Last Exec Ordered to Disgorge Bonus From Aborted Ribapharm Spin-Off

A Delaware state court has ordered the ex-president of ICN Pharmaceuticals to return a $3 million bonus he got as part of $36 million in perks he and former CEO Milan Panic awarded themselves for the aborted spin-off of the company's Ribapharm division.

The Chancery Court ruling came after the trial of Panic and Adam Jerney, the ex-president and COO of the company now called Valeant Pharmaceuticals International.

The decision covers only Jerney's liability since after the trial Panic joined the other defendant officers and directors by settling with the company.

The court also found that since Jerney had acted disloyally, he must return more than $3 million ICN had advanced to him to pay his defense bills.

The ruling appears to be the final chapter in litigation that sprang from a canceled initial public offering and spin-off of a division of ICN that produced Ribavirin, an antiviral drug that combats DNA viruses.

According to court records, initially the lawsuit was brought on behalf of ICN by dissident shareholders who claimed that founder Panic, who was the prime minister of Yugoslavia from 1992 to 1993, breached his duty and defrauded investors in a four-part scheme.

First, he wildly overestimated the value of the Ribapharm division to justify grossly excessive bonuses to himself and his "cronies" among the officers and directors, the shareholders said.

Next, Panic allegedly used his domination of the ICN board of directors to ensure that it would rubber-stamp the award of more than $36 million in stock options to him and Jerney as a reward for the development of Ribapharm and the anticipated revenue the IPO would bring in.

Then, he backdated those stock options by setting the option value according to the price the shares sold for at a low point in the stock price history rather than the price the stock sold for when it was awarded, the shareholders said.

This entitled Panic and Jerney to an extra profit when they cashed in the illegally discounted shares at market value, according to the lawsuit.

In the final step Panic allegedly used his influence over the board to convince the directors to allow him and Jerney to take cash instead of the overvalued stock options, so that by the time the shareholders realized they had been hoodwinked they could not rescind the bonus.

However, by the time Panic and Jerney resigned their positions as officers and directors of ICN in 2002, dissident shareholders who were critical of Panic's management and compensation had gained a majority on the board of directors.

They stopped the IPO and the planned spin-off of Ribapharm and bought back the shares that had been sold in the first stages of the IPO.

The dissident-controlled board exercised its power under the law of Delaware, where ICN was incorporated, to take over as the plaintiff in the Delaware Chancery Court derivative suit.

During discovery the board reached settlements with all the defendants except Panic and Jerney, and Panic settled after trial for an undisclosed amount.

In his decision Vice Chancellor Stephen Lamb found that the plaintiffs clearly proved that the bonuses were "ill-advised and not entirely fair to the company."

The bonuses were the product of a process that was "improperly dominated by Panic," "deeply flawed with self-interest and in no way ... arm's-length bargaining," the judge said.

The vice chancellor noted that the meeting at which the directors approved the lucrative conversion of the defendants' stock options into cash took less than 15 minutes.

The judge determined that the IPO was mainly a scheme that Panic devised to line his pockets.

Since Panic was the main architect of the scheme, the appropriate punishment for Jerney is for him to disgorge the $3 million in bonuses and pay any additional damages he may have caused by his breach of duty, Vice Chancellor Lamb said.

In addition, he must return more than $3 million that had been advanced to him under Delaware's indemnification and advancement statutes, the court said.

The Delaware General Corporation Law requires companies chartered there to pay the defense bills of officers and directors who are sued because of actions taken in their official capacity.

The advancement statute requires that companies pay those bills as they come in, subject to the officers' pledge to pay back that money if they are found to have acted dishonestly or disloyally.

Jerney was clearly disloyal to ICN and must pay interest compounded monthly on the $3 million advanced because he undeservedly had the use of that money for several years, the vice chancellor said.