PHILADELPHIA/NEW YORK - Swiss drugmaker Novartis (NOVN.VX) is taking a rare stance in the M&A world by lowballing Alcon's minority shareholders.

Offering disparate prices for different stock constituents is rare in U.S.-listed company deals, where buyers are fearful of scrutiny and lawsuits. But the Novartis move is shielded by Swiss takeover law, which hampers minority shareholders' ability to balk.

A simultaneous offer with this much of a disparity between the majority and minority shareholders is quite rare, said John Coffee, Columbia University Law School professor.

While eye care firm Alcon (ACL.N), founded in 1945 by two pharmacists in Texas, is listed on the New York Stock Exchange, it is incorporated in Hunenberg, Switzerland.

Novartis can push through the $39 billion deal once it takes majority control of Alcon from Nestle because, under Swiss law, mergers require approval of two-thirds of shareholders and a simple board majority.

Novartis' proposal leaves Alcon's minority holders significantly worse off than majority owner Nestle (NESN.VX). Novartis aims to pay Nestle $28.1 billion, or $180 per share, while giving minority holders $11 billion in a stock-for-stock exchange, currently worth $147 per share. The price for minority holders was initially indicated at $153 per share, but the value of Novartis shares has since declined.

Alcon's minority holders have little recourse, according to legal experts and analysts.

It appears that Novartis can force through the rest of the transaction, leaving minority shareholders in Alcon without much power, said Bernstein Research analyst Tim Anderson. This comes as a surprise and is different from how minority-interest transactions are handled in the U.S.

There may be some recourse for minority Alcon shareholders, such as filing a legal complaint with the courts after the deal closes, disputing the price that Novartis is offering. But at first blush, the odds of this being successful appear low, Anderson said.

Alcon said on Tuesday an independent director committee believed the company had established important protections for minority shareholders against a coercive takeover bid.

Novartis appears to be attempting to circumvent the minority protection principle ... by claiming that the Alcon minority shareholders are neither accorded minority protections under the Swiss Takeover Code nor the rules under the NYSE, the Alcon directors committee said in a statement.

Alcon shares rose 1 percent on Tuesday to $155.95. Some analysts expect Novartis to make a higher offer to the minority holders.

Our base-case scenario remains that the current offer to the minority shareholders of $153/share merely allows the start of negotiations with minority equity holders, Morgan Stanley analyst Andrew Baum said in a research note. He expects Novartis to secure an agreement to buy the minority shares with a modest cash bump.


The situation is not unprecedented in Switzerland. When Philip Morris (PM.N) unit Kraft General Foods bought coffee and confectionery company Jacobs Suchard in 1990, majority owner Klaus Jacobs got a premium of more than 40 percent over the price offered to minority shareholders.

In the United States, paying different stockholders different prices is rare because people anticipate there will be many unhappy shareholders and there will be a lawsuit and the reasons for treating people differently will be scrutinized, said Morton Pierce, chairman of law firm Dewey & LeBoeuf's M&A group.

People tend to try to avoid that controversy, Pierce said.

The cases in which different prices are offered usually involve paying a higher amount for a preferred class of stock.

Xerox Corp's (XRX.N) cash-and-stock deal to buy ACS (ACS.N) in September proposed issuing $300 million of convertible preferred stock to ACS's Class B shareholders.

Elements of the deal were challenged in shareholder lawsuits, but the deal is moving forward to a vote and must be majority approved by Class A shares, according to recent regulatory filings by the companies.

In another example, DirecTV, the satellite television provider, said in May it would merge with a division to be spun off from Liberty Media (LINTA.O) in an all-stock transaction that gave media mogul John Malone and his family a 24 percent voting stake in the new entity.

Some deals involving a price disparity eventually saw movement from the acquirer to amend the deal.

For example, U.S. wine and spirits maker Constellation Brands (STZ.N) eventually offered the same exchange ratio to two classes of shareholders in its deal to buy wine maker Robert Mondavi after an original recapitalization plan faced pressure from shareholders.

Novartis said its offer is fair and it can wait out the minority holders. If the offer is not accepted, Novartis will wait until it gains majority control.

Novartis contends the proposal to the minority shareholders marks a 12 percent premium to Alcon's share price before the shares rose in anticipation of a deal.

The fear is that Novartis could leave the minority block in place, and the threat is that the minority gets stuck with an illiquid stock that doesn't trade and is essentially worse than what you have now, said Coffee. You want more but you could be worse off in the long run.

(Reporting by Megan Davies and Jessica Hall, additional reporting by Ben Hirschler and Quentin Webb in London; editing by John Wallace)

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