Idenix Pharmaceuticals (IDIX)

[DewDiligence]

Protection from Hostile Takeover by Novartis

NVS currently owns 56% of the shares of IDIX and is entitled to name two of the nine directors on IDIX’s BoD.

However, until 5/8/08, NVS is barred from seeking to acquire IDIX by increasing its equity in IDIX to more than the existing 56% stake.

From page 12 of IDIX’s 2006 10K report (http://tinyurl.com/2uvynn ):

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“…we have required that, with certain limited exceptions, Novartis and its affiliates not acquire additional shares of our voting stock unless a majority of our independent directors approves or requests the acquisition. These restrictions will terminate on May 8, 2008…”
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Note the word independent in the above excerpt; this means that NVS’ two directors on IDIX’s nine-member BoD do not get to vote on this matter. Hence, until 5/8/08, at least four of the seven non-NVS directors would have to agree to the terms of a NVS takeover for the takeover attempt to be lawful.

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After 5/8/08, IDIX shareholders will continue to have some protection from a hostile NVS takeover under Delaware corporate statutes. Delaware law imposes restrictions on hostile takeovers in two ways: 1) In a deal requiring a shareholder vote, the suitor’s own votes do not count; and 2) In a tender offer, any investor who does not tender his shares retains the right to ask the Chancery Court to set a cash value for the non-tendered shares.

Given the above, why does the NVS-IDIX standstill agreement (until 5/8/08) matter? It matters because it provides a fast and easy way for IDIX to stop a hostile takeover by filing a complaint based on a simple breech of contract.