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(Reuters) - Carl Icahn's lead nominee for Forest Laboratories Inc's board has an incentive to help the billionaire investor make a profit of more than $340 million, or 37 percent, in an unusual arrangement that could raise governance questions and hurt the activist in his proxy fight against the U.S. drugmaker.
Icahn owns about 26.4 million shares, or 9.92 percent of Forest, making him the second-largest investor in the company. Icahn sued Forest in Delaware's Court of Chancery on Thursday, demanding more information about its succession planning.
The court filing revealed that the Forest stake cost him around $912 million, implying an average price of about $34.55 per share.
The investor has given Eric Ende, his nominee to lead the proxy battle against Forest, an incentive to achieve at least $47.50 per share, a May 30 regulatory filing shows. Ende, president of Ende BioMedical Consulting Group, stands to get 1 percent of Icahn's profits above $47.50 per share under certain conditions. He can get the payout for up to two-and-half years following Forest's annual meeting on August 15.
That means if Icahn sells his Forest stock at $50 apiece, for example, Ende would get about $659,000, the filings show. Ende separately also gets a fee of $65,000 per month during the proxy contest.
Forest shares closed up 2.5 percent at $34.99 on Friday on the New York Stock Exchange.
The arrangement with Ende, which corporate governance experts said was highly unusual, is likely to play into Forest's hands as it formulates its defense against Icahn. The nature of the incentive and the fact that the strike price for Ende is nearly 36 percent higher than where Forest's shares are trading now, could lead to criticism that his interests as a director would not be aligned with the rest of the shareholders.
"This raises novel and unique and difficult fiduciary duty questions if Ende were to be elected to the board," said Robert Jackson, an associate professor of law at Columbia Law School. "What's especially difficult about this agreement is that his payment depends not on the returns to the stock as a whole but on Icahn's profit."
"The director would have to take a great deal of care not to take decisions that are viewed to be just in Icahn's interests and not the other shareholders," said Jackson, who has earlier served as an adviser to senior U.S. Treasury Department officials and in the Office of the Special Master for TARP Executive Compensation.
To be sure, Ende will have to work hard for the money. "Ende understands that a proxy contest is a 24/7 endeavor and will provide Services accordingly," his agreement with Icahn reads.
Ende is a former Merrill Lynch biotechnology analyst who also served on Genzyme Corp's board before it was bought by France's Sanofi last year. He referred all questions about the agreement to Icahn's office. Icahn did not respond to a request for comment.
Icahn has intensified pressure on Forest in recent weeks, restarting a fight that he lost last year. The investor is seeking to place four members on the company's board.
The other three nominees are Pierre Legault, who until recently was CEO of biotechnology firm Prosidion Ltd, a unit of Astellas Pharma; Daniel Ninivaggi, president of Icahn Enterprises; and Andrew Fromkin, former CEO of Clinical Data Inc, a company Forest bought last year. Icahn has not disclosed his arrangements with the other nominees.
Icahn has not yet said what he wants to do with the company, but in the past he has typically pushed his targets to sell.
For now, Icahn is taking aim at Forest mostly over corporate governance issues. In the lawsuit and in a letter to the company, he said the company's longtime chief, Howard Solomon, may hand over the reins to his son, David Solomon, who is senior vice president for corporate development and strategic planning.
"Howard Solomon and this board, who collectively own less than 2 percent of this great company, must be made to realize that Forest Labs is not a dynasty to be despotically handed down from father to son," Icahn said in the letter, which was filed with the U.S. Securities and Exchange Commission on Friday.
Forest dismissed Icahn's criticism and said it was "engaged in ongoing succession planning." The company's independent directors have retained an executive search firm to help evaluate candidates inside and outside the company.
Regarding the 84-year-old Howard Solomon, who has led the company for about 35 years, Forest said: "It would be both inappropriate and unusual to announce his successor at this time."
Icahn filed the lawsuit seeking internal records "to determine whether they should bring suit against Mr. Solomon, the Forest directors and perhaps others" for breaching their fiduciary duties to shareholders.
Icahn also seeks information relating to "a peculiar stock repurchase program" in 2011 that the lawsuit said might have been arranged to "ward off a proxy contest by the Icahn Parties."
The complaint also demanded records regarding a recent Forest announcement slashing its earnings guidance.
Icahn brought a similar lawsuit seeking internal Forest documents a year ago. The parties reached a confidential settlement.
The case is High River Limited Partnership et al v Forest Laboratories Inc, Delaware Court of Chancery, No. 7663.
Reporting by Lewis Krauskopf and Paritosh Bansal in New York and Tom Hals in Wilmington, Del.; Editing by Matthew Lewis, John Wallace and Tim Dobbyn