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Bankruptcy Court OKs Vermillion Incentive Bonus Plan as Part of Chapter 11 Proceedings

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The US Bankruptcy Court in Delaware this week approved an incentive bonus plan that could result in significantly lower payments to Vermillion's three directors than they would have received under a plan proposed by the company.

The decision handed down by the court is part of Chapter 11 proceedings by Vermillion as it works through its proposed bankruptcy reorganization [see PM 04/02/09].

The terms set by the court cover both gross proceeds from the sale of any assets as part of the reorganization; and any distribution of cash, debt, or equity if and when Vermillion's reorganization plan is approved.

Vermillion's OVA-1 triage ovarian cancer diagnostic is currently under review by the US Food and Drug Administration for possible 510(k) clearance, but any decision reached by the agency would not affect the court's terms.

Under those terms, described in a court document dated June 22, Vermillion's directors, Gail Page, James Burns, and John Hamilton would be awarded:

- nothing for the first $3 million of any sale of assets or distribution of cash, debt, or equity;
- 6 percent of the total value of the sale of assets or distribution of cash, debt, or equity greater than $3 million but less than or equal to $10 million;
- and 8 percent of the total value of the sale of assets or distribution of cash, debt, or equity greater than $10 million.

Page would be paid 50 percent of the total incentive bonus, while Burns and Hamilton would receive 25 percent each of the bonus, unless the three agree to other conditions.

So, for example, under the court's formula, if Vermillion were to receive gross proceeds of $16 million from a sale of its assets, Page, Burns, and Hamilton would receive a total of $900,000 as a bonus, calculated as follows: They would receive no bonus for the first $3 million of the $16 million; but they would be awarded $420,000 for the next $7 million of the proceeds; and would receive $480,000 on the next $6 million of the proceeds.

Half of the $900,000 bonus would be given to Page, while Burns and Hamilton would each receive $225,000.

Unders some circumstances, the directors' bonuses could be substantially reduced under the court's plan from an incentive bonus plan submitted by Vermillion in late April [see PM 04/30/09].

Under Vermillion's plan, Page would receive an $800,000 bonus if its reorganization plan had been approved and the cash, debt, or equity distributed equaled $16 million, compared to the $450,000 under the court's plan.

But under the company's proposed plan, Page would receive a $300,000 bonus if an asset sale prior to FDA approval of the OVA-1 test had netted $16 million.

The idea of an incentive bonus plan was called into question soon after Vermillion filed a motion for court approval of its plan. A US Bankruptcy trustee and a Vermillion creditor, Quest Diagnostics, said that Vermillion's plan violated bankruptcy codes, and amounted to a "pay-for-play" payment designed to keep the three directors from jumping ship, and asked the court to deny Vermillion's motion [see PM 05/14/09].

In its decision, the court did not address the trustee's or Quest's objections. It however, said that the incentive plan "is in the best interest of [Vermillion], its creditors, and other parties in interest."

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