Thursday, March 25, 2010

Board member resignation at Biomarin raises questions, among them a possible buyout (BMRN)

(first reported at

Biomarin (BMRN) released some back-and-forth between the company and resigning board member Joseph Klein.

In his resignation letter, Klein claims his efforts were unappreciated, especially in regards to internal audit investigations and dealings with management.

The market is sending shares higher today on buyout speculation, but what caught my interest was the disagreements over depreciation timetables.

There exists disagreement between the Board and me on my view of a number of issues as I learned from colleagues on the board. The following are some examples:

Disagreement over How and When I ask questions as Chairman of the Audit Committee. Specific examples cited were (a) question on revenue recognition of a shipment to a Japanese distributor was asked in the presence of the external auditor and the entire finance team; and (b) question on extension of lives for fixed asset depreciation was asked in the presence of the external auditor and the entire finance team. These questions were viewed as “inappropriate” and “micromanaging the audit committee process.

The company reports Depreciation of about $5.8million per quarter.  If this had to be increased, then it would reduce GAAP earnings per share.  Earnings for this quarter are expected to be zero, and next quarter the estimate is one cent.  Any boost to Depreciation would put both of these estimates into the red, which (to a cynic!) could be reason enough for a management to keep Depreciation inappropriately low...

Judging from this letter, Klein is looking out for shareholders by keeping management accountable (keeping separate the chairman and CEO positions), as well as watching out for inappropriate poison pills (anti-takeover measures).

Disagreement over How to Conduct an Ongoing Investigation of a Serious Matter. While I still do not believe there has been any wrongdoing by the company and an investigation of an alleged violation is ongoing, there were some disagreements about how to conduct an independent investigation and, in my opinion, management has influenced both the direction and conduct of the investigation. My suggestions about the investigation process were viewed as “micromanaging the audit committee process.”

Disagreement over How to Modify the Company’s Poison Pill. When asked, I was in favor of removing the poison pill, but then compromised my position by suggesting we establish an automatic sunset provision, which would force regular evaluation of the Poison Pill to determine if it was in the best interest of the shareholders.

Disagreement with the CEO on How and When the CEO should present to our entire Board a serious, reasonable offer by a third party to acquire the company. I continue to believe that the CEO should present any serious offer that he has received to acquire the company to the full Board so that the full Board can determine what is in the best interests of our shareholders. In my opinion, these discussions should be by the entire Board in a duly-noticed board meeting, and not in selective one-on-one telephone conversations or emails.

Disagreement with the CEO over his Desire to Combine the Chairman and CEO Roles. I continue to believe that BioMarin’s existing practice of having a Chairman that is separate from the CEO represents best practice in corporate governance and is in the best interest of our shareholders.

Below are a few portions of the company's response:

Disagreement Regarding How and When Mr. Klein Asked Questions as Chairman of the Audit Committee
While members of the Board have raised the issue of the appropriateness of the manner and timing of certain questions previously asked by Mr. Klein, these comments were made solely in the context of Mr. Klein raising these issues and asking these questions when the directors were in meetings where junior personnel of the Company were in attendance. The Board requested that Mr. Klein refrain from asking questions or raising sensitive issues at these meetings and that he instead raise them first in meetings with senior management or other directors or in executive session with the independent auditors. None of the other Board members took issue with the substance of the questions, but rather the appropriateness of asking such questions in the presence of certain junior personnel. The other directors believe that these were legitimate requests to make and that Mr. Klein, as the Chairman of the Audit Committee, should understand that he should follow the proper procedure and channels for discussing issues among the Board. On several occasions, dating back months before March 2010, Mr. Klein acknowledged that some of his comments and questions were made in an inappropriate context and that he should be mindful of the problems that such behavior could cause. However, in connection with deliberating on Mr. Klein’s nomination, the Board found at the March 15, 2010 meeting that this conduct had not been remedied appropriately over the past year and was continuing to interfere with constructive Board meetings.
Disagreement Regarding How to Conduct an Ongoing Investigation Regarding a Serious Matter
The Company disagrees with Mr. Klein’s characterization of the ongoing preliminary investigation of a matter by the Audit Committee. The Audit Committee believes it has fulfilled and is continuing to fulfill all of its obligations in handling this preliminary investigation and has taken its responsibilities regarding the potential matter seriously. Although the preliminary investigation is ongoing, the Audit Committee has not to date developed any evidence that a violation of law has occurred. In the course of an investigation not related to the matter referenced in the Resignation Letter, the Company discovered an email that contained a statement that the Audit Committee believed required serious inquiry to determine the meaning of such statement as it related to the fact that a third party agent of the Company may have engaged in potential misconduct. In seeking to understand the nature of the


context in which any allegation of potential misconduct may have occurred, the Audit Committee (with the participation and affirmative vote of Mr. Klein) determined to first conduct a preliminary investigation with the supervision of outside counsel to evaluate whether the circumstances surrounding the email warranted a full investigation. Mr. Klein participated in every significant decision about the conduct of the preliminary investigation and noted his agreement with each of these decisions. The Audit Committee and the Board are still evaluating the information and have not yet made a determination as to whether or not to initiate a full investigation into the matter. The Company is taking the matter seriously and believes that the current direction and conduct of the preliminary investigation is appropriate based on the information available at this time. Moreover, the Board disputes Mr. Klein’s premature characterization of the work to date of the Audit Committee as a full and formal investigation or that a serious matter to be investigated has occurred.
Disagreement Regarding How to Modify the Company’s Poison Pill
The Board disputes Mr. Klein’s characterization that a discussion among Board members regarding whether a stockholder rights plan should be adopted and if so, what provisions should be contained in the plan, constitutes a disagreement with the Board that forms the basis of his resignation. The Board believes that discussions prior to adoption as to different provisions to be contained in a stockholder rights plan is common among directors. The existing stockholder rights plan was approved in February 2009 by the Board by a vote of 7-0. Mr. Klein attended a prior meeting where the plan was discussed, but, although he received appropriate notice of the meeting, was unable to attend the meeting when the plan was approved due to a scheduling conflict. Moreover, the Board cannot reconcile how the changes to the Company’s stockholder rights plan could be deemed to be a disagreement that ultimately caused Mr. Klein to resign since the Board made the decision in February 2009 and Mr. Klein continued to serve as a director for over a year following the adoption of the Company’s existing stockholder rights plan.
Disagreement with the CEO Regarding How and When the CEO Should Present Reasonable Offers by a Third Party to Acquire the Company
The Company disputes Mr. Klein’s assertion that Mr. Bienaimé, the Company’s Chief Executive Officer, received a bona fide offer from a third party and failed to share this offer with the Board for consideration. The Company has never received any such offer while Mr. Bienaimé has been Chief Executive Officer and the Company has not engaged in a sale process or the evaluation of similar strategic alternatives as the Board believes that the best course of action to maximize long-term stockholder value is to execute on the Company’s long-term business plan as an independent entity. The Board and management of the Company well understand and acknowledge their obligations under Delaware law regarding third party offers.
Disagreement with the CEO over his Desire to Combine the Chairman and CEO Roles
The Company disputes Mr. Klein’s characterization of the issue of whether to combine the Chairman of the Board and Chief Executive Officer roles as a disagreement with the Chief Executive Officer or the Board. As part of its regular review of the roles and positions held by the directors of the Company, including the position of Chairman of the Board, memberships on the committees of the Board, and the scope of responsibility for the Chief Executive Officer, the Corporate Governance and Nominating Committee (including Mr. Klein) has discussed whether the Chief Executive Officer can also hold the position of Chairman of the Board. The members of the Corporate Governance and Nominating Committee have to date unanimously determined that the current Board governance structure separating the Chairman of the Board and Chief Executive Officer roles continues to be appropriate at this time. The matter was never raised to the full Board and the Chief Executive Officer was not involved in the discussion at any Corporate Governance and Nominating Committee meeting. The Board does not believe that its position is contrary to Mr. Klein’s view that the offices of Chief Executive Officer and Chairman of the Board should be held by different persons, so the Board is unable to reconcile how Mr. Klein’s view forms a valid basis for his resignation.

Copyright 2010 AlphaNinja

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