Case 1:17-cv-00325-LPS Document 1 Filed 03/27/17 Page 1 of 33 PageID #: 1
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
MICHAEL RUBIN, On Behalf of Himself ) and All Others Similarly Situated, ) ) Plaintiff, ) Case No. ______) ) JURY TRIAL DEMANDED v. ) CLASS ACTION ) MEAD JOHNSON NUTRITION ) COMPANY, PETER KASPER JAKOBSEN, ) JAMES M. CORNELIUS, STEVEN M. ) ALTSCHULER, HOWARD B. BERNICK, ) KIMBERLY A. CASIANO, ANNA C. ) CATALANO, CELESTE A. CLARK, ) STEPHEN W. GOLSBY, MICHAEL ) GROBSTEIN, PETER G. RATCLIFFE, ) MICHAEL A. SHERMAN, ELLIOTT ) SIGAL, and ROBERT S. SINGER, ) Defendants. )
COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS
Plaintiff Michael Rubin (“Plaintiff”), by and through his undersigned counsel, for his
complaint against defendants, alleges upon personal knowledge with respect to himself, and
upon information and belief based upon, inter alia, the investigation of counsel as to all other
allegations herein, as follows:
NATURE OF THE ACTION
1. This is a class action brought on behalf of the public stockholders of Mead
Johnson Nutrition Company (“Mead Johnson” or the “Company”) against Mead Johnson and its
Board of Directors (the “Board” or the “Individual Defendants”) for their violations of Sections
14(a) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15.U.S.C. §§ Case 1:17-cv-00325-LPS Document 1 Filed 03/27/17 Page 2 of 33 PageID #: 2
78n(a), 78t(a), and U.S. Securities and Exchange Commission (“SEC”) Rule 14a-9, 17 C.F.R.
240.14a-9, and to enjoin the vote on a proposed transaction, pursuant to which Mead Johnson will be acquired by Reckitt Benckiser Group plc (“Reckitt Benckiser”), through its wholly- owned subsidiary Marigold Merger Sub, Inc. (“Merger Sub”) (the “Proposed Transaction”).
2. On February 10, 2017, Mead Johnson issued a press release announcing that it had entered into an Agreement and Plan of Merger (the “Merger Agreement”) to sell Mead
Johnson to Reckitt Benckiser. Under the terms of the Merger Agreement, Reckitt Benckiser will acquire all outstanding shares of Mead Johnson for $90.00 in cash (the “Merger Consideration”).
The Proposed Transaction is valued at approximately $17.9 billion.
3. On March 13, 2017, Mead Johnson filed a Preliminary Proxy Statement on
Schedule 14A (the “Proxy”) with the SEC in connection with the Proposed Transaction. The
Proxy, which recommends that Mead Johnson stockholders vote in favor of the Proposed
Transaction, omits or misrepresents material information concerning, among other things: (i)
Mead Johnson management’s projections, including the projections utilized by the Company’s financial advisors, Goldman, Sachs & Co. (“Goldman Sachs”) and Morgan Stanley & Co. LLC
(“Morgan Stanley”), in their financial analyses; (ii) the valuation analyses prepared by Goldman
Sachs and Morgan Stanley in connection with the rendering of their fairness opinions; and (iii) material information concerning the background of the process leading up to the Proposed
Transaction. The failure to adequately disclose such material information constitutes a violation of Sections 14(a) and 20(a) of the Exchange Act as Mead Johnson stockholders need such information in order to cast a fully-informed vote in connection with the Proposed Transaction.
4. In short, the Proposed Transaction is designed to divest Mead Johnson’s public stockholders of the Company’s valuable assets without fully disclosing all material information
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concerning the Proposed Transaction to Company stockholders. To remedy defendants’
Exchange Act violations, Plaintiff seeks to enjoin the stockholder vote unless and until such
Exchange Act violations are cured.
JURISDICTION AND VENUE
5. This Court has jurisdiction over the claims asserted herein for violations of
Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9 promulgated thereunder
pursuant to Section 27 of the Exchange Act, 15 U.S.C. § 78aa, and 28 U.S.C. § 1331 (federal question jurisdiction).
6. This Court has jurisdiction over the defendants because each defendant is either a
corporation that conducts business in and maintains operations within this District, or is an
individual with sufficient minimum contacts with this District so as to make the exercise of
jurisdiction by this Court permissible under traditional notions of fair play and substantial justice.
7. Venue is proper under 28 U.S.C. § 1391 as well as under Section 27 of the
Exchange Act, 15 U.S.C. § 78aa, because a substantial portion of the actionable conduct took
place in this District.
PARTIES
8. Plaintiff is, and has been at all times relevant hereto, a continuous stockholder of
Mead Johnson.
9. Defendant Mead Johnson is a Delaware corporation with its principal executive
offices located at 225 North Canal Street, 25th Floor, Chicago, Illinois 60606. The Company is a
global leader in nutrition for infants and children. Mead Johnson’s common stock is traded on the New York Stock Exchange under the ticker symbol “MJN.”
10. Defendant Peter Kasper Jakobsen (“Jakobsen”) has been Chief Executive Officer
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(“CEO”) since 2013 and President and a director of the Company since 2012.
11. Defendant James M. Cornelius (“Cornelius”) has been Chairman of the Board since 2009.
12. Defendant Steven M. Altschuler (“Altschuler”) has been a director of the
Company since 2009.
13. Defendant Howard B. Bernick (“Bernick”) has been a director of the Company
since 2009.
14. Defendant Kimberly A. Casiano (“Casiano”) has been a director of the Company
since 2010.
15. Defendant Anna C. Catalano (“Catalano”) has been a director of the Company
since 2010.
16. Defendant Celeste A. Clark (“Clark”) has been a director of the Company since
2011.
17. Defendant Stephen W. Golsby (“Golsby”) has been a director of the Company
since 2009.
18. Defendant Michael Grobstein (“Grobstein”) has been a director of the Company
since 2014.
19. Defendant Peter G. Ratcliffe (“Ratcliffe”) has been a director of the Company
since 2009.
20. Defendant Michael A. Sherman (“Sherman”) has been a director of the Company
since 2015.
21. Defendant Elliott Sigal (“Sigal”) has been a director of the Company since 2009.
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22. Defendant Robert S. Singer (“Singer”) has been a director of the Company since
2009.
23. Defendants Jakobsen, Cornelius, Altschuler, Bernick, Casiano, Catalano, Clark,
Golsby, Grobstein, Ratcliffe, Sherman, Sigal and Singer are collectively referred to herein as the
“Board” or the “Individual Defendants.”
OTHER RELEVANT ENTITIES
24. Reckitt Benckiser is incorporated in England and Wales. Reckitt Benckiser is a consumer goods company that produces health, hygiene and home products.
25. Merger Sub is a Delaware corporation and a wholly-owned indirect subsidiary of
Reckitt Benckiser.
CLASS ACTION ALLEGATIONS
26. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal
Rules of Civil Procedure on behalf of all persons and entities that own Mead Johnson common stock (the “Class”). Excluded from the Class are defendants and their affiliates, immediate families, legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest.
27. Plaintiff’s claims are properly maintainable as a class action under Rule 23 of the
Federal Rules of Civil Procedure.
28. The Class is so numerous that joinder of all members is impracticable. While the exact number of Class members is unknown to Plaintiff at this time and can only be ascertained through discovery, Plaintiff believes that there are thousands of members in the Class. As of
March 9, 2017, there were 183,617,672 shares of Company common stock issued and outstanding. All members of the Class may be identified from records maintained by Mead
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Johnson or its transfer agent and may be notified of the pendency of this action by mail, using forms of notice similar to that customarily used in securities class actions.
29. Questions of law and fact are common to the Class and predominate over questions affecting any individual Class member, including, inter alia:
(a) Whether defendants have violated Section 14(a) of the Exchange Act and
Rule 14a-9 promulgated thereunder;
(b) Whether the Individual Defendants have violated Section 20(a) of the
Exchange Act; and
(c) Whether Plaintiff and the other members of the Class would suffer irreparable injury were the Proposed Transaction consummated.
30. Plaintiff will fairly and adequately protect the interests of the Class, and has no interests contrary to or in conflict with those of the Class that Plaintiff seeks to represent.
Plaintiff has retained competent counsel experienced in litigation of this nature.
31. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy. Plaintiff knows of no difficulty to be encountered in the management of this action that would preclude its maintenance as a class action.
32. Defendants have acted, or refused to act, on grounds generally applicable to the
Class as a whole, and are causing injury to the entire Class. Therefore, final injunctive relief on behalf of the Class is appropriate.
SUBSTANTIVE ALLEGATIONS
Company Background and Strong Financial Outlook
33. Mead Johnson was founded in 1904, and introduced the Company’s first infant feeding product, Dextri-Maltose, in 1911. Over the next several decades, Mead Johnson expanded into vitamins, pharmaceutical products and children’s nutrition, and into extensive
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geographies beyond the United States. In 1967, the Company became a wholly-owned
subsidiary of Bristol-Myers Squibb Company (“BMS”) and in February 2009, completed its initial public offering with BMS retaining a significant ownership interest in the Company.
BMS subsequently completed a split-off of its remaining interest in Mead Johnson and in
December 2009, Mead Johnson became an independent public company, now focusing solely on
pediatric nutrition.
34. The Company’s recent financial results underscore its promising prospects. On
July 28, 2016, Mead Johnson issued a press release announcing its financial results for the
second quarter of 2016. For the quarter, the Company reported a 10% increase in non-GAAP
earnings before interest and income taxes (“EBIT”), excluding specified items and the impact of
foreign exchange, compared to the second quarter of 2015. Defendant Jakobsen commented on
the quarter’s financial results, stating:
As we move through this year, I am pleased that we continue to deliver against our profit objectives despite a challenging global operating environment. We are making good progress with our portfolio and channel transformation in China despite near-term challenges. We are aligning the organization behind more ambitious operating cost reductions in support of both our growth and value creation strategies.
35. On October 27, 2016, the Company announced its third quarter 2016 financial
results, including a 1% increase in EBIT compared to the third quarter 2015.
36. On January 26, 2017, the Company reported its financial results for the fourth
quarter and full year 2016. Mead Johnson reported a 15% increase in EBIT in the fourth
quarter 2016 compared to the fourth quarter 2015. Commenting on the results, defendant
Jakobsen stated:
In the fourth quarter we continued to make progress with a series of important strategic transitions in key markets. Our imported products again grew strongly in China - and we doubled our sales volume via e-commerce out of Hong
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Kong over the prior quarter. Though it will take some time for us to complete the transition phase we are currently in, we are encouraged by early signs our plans are working.
The Sale Process
37. Beginning in December 2015 and continuing through the fall of 2016, Mead
Johnson engaged in discussions with a company referred to in the Proxy as “Company A” regarding potential transactions between the two companies.
38. On June 9 and June 10, 2016, the Board held its annual review of the Company’s strategic plan where it also approved financial projections covering the period from 2017-2021
(the “June 2016 Projections”).
39. Later in June 2016, defendant Jakobsen held a meeting with a company referred to in the Proxy as “Company B,” but Company B did not express interest in pursuing a transaction with Mead Johnson.
40. Evidently, Mead Johnson consulted with Goldman Sachs concerning “various potential strategic alternatives” throughout 2016. However, despite Goldman Sachs’ expertise and knowledge of the Company and the industry, Mead Johnson also engaged Morgan Stanley on September 30, 2016 to serve as a co-advisor. The Proxy fails to disclose the reason the Board determined it needed two financial advisors, including whether this decision related to some aspect of Goldman Sachs’ performance or a potential conflict of interest on the part of Goldman
Sachs.
41. Defendant Singer subsequently facilitated a meeting with Reckitt Benckiser and its largest stockholder, JAB Holdings B.V. (“JAB”). On December 2, 2016, defendants
Cornelius and Singer met with Rakesh Kapoor (“Kapoor”), CEO of Reckitt Benckiser, and Peter
Harf (“Harf”), senior partner of JAB, to discuss Mead Johnson’s business generally, as well as
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Reckitt Benckiser’s interest in exploring a potential transaction with the Company. As
Defendant Singer currently serves on the board of directors of certain entities controlled by JAB, he knew Harf, who served on Reckitt Benckiser’s board of directors from 1999 through 2015.
At this meeting, although expressing interest in an acquisition of the Company, Reckitt
Benckiser essentially conditioned its interest on Mead Johnson abstaining from any type of pre- signing market check, threatening complete withdrawal from discussions with the Company if it should seek out or consider other potential purchasers.
42. After receiving this interest in a potential transaction from Reckitt Benckiser in early December 2016, Company management determined to update the 2017 budget and long- range projections that had been included in the June 2016 Projections to present to the Board for approval at its January 22, 2017 meeting.
43. On December 19, 2016, the Company and Reckitt Benckiser signed a confidentiality agreement with an eighteen-month standstill provision. The next day, members of management from both companies held a meeting discussing Mead Johnson’s overall business, strategy and organization.
44. On January 13, 2017, Kapoor presented defendant Cornelius a letter outlining a non-binding proposal pursuant to which Reckitt Benckiser would acquire the Company for
$90.00 per share in cash. The letter specifically noted that Reckitt Benckiser was unwilling to engage in a traditional back and forth negotiation with respect to value. Kapoor also reiterated that Reckitt Benckiser was unwilling to participate in a broad sales process of the Company.
45. Following delivery of Reckitt Benckiser’s proposal, the Company instructed
Goldman Sachs to prepare valuation analyses based on Company management’s preliminary updates to the June 2016 Projections (the “Preliminary Projections”), which had been
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downwardly revised from the June 2016 Projections. On January 18, 2017, Goldman Sachs reviewed its financial analysis of Reckitt Benckiser’s proposal with the Board based on the
Preliminary Projections. Critically, the Proxy fails to disclose the full set of June 2016
Projections, as well as a full set of the Preliminary Projections which Goldman Sachs utilized in its preliminary valuation analyses. The Proxy further fails to disclose the implied per share values generated by Goldman Sachs in its preliminary valuation analyses of the Company using the Preliminary Projections and how these implied per share values for the Company compared to Reckitt Benckiser’s proposal.
46. Mead Johnson management subsequently further revised its Company projections and, on January 20, 2017, sent the Board a proposed final update to the June 2016 Projections
(the “Long-Range Plan”). On January 22, 2017, the Board held a meeting to review the Long-
Range Plan and discuss developments regarding a potential transaction with Reckitt Benckiser.
Defendant Jakobsen also informed the Board that he received interest from the CEO of Company
A, who noted that Company A was considering making an offer to acquire Mead Johnson.
47. On January 27, 2017, defendant Cornelius requested that Reckitt Benckiser raise its $90.00 per share proposal, but Kapoor informed defendant Cornelius that Reckitt Benckiser was unwilling to do so. Following this conversation, defendant Jakobsen called the CEO of
Company A to determine whether Company A had progressed with its assessment of whether to make an offer for Mead Johnson. Company A’s CEO indicated it was continuing to evaluate a potential transaction with Mead Johnson and might be in a position to share its results in approximately two weeks.
48. After Reckitt Benckiser again threatened to withdraw its offer and cease discussions with Mead Johnson, the Company acceded to Reckitt Benckiser’s threats, granting
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Reckitt Benckiser access to due diligence. On January 30, 2017, Reckitt Benckiser provided a
draft merger agreement to Mead Johnson.
49. On February 3, 2017, the Company’s legal advisor sent a revised draft of the
merger agreement to Reckitt Benckiser’s legal advisor which contained, among other things, a
“go-shop” provision, and contemplated an irrevocable undertaking from JAB committing to vote
its shares of Reckitt Benckiser in favor of the transaction.
50. Over the next few days, the parties and their advisors negotiated the terms of the
Merger Agreement and Reckitt Benckiser ultimately refused to accept a go-shop provision.
Essentially, Reckitt Benckiser was successful in shutting out any potential competition for the
Company and refusing to raise its offer even once after submitting its initial proposal.
51. On February 9, 2017, the Board held a meeting during which both Goldman
Sachs and Morgan Stanley delivered their fairness opinions. The Board then unanimously approved the Merger Agreement.
52. The next day, Mead Johnson and Reckitt Benckiser executed the Merger
Agreement.
The Proposed Transaction
53. On February 10, 2017, following execution of the Merger Agreement, the
Company issued a press release announcing the Proposed Transaction. The press release stated,
in relevant part:
GLENVIEW, Ill. -- Feb. 10, 2017-- Mead Johnson Nutrition Company (NYSE:MJN) today announced that it has reached an agreement to be acquired by Reckitt Benckiser Group plc (RB), the world's leading consumer health and hygiene company. As a result of this transaction, Mead Johnson will become a new division of RB with its globally-recognized Enfamil and Nutramigen brands joining RB's portfolio of leading consumer health brands.
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RB has agreed to pay $90 cash for each share of Mead Johnson common stock in a transaction valued at approximately $17.9 billion (including net debt). The price represents a premium of 29% to MJN's undisturbed closing price on February 1, 2017 before market speculation of a potential transaction. Including Mead Johnson's net debt of $1.2 billion as of December 31, 2016, the total enterprise value of the transaction is $17.9 billion, representing a multiple of 17.4x 2016 non-GAAP EBITDA. The transaction has been unanimously approved by the Mead Johnson Board of Directors. Closing of the transaction is subject to customary conditions, including approval by shareholders of both Mead Johnson and RB and regulatory approvals, and is expected to occur during the third quarter of 2017. Mead Johnson will continue to pay its normal quarterly dividend until closing.
* * *
"Mead Johnson's geographic footprint significantly strengthens our position in developing markets, which account for approximately 40% of the combined group's sales, with China becoming our second largest ‘Powermarket,'" noted RB's Chief Executive Officer, Rakesh Kapoor. "We are confident that our deep understanding of consumer needs and our expertise in scaling global brands will deliver significant growth for the MJN portfolio. We will draw on the best of both businesses and continue to build on Mead Johnson's extensive R&D, regulatory, quality and specialist distribution capabilities."
Insiders’ Interests in the Proposed Transaction
54. Reckitt Benckiser and Mead Johnson insiders are the primary beneficiaries of the
Proposed Transaction, not the Company’s public stockholders. The Board and the Company’s executive officers are conflicted because they will have secured unique benefits for themselves from the Proposed Transaction not available to Plaintiff and the public stockholders of Mead
Johnson.
55. Notably, the Company’s executive officers have secured positions for themselves following completion of the Proposed Transaction. The Company will continue operating as a new standalone division within Reckitt Benckiser. Indeed, the Proxy states that “our executive officers at the effective time of the merger will be the executive officers of the surviving corporation.”
56. Moreover, Company insiders stand to reap substantial financial benefits for securing
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the deal with Reckitt Benckiser. Pursuant to the Merger Agreement, upon consummation of the Proposed Transaction, Mead Johnson’s directors and officers will receive cash payments from the immediate vesting of all outstanding Company stock options, restricted stock units, and performance stock units, as summarized in the following table:
Unvested Total Merger Stock Options Consideration Name (#) RSUs (#) PSUs (#) ($) Named Executive Officers (1) Peter Kasper Jakobsen 195,619 124,527 50,411 $ 18,547,379 Michel Cup 78,099 39,189 10,740 $ 5,725,918 Charles M. Urbain 52,648 35,560 13,625 $ 5,213,088 Patrick M. Sheller 40,911 20,945 7,093 $ 3,074,005 Ian E. Ormesher 39,753 16,253 6,191 $ 2,570,545 Other Executive Officers James Jeffrey Jobe. 31,839 27,112 7,056 $ 3,540,445 Dirk Hondmann, Ph.D 25,830 17,295 6,794 $ 2,541,985 James E. Shiah 21,157 7,071 2,140 $ 1,153,459 Directors James M. Cornelius. — 3,418 — $ 307,620 Steven M. Altschuler, M.D — 1,709 — $ 153,810 Howard B. Bernick — 1,709 — $ 153,810 Kimberly A. Casiano — 1,709 — $ 153,810 Anna C. Catalano. — 1,709 — $ 153,810 Celeste A. Clark, Ph.D — 1,709 — $ 153,810 Stephen W. Golsby — 1,709 — $ 153,810 Michael Grobstein — 1,709 — $ 153,810 Peter G. Ratcliffe — 1,709 — $ 153,810 Michael Sherman — 1,709 — $ 153,810 Elliott Sigal, M.D., Ph.D. — 1,709 — $ 153,810 Robert S. Singer — 1,709 — $ 153,810
57. Further, if they are terminated in connection with the Proposed Transaction,
Mead Johnson’s named executive officers stand to receive substantial cash severance payments. Indeed, if defendant Jakobsen is not retained by Reckitt Benckiser following
consummation of the merger, he stands to receive over $33 million in golden parachute compensation. The following table summarizes the cash amounts payable to the Company’s named executive officers with respect to severance and equity awards, including the above
equity payments, in connection with the Proposed Transaction:
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Health Supplemental and Tax Cash Retirement Welfare Gross-Up Severance Equity Benefits Benefits Payments Other Total Name ($)(1) ($)(2) ($)(3) ($)(4) ($)(5) ($)(6) ($)(7) Peter Kasper Jakobsen $ 6,733,562 $ 18,547,379 $ 673,356 $ 21,996 $ 6,978,328 $ 115,000 $ 33,069,621
Michel Cup $ 2,736,712 $ 5,725,918 $ 246,304 $ 21,666 $ 2,122,975 $ 85,000 $ 10,938,575 Charles M. Urbain $ 2,345,753 $ 5,213,088 $ 234,575 $ 23,160 — $ 75,000 $ 7,891,576 Patrick M. Sheller $ 1,730,137 $ 3,074,005 $ 155,712 $ 10,210 $ 1,251,193 $ 65,000 $ 6,286,257 Ian E. Ormesher $ 1,557,123 $ 2,570,545 $ 140,141 $ 21,204 $ 1,052,888 $ 60,000 $ 5,401,901
The Proxy Contains Material Misstatements or Omissions
58. Defendants filed a materially incomplete and misleading Proxy with the SEC and
disseminated it to Mead Johnson’s stockholders. The Proxy misrepresents or omits material
information that is necessary for the Company’s stockholders to make an informed decision
whether to vote in favor of the Proposed Transaction or seek appraisal.
59. Specifically, as set forth below, the Proxy fails to provide Company stockholders
with material information or provides them with materially misleading information concerning:
(i) Mead Johnson management’s projections, including the projections utilized by Goldman
Sachs and Morgan Stanley in their financial analyses; (ii) the valuation analyses prepared by
both Goldman Sachs and Morgan Stanley in connection with the rendering of their fairness
opinions; and (iii) material information concerning the sale process leading up to the Proposed
Transaction. Accordingly, Mead Johnson stockholders are being asked to vote for the Proposed
Transaction without all material information at their disposal.
Material Omissions Concerning Mead Johnson’s Financial Projections
60. The Proxy is materially deficient because it fails to disclose material information
relating to the Company’s intrinsic value and prospects going forward.
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61. Specifically, on June 9 and 10, 2016, the Board conducted its annual review of the Company’s strategic plan and reviewed and approved the June 2016 Projections covering
the period from 2017-2021. The Proxy fails, however, to disclose any of the key assumptions,
limitations and risks associated with the Company’s June 2016 Projections.
62. Thereafter, at the January 18, 2017 Board meeting, Goldman Sachs reviewed for the Board certain financial aspects of Reckitt Benckiser's January 13, 2017 proposal based on the Preliminary Projections. The Proxy fails, however, to disclose the key inputs to the
Preliminary Projections and critically fails to disclose the implied per share values of Mead
Johnson stock generated by Goldman Sachs utilizing the Preliminary Projections. This information is critical to Mead Johnson stockholders to evaluate the value implications resulting from the update to the June 2016 Projections and how the implied per share values compared to
Reckitt Benckiser’s proposal and to further assess whether the subsequent update to the
Preliminary Projections (the Long-Range Plan) was made in order to fit Reckitt Benckiser’s proposed merger consideration into a range of fairness.
63. With respect to each of the June 2016 Projections and the Preliminary
Projections, the Proxy fails to disclose the following key financial metrics that were included in the Company’s Long-Range Plan and utilized by both Goldman Sachs and Morgan Stanley in their financial analyses underlying their respective fairness opinions: (a) net sales, (b) gross profit, (c) adjusted operating expenses, (d) adjusted EBIT, (e) adjusted EBITDA, (f) unlevered free cash flow, (g) fuel for growth, (h) real estate consolidation, (i) net earnings, (j) minority interest, (k) provision for GAAP income taxes, (l) unlevered income tax expense, (m) interest expense, (n) depreciation and amortization, (o) capital expenditures, and (p) changes in net
working capital.
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64. On January 20, 2017, Mead Johnson management sent the Board the Long-Range
Plan, which was reviewed and approved at the January 22, 2017 Board meeting.
65. With respect to the Long-Range Plan, the Proxy discloses the unlevered free cash
flow for years 2017-2021, but fails to disclose the following key financial metrics that were
utilized to derive the Company’s unlevered free cash flow: (a) unlevered income tax expense, (b) interest expense, (c) depreciation and amortization, (d) capital expenditures, (e) changes in net working capital, (f) dividends, and (g) a reconciliation of GAAP EBIT to non-GAAP unlevered free cash flows.
66. Further, the Proxy fails to explain the reason dividends and undistributed earnings are deducted in the calculation of Adjusted EPS, which is material in light of the fact that these items are not expense items.
67. The omission of this information renders the following statements in the Proxy false and/or materially misleading in contravention of the Exchange Act:
(a) From pages 43-46 of the Proxy:
Unaudited Prospective Financial Information
Our management prepares projections of the Company's expected financial performance as part of its ongoing management of the business. Other than guidance in connection with its regularly-scheduled earnings releases, these projections are not disclosed as a matter of course due to the inherent unpredictability of the underlying assumptions and estimates. However, the Company is including in this proxy statement to provide our stockholders access to a summary of certain unaudited prospective financial information that was prepared by our management and used by our Board and Reckitt Benckiser in connection with their respective evaluations of the proposed merger and, following its review and approval by our Board, by Goldman Sachs and Morgan Stanley, the financial advisors to the Company, in providing financial advice to our Board. The inclusion of this information should not be regarded as an indication that any of the Company, Reckitt Benckiser, Goldman Sachs, Morgan Stanley, their respective representatives or any other recipient of this information considered, or now considers, it necessarily to be predictive of actual future results, or that it should be construed as financial guidance, and it should not be relied on as such. Our
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management prepared these projections, which were reviewed and approved by our Board at its January 22, 2017 meeting and subsequently provided by the Company to Goldman Sachs and Morgan Stanley for use in the preparation of the opinions of Goldman Sachs and Morgan Stanley rendered orally to our Board at its February 9, 2017 meeting (with such opinions subsequently confirmed by delivery of Goldman Sachs' and Morgan Stanley's written opinions on February 10 and February 9, respectively). The only projections used by our Board in resolving to approve the transaction with Reckitt Benckiser were the projections included in the Long-Range Plan, and Goldman Sachs and Morgan Stanley did not use or rely on any projections other than those included in the Long-Range Plan to perform any of the financial analysis undertaken in connection with their respective fairness opinions.
Our management, as part of ordinary course strategic and operational planning for its business, develops multi-year financial projections based on its evolving strategy, results and actions. As part of such process, our management prepared, and our Board approved at its June 9-10, 2016 meeting, the June 2016 Projections. In early December 2016, as a result of underperformance relative to the Company's 2016 budget since the June 2016 Board meeting, our Chief Executive Officer and Chief Financial Officer determined to update the 2017 budget and long-range projections that had been included in the June 2016 Projections to present to our Board for approval at its January 22, 2017 meeting. At the time the Company received Reckitt Benckiser's non-binding January 13, 2017 proposal to acquire the Company, our management was in the process of preparing this update, and it was this near final update to the June 2016 Projections that the Company provided to Goldman Sachs and instructed Goldman Sachs to use for purposes of the preliminary valuation analysis Goldman Sachs delivered to our Board at its January 18, 2017 meeting. Our management then completed its work and sent a proposed Long-Range Plan to our Board on January 20, 2017. Following review and approval by our Board at its January 22, 2017 meeting, the Long-Range Plan was provided by the Company to Goldman Sachs and Morgan Stanley for use in the preparation of the opinions of Goldman Sachs and Morgan Stanley rendered orally to our Board at its February 9, 2017 meeting (with such opinions subsequently confirmed by delivery of Goldman Sachs' and Morgan Stanley's written opinions on February 10 and February 9, respectively). The primary differences between the projections included in the preliminary update to the June 2016 Projections that were utilized by Goldman Sachs at the January 18, 2017 Board meeting and the projections included in the Long-Range Plan are described in footnote (7) to the first table set forth below. The primary differences between the June 2016 Projections and the Long-Range Plan are described in footnote (8) to the first table set forth below.
While presented with numeric specificity, the unaudited prospective financial information reflects numerous estimates and assumptions made with respect to business, economic, market, competition, regulatory and financial
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conditions and matters specific to the Company's business, all of which are difficult to predict and many of which are beyond the Company's control. The unaudited prospective financial information reflects both assumptions as to certain business decisions that are subject to change and, in many respects, subjective judgment, and thus is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. The Company can give no assurance that the unaudited prospective financial information or the underlying estimates and assumptions will be realized. In addition, since the unaudited prospective financial information covers multiple years, such information by its nature becomes less predictive with each successive year. Furthermore, the unaudited prospective financial information should not be construed as commentary by our management as to how our management expects the Company's actual results to compare to Wall Street research analysts' estimates, as to which the Company expresses no view.
Actual results may differ materially from those set forth below, and important factors that may affect actual results and cause the unaudited prospective financial information to be inaccurate include, but are not limited to, risks and uncertainties relating to the Company's business, industry performance, general business and economic conditions, customer requirements, competition and adverse changes in applicable laws, regulations or rules. For other factors that could cause actual results to differ, please see the section entitled "Cautionary Statement Regarding Forward-Looking Statements" on page 20 and the sections entitled "Risk Factors" and "Forward-Looking Statements" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and the other reports filed by the Company with the SEC. Given the proposed merger under the merger agreement with Reckitt Benckiser and assuming that such merger is completed, the unaudited prospective financial information for the Company as a standalone entity for the years 2018 to 2021 set forth below will no longer be applicable.
The unaudited prospective financial information does not take into account any circumstances or events occurring after the date it was prepared. The Company can give no assurance that, had the unaudited prospective financial information been prepared as of the date of this proxy statement, similar estimates and assumptions would be used. The Company does not intend to, and disclaims any obligation to, make publicly available any update or other revision to the unaudited prospective financial information to reflect circumstances existing since its preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the assumptions underlying the unaudited prospective financial information are shown to be in error, or to reflect changes in general economic or industry conditions. The unaudited prospective financial information does not take into account the possible financial and other effects on the Company of the merger and does not attempt to predict or suggest future results of the combined company. The unaudited prospective financial information does not give effect to the merger, including the impact of negotiating or executing the merger agreement, the
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expenses that may be incurred in connection with consummating the merger or the potential synergies that may be achieved by the combined company as a result of the merger. Further, the unaudited prospective financial information does not take into account the effect on the Company of any possible failure of the merger to occur. None of the Company, Goldman Sachs, Morgan Stanley or their respective affiliates, officers, directors, advisors or other representatives has made, makes or is authorized in the future to make any representation to any Company stockholder or other person regarding the Company's ultimate performance compared to the information contained in the unaudited prospective financial information or that the forecasted results will be achieved. The summary of the unaudited prospective financial information included below is being provided solely because it was made available to our Board, Reckitt Benckiser, Goldman Sachs and Morgan Stanley, the financial advisors to the Company, and approved by our Board, and not to influence your decision as to whether to vote for the proposal to adopt the merger agreement or take any action in connection with the merger or your ownership of shares.
The following table summarizes selected unaudited prospective financial information prepared by our management for the fiscal years ending December 31, 2017 through December 31, 2021, which was provided to our Board, Reckitt Benckiser, Goldman Sachs and Morgan Stanley.
(for the year ended December 31 of each year, dollars in millions other than per share amounts): 2017 2018 2019 2020 2021 Net Sales $ 3,756 3,942 4,184 4,475 4,745 Gross Profit $ 2,393 2,481 2,632 2,810 2,979 Less: Adjusted Operating Expenses(1) (1,502 ) (1,501 ) (1,547 ) (1,627 ) (1,707 ) Adjusted EBIT(2) $ 892 980 1,085 1,183 1,272 Adjusted EBITDA(3) 996 1,081 1,193 1,297 1,392 Adjusted EPS (Incl. One Time Tax Benefit)(4) $ 3.35 3.58 4.02 4.43 4.80 Adjusted EPS (Excl. One Time Tax Benefit)(5) $ 3.20 3.58 4.02 4.43 4.80 532 - 738 - Unlevered Free Cash Flow(6)(7)(8) $ 546 743 798 825 890
(1) Adjusted Operating Expenses represents operating expenses adjusted in 2017 to exclude an estimated $25 million of charges related to Fuel for Growth and Real Estate Consolidation. See "Non-GAAP Financial Measures" below for additional information on these charges. The most comparable GAAP measure is Operating Expenses.
(2) Adjusted EBIT represents earnings before net interest expenses and income taxes adjusted in 2017 to exclude an estimated $25 million of charges related to Fuel for Growth and Real Estate Consolidation. See "Non-GAAP Financial Measures" below for additional information on these charges. The most comparable GAAP measure is Earnings before Interest and Income Taxes.
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(3) Adjusted EBITDA represents earnings before net interest expenses, income taxes, depreciation and amortization adjusted in 2017 for an estimated $25 million of charges related to Fuel for Growth and Real Estate Consolidation. See "Non-GAAP Financial Measures" below for additional information on these charges. The most comparable GAAP measure is Earnings before Interest and Income Taxes.
(4) Adjusted EPS (Incl. One Time Tax Benefit) represents net earnings attributable to shareholders reduced by dividends and undistributed earnings attributable to unvested shares divided by the weighted average shares outstanding adjusted for the effect of dilutive stock options and performance share awards. In 2017, expected GAAP EPS has been adjusted to exclude an estimated $0.09 of charges related to Fuel for Growth and Real Estate Consolidation. See "Non-GAAP Financial Measures" below for additional information on these charges. 2017 also includes a potential one time tax benefit estimated to be $0.15. The most comparable GAAP measure is diluted earnings per share. Adjusted EPS (Incl. One Time Tax Benefit) includes a $0.20 per share negative currency impact.
(5) Adjusted EPS (Excl. One Time Tax Benefit) represents net earnings attributable to shareholders reduced by dividends and undistributed earnings attributable to unvested shares divided by the weighted average shares outstanding adjusted for the effect of dilutive stock options and performance share awards. 2017 expected GAAP EPS has been adjusted to exclude an estimated $0.09 of charges related to Fuel for Growth and Real Estate Consolidation. See "Non-GAAP Financial Measures" below for additional information on these charges. 2017 excludes a potential one time tax benefit estimated to be $0.15. The most comparable GAAP measure is diluted earnings per share. Adjusted EPS (Excl. One Time Tax Benefit) includes a $0.20 per share negative currency impact.
(6) Unlevered Free Cash Flow represents Earnings before Interest and Income Taxes less unlevered income tax expense, plus depreciation and amortization, less capital expenditures, and changes in net working capital accounts (in each case based on income statement, balance sheet and cash flow data provided by the Company as part of the Long Range Plan). The most comparable GAAP measure is Earnings before Interest and Income Taxes. Goldman Sachs used the internal projections provided by the Company to calculate the following estimates of Unlevered Free Cash Flow that were approved by the Company for use by Goldman Sachs in its analyses: $546 million for 2017, $743 million for 2018, $798 million for 2019, $825 million for 2020 and $890 million for 2021. Morgan Stanley used the internal projections provided by the Company to calculate the following estimates of Unlevered Free Cash Flow that were approved by the Company for use by Morgan Stanley in its analyses: $532 million for
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2017, $738 million for 2018, $798 million for 2019, $825 million for 2020 and $890 million for 2021. The difference between the Unlevered Free Cash Flow estimates calculated by Goldman Sachs and the Unlevered Free Cash Flow estimates calculated by Morgan Stanley is attributable to differences in their calculation of changes in net working capital. Goldman Sachs, with the approval of the Company, used the Company's internal projections for accounts receivable, inventory, other current operating assets, accounts payable and other current operating liabilities to calculate changes in net working capital, while Morgan Stanley, with the approval of the Company, used the Company's internal projections for accounts receivable, inventory and accounts payable to calculate changes in net working capital.
(7) The preliminary update to the June 2016 Projections differed from the Long-Range Plan in three primary respects. First, the preliminary update to the June 2016 Projections did not include figures for 2021. Second, the Long-Range Plan included a figure for Adjusted EPS (Inc. One Time Tax Benefit) in 2017 that was 4.69% higher than such figure in the preliminary update to the June 2016 Projections, as well as certain variances that resulted in such increase. This difference was as a result of the preliminary update to the June 2016 Projections not including a $0.15 per share positive impact due to the potential one time tax benefit described in footnotes (4) and (5) above. Third, the Long-Range Plan included a figure for Adjusted EPS (Inc. One Time Tax Benefit) in 2020 that was 1.56% lower than the figure included in the preliminary update to the June 2016 Projections, as well as certain variances that resulted in such decrease. This difference was as a result of the preliminary update to the June 2016 Projections including a lower assumption with respect to operating expenses in 2020 than was included in the Long-Range Plan.
(8) The Long-Range Plan differs from the June 2016 Projections in certain material respects. The primary differences were driven by, among other things, updates to the June 2016 Projections to reflect a decrease in 2016 actual performance versus budgeted performance, a downward revision to the Company's projected financial performance for 2017 and anticipated costs in connection with the launch of new products and anticipated changes in the business model in certain geographies. As a result of these developments, the Adjusted EPS (Inc. One Time Tax Benefit) figures for 2017, 2018 and 2021 that are set forth in the Long Range Plan were 14.84%, 17.51% and 11.02% lower, respectively, than the Adjusted EPS (Inc. One Time Tax Benefit) figures set forth in the June 2016 Projections, with associated decreases in other line items that form a part of Adjusted EPS (Inc. One Time Tax Benefit).
Material Omissions Concerning Goldman Sachs’ and Morgan Stanley’s Financial Analyses
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68. The Proxy describes Goldman Sachs’ and Morgan Stanley’s fairness opinions and the various valuation analyses performed in support of their opinions. However, the descriptions of Goldman Sachs’ and Morgan Stanley’s fairness opinions and analyses fails to include key inputs and assumptions underlying these analyses. Without this information, as described below,
Mead Johnson’s public stockholders are unable to fully understand these analyses and, thus, are unable to determine what weight, if any, to place on Goldman Sachs’ and Morgan Stanley’s fairness opinions in determining whether to vote in favor of the Proposed Transaction or seek appraisal. This omitted information, if disclosed, would significantly alter the total mix of information available to Mead Johnson’s stockholders.
69. For example, Goldman Sachs performed an Illustrative Present Value of Future
Share Price Analysis designed to provide an indication of the present value of a theoretical future value of the Company’s equity as a function of the Company’s estimated future earnings, projected dividends and assumed price to future earnings per share multiple. The
Proxy fails, however, to disclose the Company’s projected dividends used in the analysis.
70. With respect to Goldman Sachs’ Illustrative Discounted Cash Flow Analysis, the Proxy fails to disclose (a) the individual inputs utilized by Goldman Sachs to derive the discount rate range of 7.75% to 8.25%, (b) the implied terminal pricing multiples corresponding to the assumed perpetuity growth rates, (c) whether Goldman Sachs treated stock-based compensation as a cash expense in its analysis, and (d) quantification of the
Company’s stock-based compensation, if Goldman Sachs treated stock-based compensation as a cash expense.
71. The omission of this information renders the following statements in the Proxy false and/or materially misleading in contravention of the Exchange Act:
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(a) From page 52 of the Proxy:
Illustrative Present Value of Future Share Price Analysis. Goldman Sachs performed an illustrative analysis of the implied present value of the future value per share of our common stock (including the present value of projected dividends), which is designed to provide an indication of the present value of a theoretical future value of a company's equity as a function of such company's estimated future earnings, projected dividends and assumed price to future earnings per share multiple. For this analysis, Goldman Sachs used the Forecasts for each of the fiscal years 2018 to 2021. Goldman Sachs first calculated the implied future values per share of our common stock as of the end of each of the fiscal years 2017 to 2020 by applying price to forward earnings per share multiples of 20.0x to 22.0x earnings per share of our common stock estimates for each of the fiscal years 2018 to 2021, which multiples were selected based upon Goldman Sachs' professional judgment and experience, and then discounted these future values per share and projected dividends to determine the implied present values as of February 1, 2017, using an illustrative discount rate of 8.8%, reflecting Goldman Sachs' estimate of the Company's cost of equity. This analysis resulted in a range of implied present values of $67.50 to $82.00 per share of our common stock (rounded to the nearest $0.25).
Illustrative Discounted Cash Flow Analysis. Using the Forecasts, Goldman Sachs performed an illustrative discounted cash flow analysis on the Company. Using discount rates ranging from 7.75% to 8.25%, reflecting estimates of the Company's weighted average cost of capital, Goldman Sachs discounted to present value as of December 31, 2016, (i) estimates of unlevered free cash flow, for the years 2017 through 2021, as reflected in the Forecasts and (ii) a range of illustrative terminal values for the Company, which were calculated by applying perpetuity growth rates ranging from 2.75% to 3.25%, to a terminal year estimate of the unlevered free cash flow to be generated by the Company, as reflected in the Forecasts. The calculation of unlevered fresh cash flows, as used by Goldman Sachs in its analysis, is described in the section entitled "—Unaudited Prospective Financial Information" beginning on page 43.
Goldman Sachs derived ranges of illustrative enterprise values for the Company by adding the ranges of present values it derived above. Goldman Sachs then subtracted from this range of illustrative enterprise values the $1.23 billion of net debt and non-controlling interest of the Company as of December 31, 2016, as provided by our management, to derive a range of illustrative equity values for the Company. Goldman Sachs then divided the range of illustrative equity values it derived by the number of fully diluted shares of our common stock, as provided by the our management to derive a range of illustrative present values per share ranging from $75.50 to $92.50 (rounded to the nearest $0.25).
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72. The Proxy similarly fails to disclose various material elements of the financial analysis performed by Morgan Stanley. For example, Morgan Stanley performed a Discounted
Equity Value Analysis by calculating a theoretical future value range of implied share prices for the Company as of January 1, 2019, and subsequently discounting such theoretical future value range including expected dividends to be received between January 1, 2017 and
January 1, 2019, to arrive at an illustrative present value range of implied share prices for the
Company as of January 1, 2017. The Proxy fails, however, to disclose the Company’s projected dividends used in the analysis.
73. Additionally, with respect to Morgan Stanley’s Discounted Cash Flow Analysis, the Proxy sets forth that for purposes of Morgan Stanley’s calculation of the future cash flows of the Company it treated stock-based compensation as a cash expense. The Proxy fails, however, to quantify the stock-based compensation figures used in the analysis. The Proxy also fails to disclose (a) the individual inputs utilized by Morgan Stanley to derive the discount rate range of 6.2% to 7.8%, (b) the implied perpetuity growth rates corresponding to the assumed terminal pricing multiples, and (c) an explanation for the use of forward pricing multiples to calculate terminal value given that the projections extend only to 2021, as well as the 2022 figure, or the assumptions used by Morgan Stanley to derive the 2022 EBITDA.
74. The omission of this information renders the following statements in the Proxy false and/or materially misleading in contravention of the Exchange Act:
(a) From pages 60-62 of the Proxy:
Discounted Equity Value Analysis
In connection with the delivery of Morgan Stanley's fairness opinion, Morgan Stanley also performed a discounted equity value analysis, which is designed to provide insight into a theoretical estimate of future implied value of a
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company's common equity as a function of such company's estimated future earnings and a theoretical range of trading multiples. The resulting estimated future implied value is subsequently discounted back to the present day at the company's cost of equity in order to arrive at an illustrative estimate of the present value for the company's theoretical future implied stock price.
For this analysis, Morgan Stanley calculated a theoretical future value range of implied share prices for the Company as of January 1, 2019, and subsequently discounted such theoretical future value range including expected dividends to be received between January 1, 2017 and January 1, 2019, as reflected in the Forecasts, to arrive at an illustrative present value range of implied share prices for the Company as of January 1, 2017. To calculate the theoretical future implied aggregate value range, Morgan Stanley applied the Company's next twelve month ("NTM") EBITDA multiple to the NTM EBITDA for the 2019 calendar year (which we refer to as the "NTM 2019 EBITDA Multiple"). Morgan Stanley then adjusted the theoretical future implied aggregate value range by the Company's total debt, non-controlling interest and cash and cash equivalents based on the estimated consolidated balance sheet of the Company as of December 31, 2018, while capitalized lease obligations for future periods were assumed to equal capitalized lease obligations as of December 31, 2016, in each case, as reflected in the Forecasts. Morgan Stanley also reviewed the P/E ratio for the 2019 calendar year (which we refer to as the "NTM 2019 EPS Ratio") for the Company, and upon the application of its professional judgment and experience, Morgan Stanley then applied a selected range of earnings multiples to the estimates of earnings for calendar year 2019. To calculate the present value range as of January 1, 2017, Morgan Stanley applied a cost of equity of 7.8%, which was selected based on Morgan Stanley's professional judgment.
Based on the foregoing analysis, Morgan Stanley derived the following range of implied equity values, per Company share as of January 1, 2017, based on estimated future cash flows contained in the Forecasts and Consensus Case, in each case as compared to the $90.00 per share merger consideration:
Reference Implied Per Forecast Scenario Multiple/Ratio Range Share Value Forecasts NTM 2019 EBITDA Multiple 12.0x - 15.0x $66.53 - 83.11 Forecasts NTM 2019 EPS Ratio 18.0x - 22.0x $65.38 - 79.22 Consensus Case NTM 2019 EBITDA Multiple 12.0x - 15.0x $56.88 - 71.66 Consensus Case NTM 2019 EPS Ratio 18.0x - 22.0x $59.23 - 71.69
Morgan Stanley observed that the discounted equity analysis was an illustrative analysis only and not a prediction of future trading.
Discounted Cash Flow Analysis
Morgan Stanley conducted a discounted cash flow analysis for the purpose of determining an implied equity value per share for our common stock. A discounted cash flow analysis is a method of evaluating an asset using estimates
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of the future unlevered free cash flows generated by the asset and taking into consideration the time value of money with respect to those future cash flows by calculating their present value. The "unlevered free cash flows" or "free cash flows" refer to a calculation of the future cash flows of an asset without including, in such calculation, any debt servicing costs. For purposes of the foregoing calculation, stock-based compensation is treated as a cash expense.
Morgan Stanley performed a discounted cash flow analysis of the Company using information contained in the Forecasts and Consensus Case, as appropriate, and public filings to calculate ranges of the implied value of the Company, assuming the merger closes on January 1, 2017.
Morgan Stanley calculated a range of implied values per the Company share based on the estimated future cash flows contained in the Forecasts and Consensus Case, as appropriate, during the calendar years 2017 through 2021. Using the definition of unlevered free cash flows set forth above, Morgan Stanley then calculated terminal values based on a terminal exit multiple of NTM EBITDA ranging from 12.0x to 15.0x. These values were then discounted to present values, as of January 1, 2017, assuming a range of discount rates of 6.2% to 7.8%, which was selected based on Morgan Stanley's professional judgment and by taking into consideration, among other things, a weighted average cost of capital calculation and the Company's assumed cost of equity calculated using a capital asset pricing model. The calculation of unlevered free cash flow, as used by Morgan Stanley in its analysis, is described in the section entitled "— Unaudited Prospective Financial Information" beginning on page 43.
In order to calculate an implied per share equity value reference range for our common stock, Morgan Stanley then adjusted the total implied aggregate value ranges by the Company's total debt, non-controlling interest and cash and cash equivalents based on the consolidated balance sheet of the Company and divided the resulting implied total equity value ranges by the Company's fully diluted shares outstanding (calculated using the treasury stock method), all as provided by our management.
Based on the foregoing analysis, Morgan Stanley derived the following range of implied equity values per our common stock as of January 1, 2017, in each case as compared to the $90.00 per share merger consideration:
Forecast Scenario Implied Per Share Value $76.07 - 99.47 Forecasts $60.72 - 79.44 Consensus Case
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75. Without such undisclosed information, Mead Johnson’s stockholders cannot
evaluate for themselves whether the financial analyses performed by Goldman Sachs and
Morgan Stanley were based on reliable inputs and assumptions or whether they were prepared
with an eye toward ensuring that a positive fairness opinion could be rendered in connection
with the Proposed Transaction. In other words, full disclosure of the omissions identified
above is required in order to ensure that stockholders can fully evaluate the extent to which
Goldman Sachs’ and Morgan Stanley’s opinions and analyses should factor into their decision
whether to vote in favor of or against the Proposed Transaction or seek appraisal.
Material Omissions Concerning the Process Leading to the Proposed Transaction
76. The Proxy also fails to disclose material information relating to the process
leading to the Proposed Transaction. The Proxy sets forth that effective as of the completion of
the merger, the Company’s current Board will be replaced by the board of directors of Merger
Sub, and its executive officers at the effective time of the merger will be the executive officers of
the surviving corporation, but fails to disclose the timing and nature of all communications
between members of Company management with Reckitt Benckiser related to their entry into
employment agreements with Reckitt Benckiser effective as of the closing of the merger,
including who participated in all such communications.
77. Communications regarding post-transaction employment during the negotiation of the underlying transaction must be disclosed to stockholders. This information is necessary for stockholders to understand potential conflicts of interest of management and the Board, as that information provides illumination concerning motivations that would prevent fiduciaries from acting solely in the best interests of the Company’s stockholders.
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78. The Proxy also fails to disclose whether the Company entered into any
confidentiality agreements with any interested parties other than Reckitt Benckiser and, if so, the
terms of those confidentiality agreements. Based on the language in the Merger Agreement, it
appears the Company may have entered into confidentiality agreements with other interested
parties. Specifically, Section 6.03(a) of the Merger Agreement provides that the Company shall
not “amend or grant any waiver or release under or fail to enforce any standstill or similar
agreement with respect to any class of equity securities of the Company or any of its
Subsidiaries. . . .”
79. The Proxy further fails to disclose the reasons Mead Johnson retained a second
banker, including whether the decision was due to any perceived conflicts of interest.
80. The omission of this information renders the following statements in the Proxy
false and/or materially misleading in contravention of the Exchange Act:
(a) From page 66 of the Proxy:
Effective as of the completion of the merger, our current Board will be replaced by the board of directors of Merger Sub, and our executive officers at the effective time of the merger will be the executive officers of the surviving corporation.
(b) From page 30 of the Proxy:
Throughout 2016 Goldman Sachs continued to provide financial advisory services to us in connection with various potential strategic alternatives. The Company selected Goldman Sachs, and later engaged it specifically in respect of a potential transaction with Reckitt Benckiser, because of its qualifications, expertise, reputation and knowledge of our business and affairs, and because Goldman Sachs was experienced and knowledgeable about our industry, strategic positioning, future prospects, and potential strategic partners.
* * *
On September 30, 2016, we entered into an engagement letter with Morgan Stanley to serve as a co-advisor to us in connection with its evaluation of potential strategic alternatives. The Company selected Morgan Stanley because of its
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qualifications, expertise, reputation and knowledge of our business and affairs, and because Morgan Stanley was experienced and knowledgeable about our industry, strategic positioning, future prospects, and potential strategic partners.
81. Defendants’ failure to provide Mead Johnson stockholders with the foregoing
material information renders the statements in the “Background of the Merger” and “Interests of
Directors and Executive Officers in the Merger” sections of the Proxy false and/or materially
misleading and constitutes a violation of Sections 14(a) and 20(a) of the Exchange Act, and SEC
Rule 14a-9 promulgated thereunder. The Individual Defendants were aware of their duty to
disclose this information and acted negligently (if not deliberately) in failing to include this
information in the Proxy. Absent disclosure of the foregoing material information prior to the
stockholder vote on the Proposed Transaction, Plaintiff and the other members of the Class will
be unable to make a fully-informed decision whether to vote in favor of the Proposed
Transaction or seek appraisal and are thus threatened with irreparable harm warranting the
injunctive relief sought herein.
CLAIMS FOR RELIEF
COUNT I
Class Claims Against All Defendants for Violations of Section 14(a) of the Exchange Act And SEC Rule 14a-9 Promulgated Thereunder
82. Plaintiff repeats all previous allegations as if set forth in full.
83. SEC Rule 14a-9, 17 C.F.R. §240.14a-9, promulgated pursuant to Section 14(a) of the Exchange Act, provides:
No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier
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communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.
84. During the relevant period, defendants disseminated the false and misleading
Proxy specified above, which failed to disclose material facts necessary in order to make the
statements made, in light of the circumstances under which they were made, not misleading in
violation of Section 14(a) of the Exchange Act and SEC Rule 14a-9 promulgated thereunder.
85. By virtue of their positions within the Company, the defendants were aware of
this information and of their duty to disclose this information in the Proxy. The Proxy was prepared, reviewed, and/or disseminated by the defendants. The Proxy misrepresented and/or omitted material facts, including material information about the unfair sale process for the
Company, the financial analyses performed by the Company’s financial advisors, and the actual intrinsic standalone value of the Company. The defendants were at least negligent in filing the
Proxy with these materially false and misleading statements.
86. The omissions and false and misleading statements in the Proxy are material in that a reasonable stockholder would consider them important in deciding how to vote on the
Proposed Transaction. In addition, a reasonable investor would view a full and accurate disclosure as significantly altering the “total mix” of information made available in the Proxy and in other information reasonably available to stockholders.
87. By reason of the foregoing, the defendants have violated Section 14(a) of the
Exchange Act and SEC Rule 14a-9(a) promulgated thereunder.
88. Because of the false and misleading statements in the Proxy, Plaintiff and the
Class are threatened with irreparable harm, rendering money damages inadequate. Therefore, injunctive relief is appropriate to ensure defendants’ misconduct is corrected.
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COUNT II
Class Claims Against the Individual Defendants for Violation of Section 20(a) of the Exchange Act
89. Plaintiff repeats all previous allegations as if set forth in full.
90. The Individual Defendants acted as controlling persons of Mead Johnson within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their positions as officers or directors of Mead Johnson and participation in or awareness of the Company’s operations or intimate knowledge of the false statements contained in the Proxy filed with the
SEC, they had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which Plaintiff contends are false and misleading.
91. Each of the Individual Defendants was provided with or had unlimited access to
copies of the Proxy and other statements alleged by Plaintiff to be misleading prior to or shortly
after these statements were issued and had the ability to prevent the issuance of the statements or
cause the statements to be corrected.
92. In particular, each of the Individual Defendants had direct and supervisory
involvement in the day-to-day operations of the Company, and, therefore, is presumed to have
had the power to control or influence the particular transactions giving rise to the securities
violations as alleged herein, and exercised the same. The Proxy at issue contains the unanimous
recommendation of each of the Individual Defendants to approve the Proposed Transaction.
They were, thus, directly involved in the making of this document.
93. In addition, as the Proxy sets forth at length, and as described herein, the
Individual Defendants were each involved in negotiating, reviewing, and approving the Proposed
Transaction. The Proxy purports to describe the various issues and information that they
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reviewed and considered — descriptions which had input from the Individual Defendants.
94. By virtue of the foregoing, the Individual Defendants have violated Section 20(a) of the Exchange Act.
95. Plaintiff and the Class have no adequate remedy at law. Only through the exercise of this Court’s equitable powers can Plaintiff and the Class be fully protected from the immediate and irreparable injury that Defendants’ actions threaten to inflict.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff demands judgment and preliminary and permanent relief,
including injunctive relief, in his favor on behalf of Mead Johnson, and against defendants, as
follows:
A. Ordering that this action may be maintained as a class action and certifying
Plaintiff as the Class representative and Plaintiff’s counsel as Class counsel;
B. Preliminarily and permanently enjoining defendants and all persons acting in
concert with them from proceeding with, consummating, or closing the Proposed Transaction
and any vote on the Proposed Transaction, unless and until defendants disclose and disseminate
the material information identified above to Mead Johnson stockholders;
C. In the event defendants consummate the Proposed Transaction, rescinding it and setting it aside or awarding rescissory damages to Plaintiff and the Class;
D. Awarding Plaintiff the costs of this action, including reasonable allowance for
Plaintiff’s attorneys’ and experts’ fees; and
E. Granting such other and further relief as this Court may deem just and proper.
JURY DEMAND
Plaintiff demands a trial by jury on all claims and issues so triable.
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Dated: March 27, 2017 RIGRODSKY & LONG, P.A.
/s/ Brian D. Long Seth D. Rigrodsky (#3147) Brian D. Long (#4347) Gina M. Serra (#5387) 2 Righter Parkway, Suite 120 Wilmington, DE 19803 Tel.: (302) 295-5310 Facsimile: (302) 654-7530 Email: [email protected] Email: [email protected] Email: [email protected] OF COUNSEL: Attorneys for Plaintiff WEISSLAW LLP Richard A. Acocelli Michael A. Rogovin Kelly C. Keenan 1500 Broadway, 16th Floor New York, New York 10036 Tel: (212) 682-3025 Fax: (212) 682-3010
33