Chairman’s Letter
Notes
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Financial Statements
32. Legal risks
As a global company with a diverse business portfolio, the Bayer Group (including Bayer Schering Pharma AG, which previously was named Schering AG) is exposed to numerous legal risks, particularly in the areas of product liability, competition and antitrust law, patent disputes, tax assessments, and environmental matters. The outcome of any current or future proceedings cannot be predicted with certainty. It is therefore possible that legal or regulatory judgments could give rise to expenses that are not covered, or not fully covered, by insurers’ compensation payments and could significantly affect our revenues and earnings. (Please note that Bayer Schering Pharma AG and Schering-Plough Corporation, New Jersey, are unaffiliated companies that have been independent of each other for many years. The names “Bayer Schering Pharma” or “Schering” as used in this Annual Report always refer to Bayer Schering Pharma AG, Berlin, Germany, or its predecessor, Schering AG, Berlin, Germany, respectively).
Legal proceedings currently considered to involve material risks are outlined below. The legal proceedings referred to do not necessarily represent an exhaustive list.
Lipobay/Baycol: As of February 1, 2008, approximately 335 Lipobay/Baycol cases remain pending against Bayer worldwide (approximately 295 of them in the United States, including class actions claiming economic loss, medical monitoring, and personal injury, one of which has been certified). We are currently aware of fewer than five pending cases in the United States that in our opinion meet our criteria for potential settlement. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs.
Since the existing insurance coverage is exhausted, it is possible – depending on the future progress of the litigation – that Bayer could face further payments that are not covered by the accounting measures already taken.
In connection with Lipobay/Baycol, a class-action lawsuit claiming damages from Bayer was filed by shareholders. The suit alleges that Bayer made misleading statements, prior to the product’s withdrawal from the market, about the product’s commercial prospects and, after its withdrawal, about the related potential financial liability. In 2005 the court dismissed with prejudice the claims of non-U.S. purchasers of Bayer AG stock on non-U.S. exchanges. Bayer has reached an agreement in principle with the remaining plaintiffs to settle the litigation on a class-wide basis for a payment by Bayer of a total of US$ 18.5 million, subject to conclusion of a final settlement agreement and court approval.
Magnevist®: As of February 1, 2008, Bayer has been served in a total of 29 lawsuits in the United States involving the gadolinium-based contrast agent Magnevist®. Three other manufacturers of gadolinium-based contrast agents in the United States also have been named party to the same or similar lawsuits. Additional cases are anticipated.
In the lawsuits, plaintiffs allege that patients developed nephrogenic systemic fibrosis (NSF) as a result of the use of Magnevist® during medical imaging procedures. NSF is a rare, severe condition that can be debilitating and in some cases fatal. Plaintiffs seek compensatory and punitive damages under theories of strict liability and negligence and/or breach of warranty, claiming that the product is defective and unreasonably dangerous, that Bayer knew or should have known of the risks associated with Magnevist®, and has failed to disclose or adequately warn its users.
The proceedings are still at an early stage. A motion is pending to create a multi-district litigation (MDL) proceeding for common pre-trial management of all cases pending in federal courts. Bayer believes that it has meritorious defenses and intends to defend itself vigorously. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs.
Trasylol® (aprotinin) is a drug approved for use in managing bleeding in patients undergoing coronary artery bypass graft surgery. As of February 1, 2008, there were 46 lawsuits pending in the United States served upon Bayer on behalf of persons alleging personal injuries, including renal failure and death, from the use of Trasylol®. Plaintiffs seek compensatory and punitive damages, claiming that Bayer knew or should have known of these risks and is liable for having failed to disclose or adequately warn users of Trasylol®. Additional cases are anticipated.
In 2006 and 2007 observational studies reported on a possible correlation between the administration of Trasylol® and severe renal dysfunction, myocardial infarction, stroke and an increase in mortality. In November 2007, Bayer temporarily suspended worldwide marketing of Trasylol® after preliminary results from an independent clinical study in Canada raised concerns about a possible increased risk of mortality in patients who had received Trasylol®. The marketing suspension will remain in effect until the final results from the Canadian study have been analyzed and the benefit-risk assessment for Trasylol® can be re-evaluated together with the health authorities. In some countries, including the United States, Trasylol® continues to be available to certain surgical patients with an established medical need. We are closely cooperating with health authorities to resolve the questions that have arisen.
Bayer believes it has meritorious defenses and intends to defend itself vigorously. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs.
Legal proceedings currently considered to involve material risks are outlined below. The legal proceedings referred to do not necessarily represent an exhaustive list.
Lipobay/Baycol: As of February 1, 2008, approximately 335 Lipobay/Baycol cases remain pending against Bayer worldwide (approximately 295 of them in the United States, including class actions claiming economic loss, medical monitoring, and personal injury, one of which has been certified). We are currently aware of fewer than five pending cases in the United States that in our opinion meet our criteria for potential settlement. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs.
Since the existing insurance coverage is exhausted, it is possible – depending on the future progress of the litigation – that Bayer could face further payments that are not covered by the accounting measures already taken.
In connection with Lipobay/Baycol, a class-action lawsuit claiming damages from Bayer was filed by shareholders. The suit alleges that Bayer made misleading statements, prior to the product’s withdrawal from the market, about the product’s commercial prospects and, after its withdrawal, about the related potential financial liability. In 2005 the court dismissed with prejudice the claims of non-U.S. purchasers of Bayer AG stock on non-U.S. exchanges. Bayer has reached an agreement in principle with the remaining plaintiffs to settle the litigation on a class-wide basis for a payment by Bayer of a total of US$ 18.5 million, subject to conclusion of a final settlement agreement and court approval.
Magnevist®: As of February 1, 2008, Bayer has been served in a total of 29 lawsuits in the United States involving the gadolinium-based contrast agent Magnevist®. Three other manufacturers of gadolinium-based contrast agents in the United States also have been named party to the same or similar lawsuits. Additional cases are anticipated. In the lawsuits, plaintiffs allege that patients developed nephrogenic systemic fibrosis (NSF) as a result of the use of Magnevist® during medical imaging procedures. NSF is a rare, severe condition that can be debilitating and in some cases fatal. Plaintiffs seek compensatory and punitive damages under theories of strict liability and negligence and/or breach of warranty, claiming that the product is defective and unreasonably dangerous, that Bayer knew or should have known of the risks associated with Magnevist®, and has failed to disclose or adequately warn its users.
The proceedings are still at an early stage. A motion is pending to create a multi-district litigation (MDL) proceeding for common pre-trial management of all cases pending in federal courts. Bayer believes that it has meritorious defenses and intends to defend itself vigorously. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs.
Trasylol® (aprotinin) is a drug approved for use in managing bleeding in patients undergoing coronary artery bypass graft surgery. As of February 1, 2008, there were 46 lawsuits pending in the United States served upon Bayer on behalf of persons alleging personal injuries, including renal failure and death, from the use of Trasylol®. Plaintiffs seek compensatory and punitive damages, claiming that Bayer knew or should have known of these risks and is liable for having failed to disclose or adequately warn users of Trasylol®. Additional cases are anticipated. In 2006 and 2007 observational studies reported on a possible correlation between the administration of Trasylol® and severe renal dysfunction, myocardial infarction, stroke and an increase in mortality. In November 2007, Bayer temporarily suspended worldwide marketing of Trasylol® after preliminary results from an independent clinical study in Canada raised concerns about a possible increased risk of mortality in patients who had received Trasylol®. The marketing suspension will remain in effect until the final results from the Canadian study have been analyzed and the benefit-risk assessment for Trasylol® can be re-evaluated together with the health authorities. In some countries, including the United States, Trasylol® continues to be available to certain surgical patients with an established medical need. We are closely cooperating with health authorities to resolve the questions that have arisen.
Bayer believes it has meritorious defenses and intends to defend itself vigorously. Based on the information currently available, Bayer has taken accounting measures for anticipated defense costs.
Diabetes Care investigation
The United States Department of Justice has pending an investigation against Bayer HealthCare’s Diabetes Care Division regarding the manner in which Bayer provided marketing support to certain customers who marketed and sold Bayer blood glucose meters and test strips to patients. Bayer is cooperating in the investigation.
Competition law proceedings
Cipro®: 39 putative class action lawsuits and one individual lawsuit against Bayer involving the medication Cipro® are pending in the United States. These matters first arose in July 2000. The plaintiffs are suing Bayer and other companies also named as defendants, alleging that a settlement to end patent litigation reached in 1997 between Bayer and Barr Laboratories, Inc. violated antitrust regulations. The plaintiffs claim the alleged violation prevented the marketing of generic ciprofloxacin as of 1997. In particular, they are seeking triple damages under U.S. law. After the settlement with Barr the patent was the subject of a successful re-examination by the U.S. Patent and Trademark Office and of successful defenses in U.S. federal courts. It has since expired. All the actions pending in federal court were consolidated in federal district court in New York in a multi-district litigation (MDL) proceeding. In 2005 the court dismissed all of plaintiffs’ claims in the MDL proceeding. The plaintiffs have appealed this decision. Further cases are pending before various state courts. Bayer believes that it has meritorious defenses and intends to defend itself vigorously.
Antitrust proceedings in connection with polymers
All proceedings by authorities reported in the past relating to rubber, polyester polyols, polyether polyols, urethanes, urethane chemicals and other primary products for urethane end products in which fines were expected have since been terminated. Most recently, a fine of €28.87 million was imposed by the E.U. Commission upon Bayer for antitrust violations relating to nitrile butadiene rubber.
In addition, subject to few exceptions, all North American civil lawsuits for damages relating thereto have been settled. Bayer no longer considers the remaining risks to be material. However, there is a possibility that further lawsuits may be filed.
In Europe, the E.U. Commission imposed fines upon Bayer or granted Bayer full amnesty in antitrust investigations concerning the products rubber chemicals, butadiene rubber, styrene butadiene rubber, polychloroprene rubber and nitrile butadiene rubber. Bayer is expecting civil antitrust lawsuits for damages to be filed concerning these products.
A new class action alleging antitrust violations in connection with certain rubber products was filed recently in Australia. The proceeding is still at a very early stage.
The financial risk from the Australian litigation and the litigation expected in Europe cannot currently be quantified. Therefore, Bayer is unable to take any accounting measures in this regard.
In addition, subject to few exceptions, all North American civil lawsuits for damages relating thereto have been settled. Bayer no longer considers the remaining risks to be material. However, there is a possibility that further lawsuits may be filed.
In Europe, the E.U. Commission imposed fines upon Bayer or granted Bayer full amnesty in antitrust investigations concerning the products rubber chemicals, butadiene rubber, styrene butadiene rubber, polychloroprene rubber and nitrile butadiene rubber. Bayer is expecting civil antitrust lawsuits for damages to be filed concerning these products.
A new class action alleging antitrust violations in connection with certain rubber products was filed recently in Australia. The proceeding is still at a very early stage.
The financial risk from the Australian litigation and the litigation expected in Europe cannot currently be quantified. Therefore, Bayer is unable to take any accounting measures in this regard.
Antitrust proceedings in connection with over-the-counter drugs in Germany
The German Federal Cartel Office (Bundeskartellamt) has instituted an inquiry against Bayer Vital GmbH questioning the manner in which Bayer extended discounts to its pharmacy customers. Bayer is cooperating with the Bundeskartellamt in its investigation.
Proceedings involving genetically modified rice
Since August 2006, Bayer CropScience LP has been party to multiple lawsuits, including putative class actions, filed in U.S. federal and state courts by rice farmers and resellers. Plaintiffs allege that they have suffered economic losses after traces of genetically modified rice were identified in samples of conventional long-grain rice grown in the U.S. This is alleged to have led to various commercial damages, including a decline in the commodity price for long-grain rice, costs associated with restrictions on imports and exports, and costs to secure alternative supplies. All the actions pending in federal court were consolidated in December 2006 in federal district court in Missouri in a multi-district litigation (MDL) proceeding, and plaintiffs recently asked that court to certify a class action.
In development of the genetically modified rice, field testing was conducted in cooperation with third parties, including a breeding research institute in the U.S. The genetically modified rice was never commercialized.
The USDA and the FDA have stated that the genetically modified rice does not present a health risk and is safe for use in food and feed and for the environment. Additionally, in October 2007, the USDA released its report concerning its investigation into how the genetically modified rice entered the commercial rice supply. The USDA was unable to determine a cause and indicated it would not pursue any enforcement actions against Bayer CropScience or any other party.
Bayer believes it has meritorious defenses in these actions and intends to continue to defend itself vigorously. Bayer has taken accounting measures for anticipated defense costs based on the information currently available.
In development of the genetically modified rice, field testing was conducted in cooperation with third parties, including a breeding research institute in the U.S. The genetically modified rice was never commercialized.
The USDA and the FDA have stated that the genetically modified rice does not present a health risk and is safe for use in food and feed and for the environment. Additionally, in October 2007, the USDA released its report concerning its investigation into how the genetically modified rice entered the commercial rice supply. The USDA was unable to determine a cause and indicated it would not pursue any enforcement actions against Bayer CropScience or any other party.
Bayer believes it has meritorious defenses in these actions and intends to continue to defend itself vigorously. Bayer has taken accounting measures for anticipated defense costs based on the information currently available.
Proceedings involving oral contraceptives
Yasmin®: In April 2005, Bayer Schering Pharma filed suit against Barr Pharmaceuticals Inc. and Barr Laboratories Inc. in U.S. federal court alleging patent infringement by Barr for its intended generic version of Bayer Schering Pharma’s Yasmin® oral contraceptive product in the United States. In June 2005 Barr filed its counterclaim seeking to invalidate Bayer Schering Pharma’s patent. Barr conceded that the marketing of a generic version of Yasmin® would infringe Bayer’s patent, therefore the proceedings now relate solely to the question of the validity of the patent. Trial of the matter began on November 15, 2007 and ended on December 4, 2007. Bayer is awaiting a court decision. YAZ®: In January 2007, Bayer Schering Pharma received notice from Barr Laboratories Inc. that it has filed an ANDA paragraph IV application with the U.S. FDA seeking approval of a generic version of Bayer Schering Pharma’s YAZ® oral contraceptive product. In October 2007 Bayer Schering Pharma received notice that Watson Laboratories Inc. also had filed an ANDA paragraph IV application with the U.S. FDA seeking approval of a generic version of Bayer Schering Pharma’s YAZ® oral contraceptive product. Both applications claim that Bayer Schering Pharma’s patents are invalid and/or that the respective generic product does not infringe them. Bayer has filed a patent infringement suit against Watson claiming, inter alia, that Bayer’s ’531 patent has been infringed. Bayer’s ’531 patent is also at issue in the patent infringement suit against Barr, mentioned in the previous paragraph, relating to the Yasmin® oral contraceptive. Bayer Schering Pharma retains FDA marketing exclusivity for YAZ® as an oral contraceptive until March 2009. The Yasmin® and YAZ® oral contraceptive products are very important to the business. Bayer is deeply committed to maintaining its leadership in oral contraception and intends to continue to vigorously defend its position.
Proceedings involving propylene oxide
In May 2006, a U.S. arbitration panel issued a final award in favor of Lyondell Chemical Co. in respect of a dispute with Bayer over interpretation of their Joint Venture Agreement for the manufacture of propylene oxide. Subsequently, Bayer sought to vacate the final award. Lyondell seeks to confirm such award and obtain pre-award interest. On March 20, 2007, the Texas District Court denied Bayer’s motion to vacate, confirmed in part the final award and ordered additional discovery. Bayer has established appropriate provisions for the entire matter.
In addition, in January 2007, Bayer filed suit against Lyondell in the U.S. seeking equitable reformation of an agreement and restitution of certain monies paid or, as a result of the final award, allegedly owing by Bayer to Lyondell in connection with the panel award.
Bayer has separately notified Lyondell of Bayer’s claim to compensation for use by Lyondell’s affiliate of certain quantities of propylene oxide from Bayer’s share of capacity under the Joint Venture.
In addition, in January 2007, Bayer filed suit against Lyondell in the U.S. seeking equitable reformation of an agreement and restitution of certain monies paid or, as a result of the final award, allegedly owing by Bayer to Lyondell in connection with the panel award.
Bayer has separately notified Lyondell of Bayer’s claim to compensation for use by Lyondell’s affiliate of certain quantities of propylene oxide from Bayer’s share of capacity under the Joint Venture.
Patent and contractual disputes
In August 2005, Abbott Laboratories commenced a lawsuit in the United States against Bayer and another party alleging infringement of two of Abbott’s patents relating to blood glucose monitoring devices. One of the devices concerned, sold by Bayer as part of its Ascensia® Contour® system, is supplied to Bayer by a Japanese manufacturer, who originally designed the product. The manufacturer is contractually obligated to indemnify Bayer against potential liability, including defense costs, with respect to infringement claims such as this. In July 2006, Abbott added a separate claim of infringement against the devices sold by Bayer as part of its DEX® and Autodisc® system. Bayer is not entitled to indemnification on this separate claim.
In November 2007, Roche Diagnostics Operations and Corange International commenced a lawsuit in the United States against Bayer and several other parties alleging infringement of two of Roche’s patents relating to blood glucose monitoring devices. Two of the accused devices are sold by Bayer as part of its Breeze® 2 and Contour® systems.
In France, Limagrain has filed suit – as legal successor to Rhône-Poulenc Agrochimie SA – against Bayer for indemnity against liabilities to third parties arising from an alleged breach of a 1986 contract to which Rhône-Poulenc was a party. A court decision is expected shortly. In parallel binding arbitration proceedings in the U.S., the arbitration panel in March 2006 denied all of Limagrain’s claims of more than US$ 60 million.
In a further dispute, Bayer has filed suit against several companies in the U.S. alleging patent infringement in connection with moxifloxacin. These companies are defending the action, claiming, among other things, that the patents are invalid, not enforceable or not infringed. In October 2007, in one of these proceedings, the U.S. District Court for the District of Delaware ruled in favor of Bayer finding validity, enforceability and infringement of the two enforced Bayer patents. No appeal was filed. In the two proceedings still pending, the trial is scheduled to begin in late February 2008.
In February 2008, Bayer received notice of a patent infringement suit filed in the United States by Novartis Vaccines and Diagnostics Inc. and Novo Nordisc A/S alleging that Bayer’s manufacturing and marketing of the recombinant Factor VIII productKogenate® infringe a substance patent granted in 2006. The suit primarily seeks damages. Bayer does not believe that it has infringed any valid patent.
Bayer believes it has meritorious defenses in these patent and contractual disputes and intends to defend itself vigorously.
Ascensia® Contour® system, is supplied to Bayer by a Japanese manufacturer, who originally designed the product. The manufacturer is contractually obligated to indemnify Bayer against potential liability, including defense costs, with respect to infringement claims such as this. In July 2006, Abbott added a separate claim of infringement against the devices sold by Bayer as part of its DEX® and Autodisc® system. Bayer is not entitled to indemnification on this separate claim. In November 2007, Roche Diagnostics Operations and Corange International commenced a lawsuit in the United States against Bayer and several other parties alleging infringement of two of Roche’s patents relating to blood glucose monitoring devices. Two of the accused devices are sold by Bayer as part of its Breeze® 2 and Contour® systems.
In France, Limagrain has filed suit – as legal successor to Rhône-Poulenc Agrochimie SA – against Bayer for indemnity against liabilities to third parties arising from an alleged breach of a 1986 contract to which Rhône-Poulenc was a party. A court decision is expected shortly. In parallel binding arbitration proceedings in the U.S., the arbitration panel in March 2006 denied all of Limagrain’s claims of more than US$ 60 million.
In a further dispute, Bayer has filed suit against several companies in the U.S. alleging patent infringement in connection with moxifloxacin. These companies are defending the action, claiming, among other things, that the patents are invalid, not enforceable or not infringed. In October 2007, in one of these proceedings, the U.S. District Court for the District of Delaware ruled in favor of Bayer finding validity, enforceability and infringement of the two enforced Bayer patents. No appeal was filed. In the two proceedings still pending, the trial is scheduled to begin in late February 2008.
In February 2008, Bayer received notice of a patent infringement suit filed in the United States by Novartis Vaccines and Diagnostics Inc. and Novo Nordisc A/S alleging that Bayer’s manufacturing and marketing of the recombinant Factor VIII product
Kogenate® infringe a substance patent granted in 2006. The suit primarily seeks damages. Bayer does not believe that it has infringed any valid patent. Bayer believes it has meritorious defenses in these patent and contractual disputes and intends to defend itself vigorously.
Further legal proceedings
Numerous actions are pending against Bayer seeking damages for plaintiffs resident outside of the United States who claim to have become infected with HIV or HCV (hepatitis C virus) through use of blood plasma products sold by Bayer. Additional actions are pending by U.S. residents who claim to have been infected with HCV.
In the United States, Bayer, together with other manufacturers, resellers and applicators, is a defendant in multiple cases, including a putative class action, that seek damages for personal injuries allegedly resulting from exposure to diphenylmethane diisocyanate (MDI) used in coal mines.
Bayer and a number of pharmaceutical companies in the United States are defendants in pending lawsuits in which plaintiffs, including states, are alleging manipulation in the reporting of wholesale prices and/or best prices for their prescription pharmaceutical products. The plaintiffs seek damages, including disgorgement of profits and punitive damages.
The shareholder resolution on the domination and profit and loss transfer agreement between Bayer Schering Pharma AG and Bayer Schering GmbH passed at the Extraordinary Stockholders’ Meeting held on September 13, 2006 is subject to legal challenges. Dissenting stockholders are seeking to have the stockholder resolution set aside or to have it declared null and void. Bayer Schering Pharma AG has commenced special proceedings (Freigabeverfahren) to obtain a judgment that the stockholder actions do not prevent registration of the domination and profit and loss transfer agreement and that any defects of the stockholder resolution do not affect the validity of the registration. In May 2007 the District Court of Berlin (Landgericht Berlin) dismissed all of the stockholders’ actions and approved Bayer Schering Pharma AG’s application in the aforementioned special proceedings. Meanwhile, both proceedings are pending before the High Court of Berlin (Kammergericht Berlin). Several stockholders have initiated a valuation proceeding (Spruchverfahren) seeking to have reviewed the adequacy of the compensation (Abfindung) and of the guaranteed dividend (Ausgleich) provided for in the domination and profit and loss transfer agreement. This proceeding is pending before the District Court of Berlin (Landgericht Berlin) as the court of first instance. One stockholder has brought a suit in Berlin, Germany, seeking to have registration of the domination and profit and loss transfer agreement in the Commercial Register removed (Amtslöschungsverfahren). The Local Court of Berlin-Charlottenburg (Amtsgericht Berlin-Charlottenburg) has dismissed such suit. The stockholder appealed to the District Court of Berlin (Landgericht Berlin), which dismissed the appeal on November 22, 2007. The further appeal brought is pending before the High Court of Berlin (Kammergericht Berlin).
A further risk may arise from asbestos litigation in the United States. In the majority of these cases, the plaintiffs allege that Bayer and co-defendants employed third parties on their sites in past decades without providing them with sufficient warnings or protection against the known dangers of asbestos. Additionally, a Bayer affiliate in the United States is the legal successor to companies that sold asbestos products until 1976. Union Carbide has agreed to indemnify Bayer for this liability.
Bayer, among others, had been named as a defendant in a putative nationwide class action filed in federal court in North Carolina, United States, which alleges violations of antitrust laws in the marketing of a certain pest control product (Premise®). On July 13, 2007, the court granted summary judgment in favor of the defendants and plaintiffs have appealed.
On September 26, 2006, a high pressure rupture of a holding tank interrupted operation of the toluene diisocyanate II unit at the Baytown, Texas facility. After the rupture, 59 contractor employees filed a lawsuit against Bayer in Texas state court. Plaintiffs allege that they have suffered physical damages and seek both compensatory and punitive damages. The first trial, to address the claims of five plaintiffs, is scheduled to begin in March 2008. Bayer is an additional named insured on insurance policies of one of the contractors, which employed 44 of the plaintiffs.
Bayer believes it has meritorious defenses in the legal proceedings reported in this section and intends to continue to defend itself vigorously.
In the United States, Bayer, together with other manufacturers, resellers and applicators, is a defendant in multiple cases, including a putative class action, that seek damages for personal injuries allegedly resulting from exposure to diphenylmethane diisocyanate (MDI) used in coal mines.
Bayer and a number of pharmaceutical companies in the United States are defendants in pending lawsuits in which plaintiffs, including states, are alleging manipulation in the reporting of wholesale prices and/or best prices for their prescription pharmaceutical products. The plaintiffs seek damages, including disgorgement of profits and punitive damages.
The shareholder resolution on the domination and profit and loss transfer agreement between Bayer Schering Pharma AG and Bayer Schering GmbH passed at the Extraordinary Stockholders’ Meeting held on September 13, 2006 is subject to legal challenges. Dissenting stockholders are seeking to have the stockholder resolution set aside or to have it declared null and void. Bayer Schering Pharma AG has commenced special proceedings (Freigabeverfahren) to obtain a judgment that the stockholder actions do not prevent registration of the domination and profit and loss transfer agreement and that any defects of the stockholder resolution do not affect the validity of the registration. In May 2007 the District Court of Berlin (Landgericht Berlin) dismissed all of the stockholders’ actions and approved Bayer Schering Pharma AG’s application in the aforementioned special proceedings. Meanwhile, both proceedings are pending before the High Court of Berlin (Kammergericht Berlin). Several stockholders have initiated a valuation proceeding (Spruchverfahren) seeking to have reviewed the adequacy of the compensation (Abfindung) and of the guaranteed dividend (Ausgleich) provided for in the domination and profit and loss transfer agreement. This proceeding is pending before the District Court of Berlin (Landgericht Berlin) as the court of first instance. One stockholder has brought a suit in Berlin, Germany, seeking to have registration of the domination and profit and loss transfer agreement in the Commercial Register removed (Amtslöschungsverfahren). The Local Court of Berlin-Charlottenburg (Amtsgericht Berlin-Charlottenburg) has dismissed such suit. The stockholder appealed to the District Court of Berlin (Landgericht Berlin), which dismissed the appeal on November 22, 2007. The further appeal brought is pending before the High Court of Berlin (Kammergericht Berlin).
A further risk may arise from asbestos litigation in the United States. In the majority of these cases, the plaintiffs allege that Bayer and co-defendants employed third parties on their sites in past decades without providing them with sufficient warnings or protection against the known dangers of asbestos. Additionally, a Bayer affiliate in the United States is the legal successor to companies that sold asbestos products until 1976. Union Carbide has agreed to indemnify Bayer for this liability.
Bayer, among others, had been named as a defendant in a putative nationwide class action filed in federal court in North Carolina, United States, which alleges violations of antitrust laws in the marketing of a certain pest control product (
Premise®). On July 13, 2007, the court granted summary judgment in favor of the defendants and plaintiffs have appealed. On September 26, 2006, a high pressure rupture of a holding tank interrupted operation of the toluene diisocyanate II unit at the Baytown, Texas facility. After the rupture, 59 contractor employees filed a lawsuit against Bayer in Texas state court. Plaintiffs allege that they have suffered physical damages and seek both compensatory and punitive damages. The first trial, to address the claims of five plaintiffs, is scheduled to begin in March 2008. Bayer is an additional named insured on insurance policies of one of the contractors, which employed 44 of the plaintiffs.
Bayer believes it has meritorious defenses in the legal proceedings reported in this section and intends to continue to defend itself vigorously.
Liability considerations following the LANXESS spin-off
The liability situation following the spin-off of the LANXESS subgroup is governed by both statutory and contractual provisions. Under the German Transformation Act, all entities that are parties to a spin-off are jointly and severally liable for obligations of the transferor entity that are established prior to the spin-off date. Bayer AG and LANXESS AG are thus jointly and severally liable for a time period of five years for all obligations of Bayer AG that existed on January 28, 2005.
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