Teva's secret weapon: Poison pill against hostile takeover

Teva Chairman Eli Hurvitz has been on sick leave for three weeks now, but the nature of his illness and his anticipated return date are still not clear.

Teva did not respond to a report on journalist Yoav Yitzhak's News1 ("Mahlaka Rishona") Web site that stated Hurvitz's health problems are incurable and as a result he will be stepping down. The Web site suggested that American investors in Teva are seeking to control the company, appoint Teva's vice chairman Phillip Frost as chairman and move the corporate headquarters to the United States.

In mid-February, Teva appointed board member Moshe Many, 81, to be acting chairman until Hurvitz returns. If Hurvitz, 77, takes too long to return, the board of directors may have to appoint a new chairman at its next meeting.

Even if Teva expects Hurvitz to return within a matter of days or weeks, the current circumstances raise the question of who will succeed him, and the matter should concern the company's shareholders and directors.

The battle for control, with the ultimate goal of moving the corporate headquarters to the United States, may be the opening shot in Frost's candidacy as chairman. Frost, 73, is the board member with most experience in the pharmaceutical industry and the only member who approaches Hurvitz's stature, in addition to being the largest private Teva shareholder. He received his 1.6% stake in the company when Teva acquired control of IVAX Corporation in 2006.

However, if he and others were to attempt to put together a group to take control of Teva, they would face substantial regulatory hurdles. Teva's corporate charter includes poison pill provisions to guard against a hostile takeover and the relocation of the company outside of Israel. The poison pill was created while Hurvitz was Teva's CEO. Hurvitz elevated the hostile takeover to an art form in the 1960s and 1970s, but has refrained from hostile acquisitions for the last two decades.

Beyond the administrative questions involved, anyone who wants to acquire control of the company will have to convince shareholders that he can outperform the current management, which has brought the company's share price to an all-time high and the market cap to $55 billion. The company's performance will matter when it comes to recruiting support from major foreign investors such as Capital Research, which has almost 5% of Teva.

Section 3 of Teva's charter states that its administrative headquarters are in Israel unless 75% of participating board members vote to move it. Teva's board has 17 members, including two outside directors. Thirteen are Israeli, and some of the foreign directors are Hurvitz's friends. Such a board does not seem particularly likely to vote to relocate the jewel in the crown of Israeli industry.

Section 59 of the Teva charter requires that a majority of the company's board be Israeli residents, unless the corporate headquarters is outside the country. Teva's CEO, pursuant to Section 84(c), must be a resident of Israel during his entire tenure. And the company's management committee meetings, pursuant to Section 75 of the charter, must take place in Israel.

More importantly for anyone potentially seeking control of the company are the mechanisms at Teva to counter such an effort, namely, staggered board appointments - every three years, five directors are appointed. This means a potential suitor cannot replace the entire board immediately, and substantially eliminates the goal of taking control.

It is also important to note that Teva's CFO for the past 25 years, Dan Suesskind, was appointed to the board on January 5, apparently around the time when Hurvitz was undergoing medical treatment. This appears to have been a clear effort to assert control, and it came just two months after the appointment of five directors to three-year terms. In addition, the fact that Hurvitz and the managers and directors, other than Frost, hold 2.4% of the company's shares could make a takeover and transfer of headquarters abroad more difficult.