July 07, 2015
Mylan's other securities law problem
Posted by Usha Rodrigues

The front page of today's WSJ featured a story about Mylan NV's failure to disclose a potential conflict of interest transaction with Rodney Piatt, its vice chairman, lead independent director, and compensation-committee chief.  On the surface it looks like a classic conflict, and corporate law students and professors alike know that's a big no-no.  As a director, Piatt has a fiduciary duty to look out for the best interests of Mylan--i.e., to pay the least possible amount.  Of course, if he's on the other side of the transaction, human nature is to try to get the most money possible.  Ergo, conflict.  

The WSJ article suggests that failure to disclose the transaction violates a securities law that requires disclosure of related party transactions.  The company says there was no related party transaction because "The day before Mylan announced plans to build the new headquarters, a company managed and partly owned by Mr. Piatt sold a 7-acre site for $1 to an entity owned by a business partner in Southpointe II, according to property records reviewed by The Wall Street Journal. The partner’s firm sold the same land to Mylan for $2.9 million later the same day."  

Yeah, it sounds fishy to me, too.  But according to Mylan, "Mr. Piatt was not a party to either transaction” and “had no direct or indirect material interest in the transactions.” Clearly they're arguing it doesn't count as a related party transaction because Piatt is not a party.  

OK, maybe.  Maybe.  But Mylan might have another securities law problem: its code of ethics, which specifically covers directors (p. 3).  Codes of ethics tend to be broader in scope than related party transactions. Nobody (but me) ever thinks about them, but Sarbanes-Oxley required that ethics codes be disclosed--along with any waivers the board of directors grants directors and senior officers (For you history buffs, this provision was the result of Andy Fastow's related-party transactions with Enron, all blessed by the board via ethics waivers). 

Mylan's has a lengthy section on conflicts of interest.  From the introduction:

We must avoid personal interests that conflict with the interests of Mylan, or that might influence or appear to influence our judgment or actions in performing our duties. The word “appear” is most important. Even where there is no actual conflict of interest, the appearance of such a conflict is damaging because it can undermine trust among personnel and jeopardize the company’s standing with our customers, regulators, shareholders and others. 

It's not clear what Piatt's relationship is to the business partner in Southpointe II to whom he sold the land for a dollar.  But 

Neither you nor any family member(s) may directly or indirectly participate in any business relationship with Mylan, other than your relationship as a director, officer, employee of Mylan, contractor or agent, unless such an arrangement has been approved by the OGC. Executive officers and directors must also obtain approval from the committee regarding such ar- rangements. Any such arrangement that has not been approved by the OGC or the Committee, as applicable, is a violation of the code and is prohibited. 

Moreover, 

Except as provided in this code, you are prohibited from acquiring any interest in a company that competes with Mylan or does business with Mylan, such as a vendor, supplier or customer, without the prior written consent of the OGC. Executive officers and members of the board must also obtain approval of the Committee before acquiring any such interest. 

What's supposed to happen if there is the appearance of a conflict? 

If a situation arises in which there is an actual, apparent or potential conflict of interest, you must disclose the matter to the OGC. If required, the OGC will escalate the matter to the Senior Executive Compliance Committee (committee).

If the committee finds that such conflict is not material and does not appear to be of a nature that it would influence the business decisions of those involved, the committee may grant a waiver in its sole discretion. 

At Piatt's level, any such waiver should be disclosed as an 8-K, about which I know a little something.   I didn't see one in December of 2013. 

It's hard to find cases of where companies don't disclose waivers when they should have--you have to ferret out the nondisclosure first.  It looks like the WSJ might have here.

 Update: I forgot, Section 406 covers only the CEO, CFO, and CAO, so Piatt's waiver wouldn't have needed to be disclosed.  He would still need to get one, arguably.  And since the corporation has adopted a code of ethics that purports to apply to its board, if it is not following the required procedures that information would arguably be material.

The thing that gets me about codes of ethics is that they seem largely like empty corporatespeak.  But they all address conflicts of interest.  Conflicts of interest are the one thing that shareholders really might care about--because they're a sign that corporate insiders are really just out to line their pockets at the company's expense.  But nobody seems to take the codes seriously, and so conflicts often get ignored.  Or that's my hunch--I don't know, because aside form the top three financial officers, waivers don't have to be disclosed!

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