The criminal probe into Valeant's former CEO raises 2 big questions (VRX)

Thomson Reuters

Former Valeant Pharmaceuticals CEO Michael Pearson is under a criminal investigation in connection to alleged fraud at the company he helmed, Bloomberg reported. 

The investigation is being helmed by US prosecutors in Manhattan and also includes former Valeant CFO Robert Schiller.

Following this news Valeant's stock crashed 12% — so it matters to somebody out there. And there are two important questions that jump right to mind with the news.

First, how will this impact Valeant's agreement with creditors? And second, how will this impact Pearson's separation agreement with the company?

Pearson helmed Valeant during its glorious rise to become one of Wall Street's darling stocks. He used a combination of serial acquisitions and drug price hikes to achieve that.

Then, last October, accusations of accounting malfeasance combined with government scrutiny over the company's drug price hikes brought the company to its knees. Valeant's stock price is down around 90% since last year's peak. 

Valeant has yet to respond to our questions regarding these two matters.

The debt

One of the most difficult things Valeant has had to deal with through this entire mess is its over $30 billion debt load. Back in April it signed an agreement with creditors that, like a lot of creditor agreements, included a clause protecting creditors from material adverse events at the company.

Here's a slice:

4.10 Adverse Proceedings, etc. There are no Adverse Proceedings, individually or in the aggregate, that could reasonably be expected to have a Material Adverse Effect. None of Borrower or any of its Subsidiaries (a) is in violation of any Applicable Laws (including Environmental Laws) that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, or (b) is subject to or in default with respect to any Governmental Authority or any final judgments, writs, injunctions, decrees, rules or regulations of any Governmental Authority, that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

So far investigations from federal prosecutors in Massachusetts and New York, plus lawsuits from shareholders like T. Rowe Price and TIA-CREF have not qualified as material adverse events, so we shall see. Either way, this issue may make it harder for Valeant to refinance this debt, which it may be seeking to do.

The agreement

Upon leaving Valeant, Michael Pearson signed a pretty sweet separation agreement. It included:

• A $9 million severance.
• "An annual bonus in respect of the 2016 fiscal year pro-rated to reflect the portion of the 2016 fiscal year elapsed prior to the Termination Date, based on (i) 150%..."
• Full benefits for himself and his dependents for two years.
• Office space for two years.
• "In exchange for the Services performed here under, Valeant agrees to pay Mr. Pearson a fee of (i) $83,333 for each month (pro-rated for partial months) that Services are performed through the end of 2016, and (ii) $15,000 for each month (pro-rated for partial months) that Services are performed after 2016 and during the Consulting Period. "
• Valeant will also pay for any travel expenses incurred by Mr. Pearson related to the company during his consulting period.

Of course, it also included a non-disparagement clause on Pearson's part, which makes you wonder how Pearson is going to defend himself if this investigation gets worse for him. Here's the clause:

Non-Disparagement . Mr. Pearson agrees not to make written or oral statements about Valeant, its subsidiaries or affiliates, or its directors, executive officers or non-executive officer employees that are negative or disparaging. Valeant shall instruct its directors and executive officers not to make written or oral statements about Mr. Pearson that are negative or disparaging. Notwithstanding the forgoing, nothing in this Agreement shall preclude (a) either Party (and, in the case of Valeant, its directors, executive officers, and non-executive officer employees) from communicating or testifying truthfully to the extent required by law to any federal, state, provincial or local governmental agency or in response to a subpoena to testify issued by a court of competent jurisdiction, (b) Mr. Pearson, if after consulting with Valeant it is determined in good faith by Mr. Pearson that a false or misleading statement concerning Mr. Pearson has been made by a director, executive officer or non-executive officer employee, from making statements specifically to rebut any such false or misleading statements made by such director, officer or employee, or (c) Valeant’s directors, executive officers or non-executive officer employees, if after consulting with Mr. Pearson it is determined in good faith by such director, officer or employee that a false or misleading statement concerning such director, officer or employee has been made by Mr. Pearson, from making statements specifically to rebut any such false or misleading statements made by Mr. Pearson.

So that's that people. Things are getting interesting again.

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