Caremark on edge of auction law

By Jessica Hall

PHILADELPHIA, Feb 15 (Reuters) - Caremark Rx Inc. CMX.N may be within its rights to refuse to talk to hostile suitor and rival Express Scripts Inc. (ESRX.O), but merger experts say its stance runs afoul of good corporate governance practices.

Caremark, which manages pharmacy benefits for corporations, has maintained that its $24.2 billion deal to be acquired by drugstore chain CVS Corp. (CVS.N) would bring more value to shareholders than Express Scripts' $27.2 billion bid.

The company has also said the Express Scripts offer contains too many conditions, as well as the antitrust risks of combining two competitors. Express Scripts has pressed ahead, though, forcing CVS to twice sweeten its bid.

Now experts wonder whether Caremark is more committed to its vision of the CVS merger creating "a powerful force for change in pharmacy services" than to getting the best deal.

"The sole obligation of a director is to get the highest possible price for their shareholders," said Charles Elson, chairman of the Center for Corporate Governance at the University of Delaware.

"Once another bidder has emerged," he added, "it's their obligation to open communication with them and explore that opportunity."

Caremark noted that the value of the CVS transaction had increased by $2.6 billion in cash since it was first proposed in November.

The deal was "the result of a thorough and thoughtful board process that continues to focus on protecting the best interests of, and creating value for, the Caremark shareholders," Caremark said.

Before the most recent increase in CVS's offer, several influential proxy advisory firms said Caremark shareholders should reject the deal. Institutional Shareholder Services this week slammed Caremark's board for failing to talk with Express Scripts, saying conditions of the Caremark-CVS pact, such as a "force the vote" clause, did not comply with current M&A best practices.

"Based on the risky strategic rationale, the nil-premium offer price, the initial poor market reaction, and the change-in-control benefits to insiders, we cannot fathom why the (Caremark) board did not ... commence nonbinding negotiations with (Express Scripts) after it had submitted its unsolicited offer," ISS said.

This week, CVS raised its bid for the second time by increasing a special, one-time dividend, but it is still offering less than Express Scripts -- and Caremark's current stock price of $64.25. CVS's offer is valued at about $61.48 per share, including the $6 dividend, and the Express Scripts bid is valued at $62.37.

Express Scripts has asked Delaware's Court of Chancery to void the $675 million breakup fee in the Caremark-CVS pact. A hearing is set for Friday.

The breakup fee and other provisions in the merger agreement "have virtually guaranteed that the Caremark board cannot properly exercise its fiduciary duties if a competing bid emerges," the lawsuit said.

This week the court ordered Caremark to push back its shareholder meeting on the CVS deal until at least March 9 from Feb. 20 so shareholder could review the new terms.