Directors declare war over core issue of corporate governance

ANALYSIS:Hastily convened board meeting on September 6th failed to placate the firm's unhappy directors, writes DOMINIC COYLE

JUST OVER a year after making peace with rebel shareholder Jack Schuler, Elan finds itself back in the firing line. Not only has Schuler resumed his campaign against the Irish biotech business, this time from within the boardroom, but another shareholder, Dane Ib Sonderby, has taken aim at the company.

In a campaign closely mirroring Schuler’s, Sonderby claims the company lacks sufficient industry expertise in the boardroom – despite the appointment of former Abbott executive Schuler and former Eli Lilly chief executive Vaughn Bryson as directors – and has committed a number of lapses in corporate governance.

Now the company is fighting back with chief executive Kelly Martin publishing a letter to shareholders on the company’s website addressing Sonderby’s criticisms just a day after the High Court granted Elan an injunction stopping lawyers hired by Schuler and Bryson investigating alleged corporate governance issues at the company. These issues are already being studied by a separate legal firm hired by the board.

However, an affidavit filed by the company as part of that process makes clear that Elan and Schuler have been at loggerheads ever since his appointment as a director at last year’s annual general meeting. It paints a picture of a boardroom irreconcilably divided.

Shortly after Schuler and Bryson joined the board in July last year, Elan appointed Atlanta law firm McKenna, Long Aldridge to conduct an independent review of corporate governance at the drug company – effectively investigating the complaints the two men had made ahead of their appointment.

Under Bill Ide, a former president of the American Bar Association, it produced an initial report which, the affidavit says, was “unanimously approved” by the board, including Schuler and Bryson.

Matters came to a head at the end of May this year. Schuler questioned elements of the deal done earlier in the year with Johnson Johnson which saw it become the largest shareholder in the company and acquire control of the development of bapineuzumab, the most advanced of the company’s Alzheimer’s disease therapies.

Schuler specifically wanted the audit committee to investigate whether certain disclosures in relation to elements of the deal were made to the board.

According to the timeline presented in the affidavit, this occurred around the same time the board had informed Schuler that it was instructing lawyers to inquire into his share dealings.

In July, Schuler and Bryson took issue with the decision to choose McKenna, Long Aldridge ( and Mr Ide) to look into the latest complaints. Elan chairman Kyran McLaughlin said they had been selected as they “were still engaged as independent counsel for the purposes of the . . . governance review”.

According to the affidavit, Schuler was concerned about alleged close ties between the firm and Elan’s former general counsel.

Meanwhile, Elan had referred concerns about Schuler’s conduct to the Securities and Exchange Commission, which regulates stock market listed companies in the United States, over potential violations of US and/or Irish laws.

By the middle of August, Schuler and Bryson had told the board they were initiating an independent investigation before this month’s board meeting which is scheduled to receive a report on the affair.

On September 3rd – the eve of the Labor Day holiday in the United States – Bryson said he and Schuler had retained California litigation specialists Bird Marella. It later emerged, the directors wanted Elan to finance this process. Over the Labor Day weekend, a flurry of e-mails passed between Bird Marella and Elan’s Dublin law firm, A L Goodbody, in which Goodbody enquired into the authority of the US firm to take instructions on the matter and their competence in Irish law, given Elan’s domicile here.

The tone of the correspondence became increasingly aggressive, with Bird Marella saying it would take Elan to court on Tuesday, September 7th, the next working day in the US.

A hastily convened meeting of Elan’s board on Monday, September 6th – conducted by phone – ended in disarray as Schuler and Bryson refused to recuse themselves as requested by their fellow directors. Eventually the meeting was adjourned and later resumed in their absence. It decided to press for the injunction blocking Bird Marella from pursuing Elan in the US courts.

Elan’s board meets in Dublin next Wednesday to consider the McKenna Long Aldridge report. Regardless of its content, the issue looks certain to rumble on, distracting executives from managing its high-risk neuroscience pipeline and promising little respite for shareholders in terms of an advance in the price of the company’s stock.