HIGH RIVER LIMITED PARTNERSHIP
ICAHN PARTNERS MASTER FUND LP
ICAHN PARTNERS MASTER FUND II LP
ICAHN PARTNERS MASTER FUND III LP
ICAHN PARTNERS LP
767 FIFTH AVENUE, 47TH FLOOR
NEW YORK, NY 10153
June 16, 2011
VIA FACSIMILE, EMAIL, BY HAND AND FEDERAL EXPRESS
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Forest Laboratories, Inc.
909 Third Avenue
New York, NY 10022
Attention: Mr. Howard Solomon, Chairman and Chief Executive Officer
Herschel S. Weinstein, Esquire, General Counsel and Corporate
Secretary
Re: Inspection of Books and Records
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Gentlemen:
High River Limited Partnership ("High River") is the record owner of 1000
shares of the common stock, ("Common Stock"), of Forest Laboratories, Inc., a
Delaware corporation (the "Corporation"). High River, Icahn Partners LP, Icahn
Partners Master Fund LP, Icahn Partners Master Fund II LP and Icahn Partners
Master Fund III LP, are collectively described herein as the "Icahn Parties."
Including the 1000 record shares held by High River, the Icahn Parties
collectively are the beneficial holders of approximately 19.9 million shares of
Common Stock costing approximately $317,000,000, which they believe represents
approximately 6.95% of the outstanding Common Stock. The Icahn Parties have been
stockholders of the Corporation for approximately two years. Attached hereto as
Exhibit A are true and correct redacted copies of brokerage statements
evidencing the beneficial ownership of Common Stock by Icahn Partners Master
Fund LP, Icahn Partners Master Fund II LP, Icahn Partners Master Fund III LP and
Icahn Partners LP.
As common stockholders of the Corporation, the Icahn Parties hereby demand,
pursuant to Section 220 of the General Corporation Law of the State of Delaware
("Section 220") and the common law of the State of Delaware, the right to
inspect, no later than June 22, 2011, during normal business hours, the books
and records of the Corporation requested herein, and to make copies or abstracts
there from.
I. Purpose.
A. Factual Background.
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In January 2004, the United States Department of Justice ("DOJ") and the
United States Attorney's Office for the District of Massachusetts began an
investigation into marketing, sales, and other activities allegedly undertaken
by Forest Laboratories, Inc. (the "Company") in connection with Celexa, Lexapro,
and a formulation of Levothroid that the Company ceased distributing in 2003. In
September 2010, the Corporation announced that a subsidiary had pled guilty to
federal felony and misdemeanor charges relating to this investigation. The
announcement also revealed that the Corporation had paid various governmental
entities in excess of $300 million to settle related charges. Thereafter, the
Corporation announced that it had settled derivative suits against its board of
directors and certain of its officers, including Howard Solomon its CEO,
stemming from the situation, and it appeared from the information disclosed to
the shareholders that the Corporation had put this situation behind it. That,
appearance, however, was false. In fact, despite the settlement and guilty plea
something had caused the federal government to seek to change the Corporation's
management.
On April 13, 2011, the Company issued a press release, the material part of
which stated as follows:
NEW YORK, Apr 13, 2011 (BUSINESS WIRE) --
Forest Laboratories, Inc. (NYSE: FRX) today announced that Howard Solomon,
Chairman, Chief Executive Officer and President, will challenge a potential
action by the Office of the Inspector General, Department of Health and
Human Services (HHS-OIG), to exclude him from participation in federal
healthcare programs. Mr. Solomon was notified yesterday of the potential
action in a letter from HHS-OIG.
The potential action emanates from matters that were settled by Forest in
2010 with no finding of knowledge or wrongdoing by Mr. Solomon. The only
basis given in the letter notifying Mr. Solomon of the potential action is
that he is "associated with" Forest. The letter gives Mr. Solomon 30 days
to respond and say why he should not be excluded. Should HHS-OIG determine
after that that Mr. Solomon be excluded, unless the effectiveness of such
exclusion is enjoined by a court, Mr. Solomon would be required to step
down from his present executive positions. Mr. Solomon plans to commence
immediate litigation to prevent such exclusion from taking effect if
HHS-OIG determines to proceed.
Board member and Chairman of the Audit Committee William J. Candee III,
speaking on behalf of Forest's entire Board of Directors stated, "It would
be completely unwarranted to exclude a senior executive against whom there
has never been any allegation of wrongdoing whatsoever. Mr. Solomon has
always set a tone of the highest integrity from the top. At Mr. Solomon's
direction, the Company has significantly enhanced its sales force
monitoring and compliance procedures. We believe the potential HHS-OIG
action may well be beyond its legal authority."
Continued Mr. Candee, "At no time during the government's six year
investigation of Forest was Mr. Solomon ever accused of any wrongdoing in
connection with the matters settled in 2010. We are hopeful that HHS-OIG
will decide that the facts and circumstances as to Mr. Solomon do not
warrant an exercise of its exclusion authority."
Herschel S. Weinstein, Vice President and General Counsel stated, "Numerous
other major pharmaceutical companies have plead guilty to much more
egregious offenses, and none of them has faced the exclusion of a senior
executive who has not himself been convicted of a crime or pleaded guilty
to a crime. We believe that HHS-OIG is contemplating using a statute that
has never before been used under these circumstances and would be exceeding
the bounds of its authority."
Since the date that release was issued, the Corporation issued its Form
10-K for 2010. It expanded upon the statements of the press release:
"Mr. Howard Solomon, our Chairman, Chief Executive Officer and President,
has received a notice from the OIGHHS indicating its intent to consider
excluding Mr. Solomon from participating in federal healthcare programs.
This potential action by the OIGHHS emanates from matters that we settled
in 2010 with no finding of knowledge or wrongdoing by Mr. Solomon. Mr.
Solomon has until June 13, 2011 to respond to this notice explaining why he
should not be so excluded. Should the OIGHHS determine after such response
that Mr. Solomon should be excluded, Mr. Solomon would be required to step
down from his present executive positions unless the effectiveness of such
exclusion is enjoined by legal proceedings. Mr. Solomon plans to commence
litigation to prevent such exclusion from taking effect if OIGHHS
determines to proceed. We do not believe any such exclusion of Mr. Solomon
is warranted and will support legal actions to challenge any such
exclusion."
The Corporation's disclosures make three points clear: (1) the federal
government had brought criminal and civil charges against the Corporation for
claimed misconduct, and those charges were settled in September 2010; (2)
contrary to public statements made by the Corporation that settlement did not
resolve all outstanding issues and the federal government has now for reasons
not disclosed by the Corporation demanded Mr. Solomon, the Corporation's
Chairman, CEO and President, step down from those roles or the Corporation will
be barred from doing business with the United States Government; and (3) the
Corporation's board of directors fully supports Mr. Solomon in his battle with
the Government and has ordered the Corporation to back him in his fight.
The board's support of Mr. Solomon comes despite declining performance of
the Corporation over the past seven years. The price of the Common Stock peaked
in February 2004 at almost $76 per share. The current price is approximately $38
per share, which means that shareholder value has been essentially cut in half
during the last seven years. Analysts are predicting even further operational
slippage as key drugs come off patent without immediate replacements. Earnings
for the fiscal year ending March 31, 2011 were $4.41 per share; the mean
estimates for fiscal 2012 and 2013 are $3.68 and $1.21 per share respectively.
Top line revenue is predicted to decline from $4.42 billion to $3.38 billion
over the same period. From 2004 to the present a total of over $10 billion in
shareholder value has evaporated under the stewardship of Mr. Solomon and the
board and corporate performance is still heading downhill.
Although the stockholders have lost huge amounts of money, the board
ensured that Mr. Solomon greatly prospered over the same period. According to
the Corporation's disclosures, Mr. Solomon received almost $50 million in total
compensation from 2004-2010. And that number is conservative. In 2004-2005 the
Company reported two possible values for options grants, and the $50 million
number uses the lower of the two values for those years. If the higher figures
were used, the reported compensation amount would increase to almost $70
million. In addition, while the shareholders were suffering from large stock
declines, Mr. Solomon was selling. In February 2007 he sold 4.3 million shares
at an average price of $52.60 per share, for a total of approximately $226
million, although the board has since issued Mr. Solomon significant amounts of
new options and shares. In other words, Mr. Solomon cashed out much of his stake
in the Company just as tough times were beginning, and his present holdings
almost entirely consist of options or shares directly granted by the Corporation
or that resulted from the exercise of options granted by the Corporation.
B. Mr. Solomon's Curious Board.
----------------------------
The Government's action against Mr. Solomon is apparently unprecedented. It
appears that never before has the Government insisted that a chief executive
officer resign in order for a company to be allowed to continue to do business
with the Government. It is difficult to understand why a board would richly
reward a chief executive for the performance that Mr. Solomon has delivered over
the past seven years. It is even more difficult to understand how any board of
directors would risk a company to support a CEO with such a track record in a
confrontation with the Government.
The Corporation, however, does not have the type of board found at a
typical public company.r It currently has 9 directors, who-together with Mr.
Solomon and the rest of executive management-collectively own only approximately
3% of the Corporation's stock, and most of that stock has been received in the
forms of options or other stock grants. The directors have invested very little
of their own cash in the Corporation.
The following table lists the current directors, their positions with the
Corporation, their ages and length of tenure on the board.
DIRECTOR POSITION WITH FOREST AGE YEAR JOINED BOARD
-------- -------------------- --- -----------------
Howard Solomon Chairman and CEO 83 1964
(since 1977)
William J. Candee, III Co-Chairman; Audit 84 1959
Comm. Chair
George S. Cohan 87 1977
Dan L. Goldwasser 71 1977
Kenneth E. Goodman Former President and COO 63 1998
Lester B. Salans, MD 75 1998
Lawrence S. Olanoff, MD Just-Resigned President 59 2006
and COO
Nesli Basgoz, MD 53 2006
Peter J. Zimetbaum, MD 47 2009
As can be seen, three of the Corporation's directors have served on the
board with Mr. Solomon for over thirty years each, and all but one of the board
members were directors during the past years in which shareholder value was
vaporized and Mr. Solomon received large amounts of compensation. Overall, the
average length of board service of the directors is almost 23 years.
Given the directors' relatively small holdings of stock, extraordinary
average length of tenure on the board and habit of rewarding Mr. Solomon while
the stockholders suffered, the possibility obviously exists that many of the
directors cannot view Mr. Solomon's performance objectively. Thus, it would be
extremely difficult for them to not support Mr. Solomon in his fight with the
Government even if that fight is not in the Corporation's or stockholders' best
interests. Indeed, it is necessary to ask whether there has been a fundamental
failure of board leadership and supervision as the directors have put their
personal loyalty and friendship to Mr. Solomon above their fiduciary duties to
the Corporation and its stockholders.
If the Corporation's scant public disclosures are correct, the board has
now irrevocably committed to supporting Mr. Solomon in his battle against the
Government. Given that commitment, it is now up to the stockholders to decide if
these are the best directors to be the stewards of Forest Laboratories' fate at
this critical time. To make that decision, though, the stockholders need far
more information about what is going on and why it is occurring than they have
received. The Corporation's public disclosures about this affair have been
opaque, inaccurate and seemingly designed to reveal the least possible
information. The stockholders have not even been informed of the charges against
Mr. Solomon. Thus, the stockholders have been denied even the most basic
information necessary to determine whether the board is following a proper and
appropriate course in its dealings with the Government or whether it is risking
the Corporation to protect the CEO.
C. The Legal Standard and the Unanswered Questions.
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Section 220 permits the stockholders of a corporation to investigate
corporate mismanagement for the purposes of, among other things, "mounting a
proxy fight to elect new directors;" "bring[ing] corporate misconduct to light;"
or bringing litigation to redress wrongdoing, so long as there is a credible
basis to believe such wrongdoing or mismanagement occurred. Here there is no
doubt that there is a credible basis to believe that wrongdoing has occurred-a
corporate subsidiary has pled guilty to a felony, the Corporation paid over $300
million in fines and reimbursement and the Government is demanding that the
Chairman and CEO be removed from his offices.
The board's action in immediately supporting Mr. Solomon - despite his
track record over the past seven years - also raises a credible basis to believe
that it too engaged in mismanagement or wrongdoing as do the Corporation's
obfuscating and misleading public statements about the situation.
In deciding how the Corporation should be governed going forward the
stockholders need answers to the following fundamental but unanswered questions.
First, what has the Government told the Corporation about why it is seeking
such an unprecedented remedy against Mr. Solomon and why did the September
settlement not resolve all such matters?
Second, why did the board immediately back Mr. Solomon? The press release
that stated that the board was backing him was issued only one day after the
Corporation purportedly was informed of the issue, which implies either that the
Corporation was already aware of the possibility that the Government might take
action against Mr. Solomon but did not disclose that to the stockholders or that
the board acted with very little information and even less time to consider the
import of what it was doing in publicly backing Mr. Solomon.
Third, does the Corporation in fact have adequate grounds to contest the
Government's actions here?
Fourth, regardless of the background facts is it actually in the interest
of the Corporation and all of its stockholders to fight the Government under
these circumstances? Is Mr. Solomon, whose last seven years of stewardship has
resulted in a drop in shareholder value of 50%, really so critical to the
success of the Corporation that it justifies the risks the board is taking?
Finally, is this board so compromised or complicit with regard to Mr.
Solomon that it has become potentially liable for its own violations of duty?
D. Why the Icahn Parties Need to Review the Documents.
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As long-term stockholders, the Icahn Parties believe that this is an
intolerable situation that is patently unfair to the Corporation's stockholders.
As the Corporation is aware, pursuant to the Corporation's by-laws the Icahn
Parties have delivered the necessary papers to nominate alternative directors at
the Corporation's annual meeting, which should be held in approximately August
2011. The purpose of this demand is:
(1) to enable the Icahn Parties to review the information requested below
and, if appropriate, to share it with their fellow stockholders in connection
with the 2011annual meeting of stockholders, and to use such information to
support the election of directors nominated by the Icahn Parties in opposition
to the Corporation's slate of directors;
(2) to help the Icahn Parties determine which among the directors are the
least independent and engaged so that the Icahn Parties might seek to replace
those directors and retain the members of the board who are best suited to help
manage the Corporation going forward;
(3) to determine whether the board breached its duties to the Corporation
and its stockholders when it determined to support Mr. Solomon in his personal
fight with the Government; and
(4) to determine whether litigation should be brought on behalf of the
Corporation and/or its stockholders against Mr. Solomon and members of the board
of directors.
II. Documents Requested.
The Icahn Parties therefore request the Corporation to produce to them the
following documents:
a) The HHS-OIG letter referred to in the press release quoted above
that was delivered to the Corporation on or about April 12, 2011
and any other documents from HHS-OIG or counsel for the
government in this matter dealing with Mr. Solomon, and any
responses by Mr. Solomon or the Corporation thereto.
b) Any document indicating that the Corporation was aware of the
possibility that HHS-OIG (or other governmental agency) might
seek such a, or similar, sanction against Mr. Solomon prior to
April 12, 2011 (including any prior correspondence with HHS-OIG
or its counsel relating to such subject).
c) All documents provided to the board of directors or a committee
thereof on this subject.
d) All board or committee minutes in which this subject is
discussed, including any minutes, resolutions or consents
pursuant to which the board or any committee thereof concluded
that it did not believe any such exclusion of Mr. Solomon [wa]s
warranted and w[ould] support legal actions to challenge any such
exclusion.
The undersigned will bear the reasonable costs incurred by the Corporation
in connection with the production of the above information.
* * *
The undersigned hereby authorizes Stephen Jenkins, Esq. and Richard D.
Heins, Esq. of Ashby & Geddes, Wilmington, DE and their respective partners,
associates, employees and any other persons designated by Stephen Jenkins or
Richard D. Heins, acting together, singly or in combination, to conduct, as
their agents, the inspection and copying requested herein and otherwise act on
behalf of the undersigned pursuant to the attached power of attorney. Please
advise the undersigned's counsel, Marc Weitzen, at (212) 702-4388, or Mark
DiPaolo at (212) 702-4361 as promptly as practicable when and where the items
demanded above will be made available to the undersigned. Please also advise
Marc Weitzen or Mark DiPaolo immediately whether you voluntarily will supply the
requested information.
Very truly yours,
HIGH RIVER LIMITED PARTNERSHIP
By: Hopper Investments LLC, general
partner
By: /s/ Edward E. Mattner
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Name: Edward E. Mattner
Title: Authorized Signatory
ICAHN PARTNERS MASTER FUND LP
By: /s/ Edward E. Mattner
---------------------
Name: Edward E. Mattner
Title: Authorized Signatory
ICAHN PARTNERS MASTER FUND II L.P.
By: /s/ Edward E. Mattner
---------------------
Name: Edward E. Mattner
Title: Authorized Signatory
ICAHN PARTNERS MASTER FUND III L.P.
By: /s/ Edward E. Mattner
---------------------
Name: Edward E. Mattner
Title: Authorized Signatory
ICAHN PARTNERS LP
By: /s/ Edward E. Mattner
---------------------
Name: Edward E. Mattner
Title: Authorized Signatory
SWORN TO AND SUBSCRIBED
before me this 16th day of June 2011
/s/ Notary Public
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Notary Public