trading windows, and was fully and properly disclosed to the markets through either SEC filings, press releases or both. [...] My only stock dispositions since 2007 have been made for charitable giving purposes and to pay the purchase price on options, as well as taxes associated with new option exercises and the vesting of restricted stock, with all of the other underlying shares retained by me.
Finally, your allegation that these transactions, which took place between five and one-half and almost nine years ago, had anything to do with inside knowledge regarding Lexapro's 2012 patent expiration is offensive, absurd, and made with no basis whatsoever. Patent expirations are a fact of life in the pharmaceutical industry. I would have hoped, Carl, that even you would be willing to acknowledge the plainly obvious fact that the timing of the expiration of Lexapro’s patent – as well as our efforts to offset its impact – had been fully disclosed and well known to the investment community for many years.
Make no mistake – I continue to own a significant position in Forest through both direct share ownership and options. Under Forest’s Stock Ownership Guidelines, the Chief Executive Officer is required to hold shares with a value equal to at least six times his or her annual base salary. The current value of my shares is well in excess of that benchmark. My substantial equity position means that my interests are aligned with those of the entire shareholder base, and reflects my confidence that Forest's business plan will continue to build optimal shareholder value for many, many years.
Our executive compensation program is designed to align executive compensation with our shareholders’ interests. As you know, aside from your votes, over 80% of our shareholders voting supported the Company’s compensation plan at last year’s annual meeting.
My compensation is overseen by our Compensation Committee, which is comprised of four independent directors – Dan L. Goldwasser, Chairman, Christopher J. Coughlin, Gerald M. Lieberman, and Brenton L. Saunders – who have directly retained an independent compensation consultant to assist them in designing and establishing our executive compensation programs. [...]
As the eighty-four year old Chairman and CEO of a thriving pharmaceutical company, I understand fully the market’s and Forest’s shareholders’ interest and natural concern that surrounds the duration of my tenure and my ultimate successor. Our succession planning is being led by independent directors, who have directly engaged Spencer Stuart to assist with, among other things, the consideration of both our deep bench of internal candidates and external candidates. I am confident that the Forest Board is fully capable of making responsible and objective succession planning decisions.
I did not anticipate that my son David would be publicly disparaged and caricatured by someone utterly ignorant of even the slightest information about his qualifications or performance.
When David first expressed interest in joining Forest, I cautioned him that as an employee of Forest Laboratories, being my son was a disadvantage rather than an advantage, and that he would have to work twice as hard as his peers to dispel the perception of favoritism and to be accepted as an equal – and that if he was not prepared to accept that burden he should not join Forest. You may have cautioned your son Brett in a similar way when he joined your company.
Naturally, I am as proud of my sons’ accomplishments as I am sure you are of your children’s accomplishments. Before joining Forest, David graduated summa cum laude from Yale College with a B.S. in Biology and received a J.D. from Yale Law School, where he was a Senior Editor of the Yale Law Journal. He practiced law for several years at a major international law firm, Paul, Weiss, Rifkind, Wharton & Garrison LLP.
But while I take personal pride in David’s accomplishments, both outside of and inside Forest, I am the CEO of a public company that has a strong, independent Board of Directors that has the final say on succession issues. I note that you chose to elevate your son Brett – following his “movie making” career – not only to executive positions within your organization, but also to positions of responsibility to shareholders as a director of public companies such as Cadus Corporation (where Brett took your seat as Chairman), American Railcar Industries, Motricity Inc., Hain Celestrian Group and Take-Two Interactive Software, among others. In certain of those situations, it appears to have been within your discretion because of your controlling stock position.
Accelerated Share Repurchase Program
Structured share repurchase transactions such as ASRs allow companies to return cash to shareholders quickly and have less exposure to market conditions and greater certainty into the number of shares retired for a given notional amount than do open market share repurchase programs. Far from being "peculiar" as you claim, structured repurchase transactions are increasingly common, and the volume of these transactions increased 42% in 2011 year over year. In fact, these transactions have been executed over the last two years by notable S&P 500 companies such as Johnson & Johnson, Home Depot, Express Scripts, Northrop Grumman, Adobe, Dr. Pepper Snapple, and Kohls, as well as by Genzyme, a company where Icahn nominees, including Eric Ende, were on the Board.
As you know Carl, Forest’s Board represents a balance of continuing leadership and new perspectives, including five new independent directors in the last six years. Just last year, our shareholders elected three new highly experienced independent directors to our Board – Christopher J. Coughlin, Gerald M. Lieberman, and Brenton L. Saunders – adding financial acumen, operational skills, investor perspective and corporate governance leadership. These directors did not just join our Board in a token role; they have taken extremely active roles in our corporate governance, with Messrs. Coughlin and Lieberman chairing the Audit and Nominating and Governance Committees, respectively. All three new directors elected in 2011 serve on two Board committees, with all three serving on the Compensation Committee. In addition, they are all leading the succession process I mentioned above, together with the independent directors of our Board.
For a self-styled corporate governance guru, you have puzzlingly compiled a roster of candidates that are far less qualified than our current Board members, and in some cases, lack the very independence you claim our slate is lacking. For example:
In sum, we remain willing and ready to engage in a thoughtful dialogue regarding how best to build value for our shareholders. And to the extent that you have suggestions or ideas that can help, we will review and consider them in good faith. But the Company’s shareholders are not well-served by mudslinging. We trust that Forest’s shareholders will be fully capable of deciding the issues before them in the coming weeks of this election contest.
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