Swiss drugmaker Novartis is seeking to use Swiss merger law to push through its buy of a minority stake in U.S. Eyecare Group Alcon, which would give it full control of the group.

Novartis, which is in the final stages of buying an additional 52 % stake from Nestle to bring its ownership up to 77 %, has made what Alcon's Independent Director Committee (IDC) deems to be a lowball offer for the remaining 23 %.

In early January, Novartis said it would offer Alcon minority shareholders 2.8 Novartis shares for each Alcon share, the equivalent of around $143 per Alcon share at latest prices.

This is an around 15 % discount to the average price of $168 per Alcon share paid to Nestle and also below Alcon's share price, which closed at $159.60 on Tuesday.

The IDC has already set up a $50-million litigation trust as it seeks to put more pressure on Novartis to raise its offer.

Lawyers are watching developments with interest as current Swiss merger law only came into effect in 2004 and so far no precedent has been set with regard to the minority shareholders' challenge.

Here are the main legal issues:

Swiss Merger Law Applies
Alcon is listed in New York, but is incorporated in Switzerland, meaning Swiss merger law applies. This does not require minorities to be offered the same price paid for the majority stake earlier in the deal.

Alcon's Organisational Regulations
Alcon's board of directors organisational regulations require that the IDC approve any merger or similar transaction involving the majority shareholder.

Novartis has said this applies to the former majority shareholder Nestle only and it can get rid of these organisational regulations or simply replace the current independent directors to force through the deal.

Defining a Fair Price
Novartis has repeatedly said it believes it is offering Alcon's minority shareholders a fair price based on various factors, including its assessment of Alcon's fundamental value as well as the unaffected Alcon share price as adjusted for speculation regarding Novartis' intentions. Novartis' bid to the Alcon minorities is pitched in shares, while Nestle is getting cash.

The IDC has repeatedly called on Novartis to raise its offer to the minority shareholders and has described the bid as grossly inadequate. But under Swiss merger law, Novartis was allowed to pay a premium and another cash/share mix to the main shareholder in order to get the majority stake. Such a move would likely be deemed an unequal treatment of the minority in other jurisdictions.

Swiss takeover law allows for a premium of up to 25 % for the majority shareholder. If the Novartis and Alcon boards approve the deal, they must issue a report detailing the main terms of the merger and Novartis will have to explain why it is offering 2.8 Novartis shares for each Alcon share.
This report and the underlying merger documents are then reviewed by a licensed audit expert who then issues a report on whether the proposed offer is reasonable and whether the methods used to arrive at this particular ratio are adequate.

But even if the auditors decide the offer is too low, the merger will not necessarily be stopped.

Conflict of Interest on the Alcon Board
An extraordinary general meeting held in Zug on Monday saw the election of five new Novartis-nominated candidates to the Alcon board, giving Novartis the majority on the Alcon board.

The IDC has argued that under Swiss law, the Alcon board members nominated by Novartis will not be able to vote on the merger due to a conflict of interest. Both the Novartis and Alcon boards must back the merger with a simple majority before it can go through.

But Hans Caspar von der Crone, a prominent Swiss legal expert mandated by the IDC, said that a resolution by a "conflicted" Alcon board on the merger agreement with Novartis would not be legally effective because the Novartis appointed board members are in a conflict of interest, which cannot be solved by the Alcon board basing its decision on a fairness opinion of an independent valuer.

Von der Crone also said Novartis needed the support of the IDC to get Alcon board approval for the deal. Novartis has said the board members it has nominated for election are well qualified to act in the interests of the Alcon shareholders and that there is no conflict of interest preventing the Alcon board to vote by simple majority in favour of the merger.

It is difficult to define conflict of interest and the consequences as there has so far not been any case like this one and it is not clear how a judge would rule on this if this were to come to court.
Members of the Alcon board face the risk of being sued for breaching their fiduciary duty to the minority shareholders if they approve an offer that is believed to be too low.

Shareholder Backing
The merger will go through if two-thirds of both Novartis and Alcon shareholders also vote in favour of the deal at an extraordinary general meeting.
A unanimous vote is not required in Switzerland, meaning the minority shareholders can be overruled and forced to render their Alcon shares in exchange for Novartis shares.

Novartis knows it can force through the deal, but the minorities can still challenge the decision and the IDC has already set up a litigation trust.

Lawsuits
A lawyer at one of the top Swiss business law firms said there could be liability claims against the Alcon board members or a possible fundamental challenge of the merger based on alleged breach of Swiss merger law.

Minority shareholders have two months after the merger has been registered to launch a lawsuit on the adequacy and fairness of the offered merger price. They could file such claims at either the cantonal court of Zug or Basel. If both are involved, these two courts could combine proceedings.
If a court decided Novartis' offer were too low, Novartis would be required to top up its bid, most likely by adding a cash element to the offer.