URL http://query.nytimes.com/gst/fullpage.html?res=9F07E4DA1230F932A25752C0A9619C8B63

DATE/ AUTHOR None	AUTHORS: Gretchen Morgenson

H A Public Pension Fund Sues Directors of Caremark Rx

S1 A public pension fund in Louisiana has sued the directors of Caremark Rx, contending that their unanimous backing of the company's $21 billion merger with CVS over a rival $26 billion bid from Express Scripts improperly benefits Caremark executives at the expense of shareholders.

S2 Among the benefits Caremark executives and directors will receive if the CVS deal goes through, the fund's lawsuit contends, are positions at the combined company and indemnification from penalties and fines that may result when criminal and regulatory investigations into possible stock option backdating by Caremark officials are concluded.

S3 Yesterday, Express Scripts filed suit to block the CVS deal, arguing that the terms deal supported by the Caremark board prevents its directors from executing their fiduciary duties to shareholders.

S4 The lawsuits, filed in Delaware Chancery Court, will once again bring the fiduciary duties of directors in the post-Enron world to the forefront.
S5 Delaware is where most major United States companies are incorporated.

S6 Caremark accepted the CVS bid on Nov. 1, even though the stock-for-stock deal offered no premium to Caremark's market price at the time.

S7 Caremark's directors have recommended that company shareholders approve the deal at a meeting that is expected to occur before March 16.

S8 On Monday, Caremark rejected the $26 billion bid made on Dec. 18 by Express Scripts, saying that it would ''result in a highly leveraged and weakened business'' if it was approved by shareholders.
S9 The Express Scripts offer of $58.50 a share is approximately 15 percent higher than the CVS bid.

S10 The lawsuit filed by the Louisiana Municipal Police Employees' Retirement System contends that the CVS deal is unfair to Caremark shareholders not only because its price is significantly below the rival bid.

S11 The pension fund's lawyers also argue that Caremark directors improperly accepted deal protection provisions in the CVS bid that act to deter other bidders, effectively making the deal a fait accompli even before the shareholders vote.

S12 First, there is the $675 million breakup fee to be paid by Caremark in cash to CVS, if the target walks away.
S13 Then, there is a so-called last-look provision, which gives CVS the chance to come back and top any rival bid.

S14 ''Any potential third-party bidders will be loath to invest the time and resources necessary to pursue a superior bid while knowing full well that CVS retains control of the bidding,'' the pension fund's lawsuit says.

S15 The Louisiana fund accuses the Caremark board of supporting the deal to benefit Edwin M. Crawford, the company's chief executive, and other executives.

S16 Under the terms of the deal, nine Caremark executives will join the combined company and Mr. Crawford will become chairman of its board and receive an estimated $48 million in exit pay.
S17 While he would probably receive a similar amount if Caremark sold out to Express Scripts, Mr. Crawford might not be asked to join the combined company under the terms of such a deal.

S18 The Louisiana pension fund also noted that the CVS deal guarantees a job at the merged company for Mr. Crawford's son, Andrew.
S19 A Caremark proxy filed last year described the younger Mr. Crawford as senior vice president for industry analysis and underwriting.

S20 The merger with CVS would also allow an unspecified number of Caremark directors -- perhaps all of them -- to get lucrative seats on the combined company's board.

S21 In its offer, CVS has also agreed to cover any costs associated with stock option backdating at Caremark, practices that are under federal investigation and the subject of another civil suit filed against the company in Tennessee.
S22 That lawsuit has challenged 4.6 million options granted to Mr. Crawford as having been possibly backdated.
S23 Stock sales covered by those options generated $262 million for Mr. Crawford, the Tennessee lawsuit contends.

S24 ''The inequities could not be more apparent,'' said Gerald H. Silk, a lawyer at Bernstein, Litowitz, Berger & Grossmann, one of the firms representing the Louisiana fund.
S25 ''Shareholders get a coercive, zero-premium deal while Crawford gets a $48 million payout, jobs for himself and his son and complete indemnification for his alleged option backdating transgressions.''

S26 A Caremark spokesman called the pension fund's lawsuit meritless and said the company would defend against it vigorously.

S27 As for the Express Scripts suit, he said it was a ''frivolous'' attempt to interfere with the CVS merger.

S28 ''Contrary to allegations made by Express Scripts, the provisions of the CVS merger agreement are lawful and appropriate,'' the spokesman said.

S29 To be sure, many of the terms in the CVS bid for Caremark -- the no-shop provisions and last-look opportunity -- are common in the merger world.

S30 But the suit filed in Delaware, comes at a time when directors' actions as fiduciaries for their shareholders are under increased scrutiny.

S31 As a result, the case, which is being heard by Chancellor William B. Chandler III, provides an opportunity for him to opine on the matter of directors' duties broadly and whether the Caremark directors exercised those obligations in particular.

S32 This is familiar territory for Chancellor Chandler, who oversaw the Disney case of 2005.
S33 In that case he chastised the company's directors for essentially rubberstamping a contract struck by Michael D. Eisner with Michael S. Ovitz that resulted in a $140 million severance payout after Mr. Ovitz was terminated a short time later.

S34 Chancellor Chandler has asked for a hearing on the issues before Caremark's shareholders vote on the CVS bid, now scheduled to take place in mid-March.

S35 In a Dec. 29 meeting with the parties in the case, Chancellor Chandler said that while he was certain Caremark would argue forcefully that its directors exercised their duties of care and loyalty to the company's owners, he also concluded that ''there is a tenable argument on the other side, and nonfrivolous claims here on the other side, that at least need to be tested against a fuller record.''

S36 Correction:  January 12, 2007, Friday  An article in Business Day yesterday about a lawsuit filed by a pension fund over the proposed merger between Caremark RX and CVS misstated the amount of exit pay that Caremark's chief executive, Edwin M. Crawford, would receive if a rival bid was accepted.
S37 If Express Scripts succeeds in its rival bid, Mr. Crawford would receive $57.6 million to $62.4 million, not an estimated $48 million.

