Independence and $400,000 at Cephalon…

April 26, 2011

High priced medication

As footnoted regulars know, we tend to pay particularly close attention to filings from companies in the maws of M&A. So we couldn’t help ourselves when we spotted some big pay figures for directors in a proxy filed by Cephalon (CEPH) late last week. That’s because Valeant Pharmaceuticals International (VRX) is giving Cephalon’s shareholders until May 12 to accept an offer of $73 a share in cash (see Reuters and DealBook). So far, at least, Cephalon’s board has rejected Valeant’s advances.

Cephalon’s directors get big bucks by almost any measure. According to Cephalon’s April 21 proxy (technically a DEFC14A filing), each of the company’s directors made more than $400,000 last year — more precisely, between $424,400 and $464,400. It’s unusual to find an entire board making far north of $300,000, even at big companies, and it’s truly rare to see every director each pulling down more than $400,000.

Most of the Cephalon board’s pay is in the form of options (granted back in May 2010), but unlike some options that are essentially earned over time, these options vested immediately. With a strike price of $59.18, the options granted in 2010 have been in the money much of the time since then. Any way you slice it, it’s a bunch of dough — and all for 12 board meetings during 2010 and fewer than that many meetings of each committee. (The proxy says the audit committee met 10 times, the nominating committee met five times and the comp committee met six times.)

Given that the pay came as options, a good bit of the current value comes from run-ups in the stock price as deal rumors spread, and then in response to Valeant’s bid for the company. Options also tend to get cashed out, or replaced, when a deal closes, so presumably the board members would benefit from a deal at a premium. But the very nature of options can provide a bigger incentive to swing for the fences, some research suggests.

There’s something else to consider: Any Cephalon director flipping to the Director Compensation section of Valeant’s April 14 proxy might be in for a shock. Just four of the company’s 9 paid directors made more than $300,000 (with three of them under $360,000), while two made closer to $200,000 and three others made under $100,000; five of the directors received no cash at all. Total bill for Valeant’s board: just about $2 million, compared to $3.1 million for Cephalon’s eight board members.

During proxy season, we tend to look at things through comp-tinted glasses, and of course there are more forces in the world than pay (though not many are quite so influential). Judging from the lengthy disclosures filed with every deal, boards go to great lengths to show that they consider other factors, and we’re sure Cephalon’s board does the same.

Still, if you’re used to making more than $400,000 in a year for part-time work, the prospect of losing that gig might be a little daunting.

Image source: Brooks Elliott via Flickr

This morning’s news that Lawson Software (LWSN) was being acquired in a $2 billion deal brings our M&A batting average up to .300. Back on Jan. 14, we gave FootnotedPro subscribers a list of 10 M&A picks and Lawson was one of our picks. Smurfit-Stone and Pride International (PDE), which announced deals in late January and early February, were also on our list. You can find out more about FootnotedPro here. FootnotedPro: Interesting. Actionable. Profitable.

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