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Michael Pearson, Chairman of the board and Chief Executive Officer of Valeant Pharmaceuticals.


An unusual $100-million (U.S.) loan deal involving Valeant Pharmaceuticals International Inc. chief executive officer Michael Pearson is raising questions about the company's governance practices after he was forced to sell 1.3 million shares he held in the company.

Valeant issued a news release Friday saying Goldman Sachs Group Inc. sold 1.3 million of Mr. Pearson's Valeant shares that it held as collateral for his loans, even though Mr. Pearson did not want the shares to be sold.

The drug company said Mr. Pearson borrowed the $100-million from Goldman Sachs to make charitable donations, meet tax obligations and purchase Valeant shares. His charitable donations included a $30-million pledge to Duke University in 2014 and a promise to help fund a community swimming pool.

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But Goldman "required repayment of the loans" as Valeant's stock plummeted in the face of allegations and investigations, and the firm sold the shares to cover the full amount of the outstanding loan, Valeant said.

Mr. Pearson said he did not agree with the decision.

"Since joining Valeant, I have not sold any shares provided to me as compensation, and it was not my desire that shares be sold now," he said in a statement.

Mr. Pearson pledged a total of two million shares to cover the loan, representing about 20 per cent of the 10 million shares he owned.

Concordia University professor Michel Magnan, who specializes in governance issues, said Valeant's board "has played a game of cat and mouse" with Mr. Pearson over his shares and his loans, and problems are coming at a bad time as Valeant faces a bigger crisis.

"It does not inspire confidence in the governance of the company," he said.

Valeant officials said there would be no further comment beyond Friday's news release.

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In its most recent shareholder proxy circular, Valeant said the board imposed restrictions on Mr. Pearson in 2010 – which have been subsequently extended – prohibiting him from selling any of his shares in the company until 2017 as part of a policy to retain and motivate executives who have built significant wealth in the company.

Mr. Pearson later used some shares as collateral for loans, the proxy circular says, and was given approval by the board. But the board said it then decided it wanted to "reduce the level of pledging generally at the company in the future," so it introduced a policy in 2014 prohibiting the use of shares as loan collateral, with exceptions for Mr. Pearson's loans.

Earlier this year, the board modified Mr. Pearson's employment agreement to allow him to sell three million shares despite his sale restrictions, plus use another one million shares for charitable giving, "which may reduce the level of pledging." He has not sold any shares.

Compensation consultant Ken Hugessen said he has seldom seen companies prohibit CEOs from selling any of their shares, and Valeant demonstrates that such a restrictive policy leaves executives too constrained with much of their wealth tied up in illiquid shares.

He said it is not a solution to let executives pledge shares as loan collateral, because it takes control of the share sales out of their hands.

"It would be better by far if [Mr. Pearson] would have sold those shares at the time he pledged them and just put out a press release. … It would have been part of ancient history. That's really the lesson – sell when you can, not when you're up against the wall."

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York University law professor and governance expert Richard Leblanc said it is unusual for companies today to allow senior executives to pledge their shares for loans or other hedging purposes. It is even more unusual when companies have a written policy prohibiting the practice, he said.

"It's just very anomalous. And the quantum of it – $100-million – should raise alarm bells."

Prof. Leblanc said most boards have banned executives from hedging their shares, or pledging them as collateral because they give up direct control over the holdings, which distorts the benefits of owning shares to align with shareholder interests.

Prof. Magnan said behaviours can change when executives are allowed to hedge or pledge their shares, because they may no longer be as motivated to think like shareholders. Some may take more risks, for example, or be less interested in long-term growth.

Prof. Leblanc said the fact that Mr. Pearson is both chair of the board and CEO has given him too much power to shape rules to his benefit. A board chair sets agendas, controls board meetings and plays a role in choosing directors for the board, Prof. Leblanc said.

"It's a huge concentration of power in one person, and there's the capacity for self-interest when you're chair and CEO," Prof. Leblanc said. "And this is a very good example."

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Mr. Pearson – who graduated from Duke with both bachelor of science and engineering degrees – pledged $30-million to the university's Pratt School of Engineering in June, 2014.

Goldman has had a long-term relationship with Valeant as adviser, lender and underwriter. A veteran Goldman senior executive, Howard Schiller, left in 2011 to become Valeant's chief financial officer. He left in June but remains on Valeant's board.

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