After some further research, I have revised my thoughts on the...

After some further research, I have revised my thoughts on the Strides/Mylan General Claims escrow.

I have noted the following explanation in Note 37.1 of the Strides Annual Report(FYE 31/03/17)

In the current year, all claims towards regulatory expenses have been settled and the Group received USD 28.33 Million as full and final settlement from out of the Regulatory Escrow deposit. The Company and Mylan also agreed on full and final settlement of warranty and indemnity claims which were adjusted against the General Claims Escrow.  The balance available in the General Claims Escrow as at March 31, 2017 in respect of all claims is USD 62 Million.

As at March 31, 2017, the outstanding claims relate to certain tax claims and third party claims. Considering the nature of the pending claims, the terms of the SPAs and the balance available in General Claims escrow, the management believes that any further outflow of resources is not probable.

This makes it clear that there was a full and final settlement of the Regulatory Claims Escrow Account, with Strides receiving USD 28.33 million of the original USD 100 million escrow amount.

There are three type of claims to be covered by the other USD 100 million General Claims Escrow account– warranty and indemnity claims, tax claims and third party claims (any claims against Mylan by POH relating to Agila would be considered a third party claim).

Strides reached full and final settlement with Mylan with respect to the warranty and indemnity claims only – Mylan got to keep USD 38 million.

That leaves USD 62 million in the General Claims Escrow account to meet outstanding tax or third party claims.

As noted in a previous post, with respect to outstanding claims, the management of Strides Shasun, noting the funds in the escrow account, has stated its belief that “any further outflow of resources is not probable”.

This assessment by Strides management is restated in the Independent Auditors Report Emphasis of Matters section of the Annual Report, where a repeated reference is made to the funds still held in escrow as well as the corporate guarantee provided in favour of Mylan. Interestingly the Auditors then state their opinion.

So what is the opinion of Strides’ Independent Auditor?

Report on Other Legal and Regulatory Requirements
(e)  In our opinion, any unfavourable outcome with regard to the matter referred to in Note 37.1 to the consolidated financial statements resulting in outflow of resources, significantly in excess of amounts set aside in escrows stated in the said Note, may have an adverse effect on the functioning of the Group.

So my revised thoughts are:

• the amount of any disputed claim would have to remain in the $100 million General Claims Escrow account past 31 December 2017 if any previously advised tax or third party claims were still unresolved
• there was USD 62 million remaining in that account, as at 30/06/17, to meet any outstanding tax or third party claims
• if those funds aren’t used to settle any tax or third party claims notified prior to 31/12/17, I believe these funds would be returned to Strides
• therefore, it seems logical to me that Mylan would be motivated to settle POH’s claim from the available escrow funds, which would otherwise be returned to Strides
• furthermore, it seems logical that Mylan would want to avoid the risk of an “unfavourable outcome…significantly in excess of amounts set aside in escrows”, given that the Independent Auditor has highlighted that such an outcome could have an adverse effect on Strides' ability to operate. One might say, agree to hand over the bird in the hand, as there just might not be two in the bush.
• it is understandable that Strides might not want to settle, as it would get any funds remaining in escrow
• on the other hand, it seems more likely that Strides would be motivated to settle as the company could be in deep trouble if it risked arbitration and the amount of order was significantly in excess of the amount remaining in escrow.

Consequently, I think the argument weighs heavily in favour of Mylan/Strides favouring settlement.


A reminder that this is my view only and I am not an expert in these matters. As always, DYOR.