Preface: Bayer is a German Company. Bayer stock is traded on the Frankfurt Stock Exchange on the XETRA Trading Platform. Bayer is one of the 30 Stocks currently included in the DAX Index, which is the German equivalent of the Dow Index.
A Level 1 American Depository Receipt (ADR) is traded on the OTC Market in the U.S. under the ticker BAYRY. Level 1 ADRs are essentially unregulated derivatives of foreign stocks held by a U.S. bank and traded in U.S. markets.
We include the above due to the significant number of references made in this article to Bayer stock. When we reference Bayer stock, we are referencing the actual stock traded in Germany, not the ADR traded in the U.S. Also, as a research hint, if you want to track Bayer stock, Google “Bayer Stock XETRA.” If you just Google Bayer Stock from the U.S., you will get the ADR charts and graphs, not the actual Bayer Stock current information.
The Roundup Settlement is Dead – Long Live the Roundup Settlement
This article covers what appears to be the demise of the Roundup settlement first announced in June of 2020, as well as what steps Bayer needs to take immediately to put a new settlement on the table that will calm the market, satisfy plaintiffs and allow the company to get back to the running of an otherwise profitable and enterprise. We also cover why Bayer should take the steps we discuss from a business perspective.
Bayer’s hope of capping future liability arising from Roundup cancer cases, without taking any measures to prevent future injuries (adding warnings and instructions to the label) were dashed by 27 words in Judge Vince Chhabra’s order handed down on July 6, 2020, in response to a proposed Class Action that could have served to cap Bayer’s future liability. These words appear on page 3 paragraph 1.
“before receiving opposition briefs, the Court is skeptical of the propriety and fairness of the proposed settlement and is tentatively inclined to deny the motion.”
If the possibility of the viability of the proposed Class Action was not foreclosed on by the above Statements, it would appear that the conference held by Judge Chhabra on 07/24/2020 put the final nail in the coffin.
“If I leave the stay in place, am I complicit in whatever shenanigans are taking place on the Bayer side,” the judge was quoted as saying by Bloomberg news. “We’ve got a bunch of cases we could send out to other jurisdictions.” (end quote). In other words, remand for trail.
Sara Randazzo of the Wall Street Journal filed a report on Aug. 27, 2020 which included the following quote:
Deals with some of the lead plaintiffs’ lawyers, Aimee Wagstaff and Jennifer Moore, still haven’t been signed by Bayer, the lawyers told a judge at a Thursday hearing. Another agreement to resolve a large batch of cases was terminated altogether earlier this month, plaintiffs’ lawyer Brent Wisner said.
It is not surprising that Bayer appears to be backing away from deals it has already made with various law firms. The following explains why Bayer may not be in a position to go through with “deals” made on a piece meal firm by firm basis at this time.
Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), the German equivalent of the U.S. SEC imposes Market Abuse Regulation (MAR) and transparency requirements (including disclosure time frame requirements,) which make it difficult for Bayer to consummate any settlement reached with any firm (piecemeal), post the failure of the Class Action, which would have served to cap future liability. The announcement made by Bayer on Wednesday – June 24, 2020 contained these words.
“The company will make a payment of $8.8 billion to $9.6 billion to resolve the current Roundup™ litigation, including an allowance expected to cover unresolved claims, and $1.25 billion to support a separate class agreement to address potential future litigation.”
With the collapse of the “$1.25 billion to portion for the the separate class agreement to address potential future litigation.” In the statement made by Bayer in June, Bafin regulations make it difficult if not impossible for Bayer to go through with the individual firm settlements previously (tentatively) put on the table. Bayer presented the settlement to the market as a package deal (covering current and future claims) and is not free under BaFin regs to simply move forward with a portion of the “package deal” now that the “future” liability portion is no longer a reality. Bayer is arguably required to revise the June statement prior to consummating any individual firm deals or risk facing regulatory action and potential lawsuits from stockholders. Thus far, Bayer has only revealed to stockholders, to the best of our knowledge, that that the settlement has encountered “bumps” in the road.
“It (Bayer) has indicated that settling existing cases is contingent on some form of agreement on future cases, and has proposed a scientific panel to rule on any future claimants that agree to submit to the out-of court procedure.”
The market wants to hear a definitive statement that removes the Roundup Litigation as a potentially fatal threat. The market will accept that Bayer may continue to face some liability from the Roundup Litigation going forward, major corporations always face the potential of litigation. The market simply needs to hear that the company can weather any storm they may face, not that no storm will ever occur. The market wants a “known” to the extent of what is knowable, as the market always prefers a “known” (even if it may not be completely thrilled with, over an unknown.
Plaintiffs want a fair settlement, even if the settlement amounts do not truly make plaintiffs whole, Plaintiffs do not want to be insulted with low ball offers. Telling someone that their family members life or their own suffering from cancer is only worth a pittance, is insulting.
The following would be an announcement that MTN believes the market would accept, Bayer (stock) would benefit from immediately and Plaintiffs would likely accept:
Bayer has reached a Global Settlement agreement to pay $22 Billion U.S. to resolve existing Roundup claims as well as provide a fund for future claims. $20 Billion of this amount will be used to pay existing claims while $2 Billion will be set aside for future claims.
Simultaneously, the Company will be adding cancer warnings as well as protective device and clothing instructions to the Roundup Product label. While these new warnings and instructions will not provide a definitively quantifiable cap on future claims, the changes will enable Bayer to make a colorable defense under The Restatement (Second) of Torts § 496A (Assumption of Risk) in any case in which the first use of Roundup occurred after the warnings and instructions are issued as well as any case in which a Plaintiff, who had not been diagnosed with NHL prior to the issuance of the new warnings and instructions and continued to use the product after the warnings and instructions were issued. Additionally, in the U.S., the addition of the new warnings and instructions will generally begin the accrual of the Statute of Limitations for any plaintiff who has already been diagnosed with NHL but has yet to file a claim.
Although management believes the $2 Billion set aside for future claims should be sufficient to cover any future liability, in the event the initial set aside is not sufficient, we do not believe any additional set asides that might be required will materially impact the financial viability of our company.
Management has made these decisions because we believe it is time to move forward and get back to the business of growing our otherwise profitable and financially sound company, focused on providing for the health care and agricultural needs of the world. It is time to focus on our future and the many great things we hope to achieve for the betterment of all.
Can Bayer Actually Pay Out $22 Billion?
Not only can Bayer pay out $22 Billion (or more), it makes business sense for the company to do so, sooner rather than later.
In July 2020, Bayer extended a bond offer of 6 billion euros ($7.15 billion U.S.) to assist in paying for the settlement announced in June. Bayer offered bonds in four tranches.
The four tranches of 1.5 billion euros each were offered with maturities of 4 years, 6.5 years, 9.5 years and 12 years. The coupons on the notes are 0.375 percent p. a., 0.75 percent p. a., 1.125 percent p. a. and 1.375 percent p. a. respectively. Demand for the bonds offered exceeded 17.5 billion euros (20.86 billion U.S.) according to reports from Reuters and other financial news media. If Bayer so desires, the company could extend the time for paying off any Roundup settlement costs, by simply making additional future bond offers. Bayer has an excellent bond rating and the market has a significant appetite for Bayer’s bond offerings. There is no business logic that could justify Bayer risking their bond rating and financial health in general, by refusing to take the steps necessary to refocus the markets attention from the Roundup litigation, to other activities of the (otherwise) financially sound business.
In addition, Bayer reported $6.172 billion Euros in cash on hand for the quarter ending December 31, 2019. (A slight increase over 2018). In the same year end report, Bayer reported $141.409 billion euros in total assets, against a mere $41.34 billion euros in long term debt. Adding an additional 22 Billion (U.S.) or approximately 18.45 billion euros to Bayer’s existing long-term debt would bring that number $59.79 billion, leaving the company with a debt to asset ratio that should not be concerning to investors.
It is also worth noting that the PE Ratio of Bayer Stock is currently 8.95 with a Market Cap of $54.23 billion euros. Prior to the Roundup Litigation, the PE Ratio for Bayer Stock generally hovered around 20, which is the average for the “Big Pharma/Big Agra” sector. If Bayer will simply take the steps needed to refocus the market away from the Roundup litigation, the companies market cap could easily double in a short period of time, returning stockholders to a debt equity ratio historically shown to be acceptable.
If Bayer were to announce tomorrow that it was entering a private mass settlement agreement that provided $20 billion dollars for existing claims, (financed by bonds) that needed no approval for the Court and employed a third party company like Brown Greer to set up an online program for the settlement that firms could use to settle their dockets, investors would rush to buy Bayer stock before the price doubles or triples.
Because the scenario above would not require approval from the Court, the only risk Bayer would face in the settlement not consummating would be mass rejections by Plaintiffs. Using Bayer’s reported figure of 125,000 current Plaintiffs worldwide, (filed and unfiled), $20 billion U.S. (16.78 euro) would render an average individual case value of $160,000 (U.S). Although Plaintiffs may not be happy with the number, it is doubtful that many would find the offer insulting and equally unlikely that many would reject the offer.
Take the Bankruptcy Bluff off the Table
Insolvenzordnung, (Germanys Bankruptcy Code) section 15a(1) contains a “no delay provision.” Section 15a(1) requires that a German Corporation file their insolvency petition no later than three weeks after the event leading to the insolvency. The clock arguably started ticking on this three-week period at the time any Bayer executive or their legal counsel first mentioned the possibility that the company might file bankruptcy as a settlement negotiation ploy. Even without the “threats” that have been intimated, if the Roundup litigation had rendered Bayer insolvent per Sections 17, 18 or 19 of the German Code, the “triggering event” for the application of 15a(1) occurred far longer than three weeks prior to any future date the company might actually file an insolvency petition in Germany.
Prior to any litigation stay being issued by the German Bankruptcy Court, a Corporation must show that it is unable to meet its mature obligations to pay (illiquidity according to sec. 17 Insolvency Act) or the Corporation will most likely not be able to pay its due liabilities of the current and the next fiscal year (impending illiquidity according to sec. 18 Insolvency Act), or if the debtor is over-indebted according to sec. 19 Insolvency Act. Contingent Liabilities (such as pending lawsuits that have yet to be converted to actual debt via the Plaintiff prevailing and receiving a judgment) are not included in the “solvency” determination.
If Bayer were able to get past section 15a(1), 17, 18 and 19, and obtain a stay order from a German Bankruptcy Court (which is highly doubtful given the fact that Bayer is far from insolvent) the German stay would not automatically be recognized by U.S. Courts. After obtaining a stay in Germany, the German foreign representative, appointed by the German Court, would have to move before a U.S. Bankruptcy Court under Chapter 15 of the U.S. Bankruptcy Code, (11 U.S.C. §§ 1501) seeking recognition of the German Courts proceedings and orders.
Among the many downsides and obstacles Bayer would face if the company attempted to make good on threats of bankruptcy, despite the fact that a filing in Germany would have no immediate impact the U.S. litigation, the filing could have an immediate impact on the company’s ability to continue to exhaust resources (pay legal fees) to defend in the U.S. litigation, including but not limited to the continuation of or filing of appeals related to judgments already granted by U.S. juries.
The Bottom Line: Even if Bayer were to jump through all of the hoops required of the German Courts and U.S. Courts required to “stay” the U.S. Roundup litigation, the process could easily drag out for several years, during which time additional Roundup trials could move forward in the U.S., potentially resulting in the addition of billions of dollars in new jury awards.
WHAT HAPPENS IF BAYER DOES NOT DO THE SMART THING?
- Plaintiffs firms continue to market for additional Roundup clients.
- More jury trials potentially resulting in massive verdicts, by Plaintiff lawyers that have already acquired billions in jury verdicts for clients.
- President Trump does not get reelected and a Biden EPA retracts the January 30, 2020. Final Statement on Roundup (not that the statement would have much impact on current cases). Although the EPA statement is not a significant threat to current Plaintiffs, the retraction of the Statement would likely not be well received by the market. Bayer stock would most likely take another hit.Why does the January 30, 2020 EPA Final Statement pose little threat to existing plaintiffs’ cases? Because it is well settled that only those agency statements that are final have the force of law required to support an impossibility preemption defense. In addition, the SCOTUS decision in Merck Sharp & Dohme Corp. v. Albrecht, 139 S. Ct. 1668, the U.S. Supreme Court 2019, arguably forecloses on Bayer arguing that the January 30, 2020 statement could have any retroactive pre-emption effect under an implied impossibility theory.More simply stated, the only value the EPA statement could possibly provide Bayer would be in Plaintiff cases, in which exposure to Roundup occurred after the EPA final statement was issued. In addition to the above, because Roundup is not a drug nor a vaccine, Comment K of the Second Restatement 402A does not apply to the case. Whether Bayer would or would not have been preempted from adding a cancer warning would not save them from the strict liability provisions of 402A.
- Bayer potentially gets delisted from DAX. Lufthansa, Germany’s flagship airline was delisted from the Dax Index in June of 2020 (after enjoying a 30-year run on the DAX). Temporary lagging revenues due to the coronavirus was the reason behind Lufthansa being delisted. The delisting sent Lufthansa stock into a nosedive that it may not recover from for decades (if ever). If Bayer executives allow the company to be delisted from the DAX over a problem they could resolve with a relatively painless bond offer, they will go down in German business history as dummkopfs.
- If Bayer is delisted from DAX or if the Roundup Litigation continues unabated, Bayer’s bond rating could be negatively impacted. At the moment, Bayer is in a position to finance a settlement through low interest bond offers; however, if the major rating services downgrade Bayer’s bond rating over concerns related to the litigation, the opportunity to finance a settlement at low interest rates paid out over a decade or more, could vanish.
- Although ousting executives is more difficult under German regulations as compared to U.S. regulations, it can be done and the current executives have already seen action taken in this direction. Bayer stockholders have already entered “no confidence” votes relevant to the current slate of executives. A “no confidence” vote is one of the steps required to oust a panel of executives under German regulations.
Although a Corporate takeover is far more difficult under German regulations, MTN has been following “major stock acquisition” filings for Bayer stock for the past two years. A triad of investors, including the French Ministry of Finance, has made significant headway in acquiring the 30% stake required to “take over” the German company.