(The opinions expressed here are those of Alison Frankel, a columnist for Reuters.)
By Alison Frankel
NEW YORK (Reuters) - Is there any Allergan shareholder who isn’t aware that William Ackman’s hedge fund, Pershing Square Capital, and the Canadian pharmaceutical company Valeant slipped through a loophole in the securities laws when they teamed up on a hostile bid for the Botox maker?
Or that Allergan believes the loophole is actually a violation of the law and Pershing is engaged in insider trading?
If so, I’d like to know the name of the remote Pacific atoll where you’ve apparently been luxuriating without the Internet, newspapers and television for the past few months.
This cleverly lawyered deal has been chronicled (including by me) with the sort of play-by-play analysis that’s usually reserved for NFL playoff games or middle-school romances.
Yet according to Allergan’s new bid for a preliminary injunction, filed Monday night in federal court in Santa Ana, California, Allergan shareholders have been operating at a critical disadvantage: They haven’t fully understood the risk that Pershing and Valeant were breaking the law.
Allergan’s lawyers at Latham & Watkins and Wachtell, Lipton, Rosen & Katz argue not only that Pershing shouldn’t be permitted to vote its nearly 10 percent stake when Allergan shareholders convene on Dec. 18 to consider the ouster of six Allergan board members, but also that Pershing should also be enjoined from voting the proxies it collects in the formal proxy fight the hedge fund launched on Sept. 29.
Shareholders, according to Allergan, can’t make a well-reasoned decision about replacing directors until Pershing discloses its supposed insider trading.
“A preliminary injunction against voting proxies until supplemental disclosures have been made is the only means of avoiding an uninformed shareholder vote,” Allergan said in the brief filed Monday.
This is an interesting new tactic by Allergan.
Some of the company’s large shareholders have emerged publicly in the past couple of weeks to question the board’s response to the Valeant takeover threat.
Those statements doesn’t necessarily mean that they or any other shareholders have tendered (or plan to tender) proxies to Pershing, although it’s also worth pointing out that more than 30 percent of Allergan’s shareholders joined Pershing’s demand that the Allergan board convene a special meeting to vote on replacing directors.
With this new injunction motion, Allergan is trying to neutralize whatever outside support Pershing has already amassed.
‘NO SUCH THING AS CO-BIDDERS’ U.S. District Judge David Carter is holding a hearing on the Allergan injunction at the end of October. If Allergan obtains the injunction it’s asking for, Pershing will have only six or seven weeks to relaunch its proxy campaign - with “corrective disclosures” about its alleged insider trading - in advance of the special shareholder meeting. And meanwhile, Allergan’s own proxy statement went out Tuesday.
Will Allergan win the preliminary injunctions it wants? You probably wouldn’t change your bet on the answer to that question based on the public version of the company’s new brief.
The fact section of the brief is heavily redacted, so it’s impossible to know whether Allergan has uncovered new evidence to back its contention that Pershing is an inside trader, not a joint bidder. The unredacted facts, Allergan alleges, aren’t anything anyone hasn’t already heard.
The company has refined its legal arguments, though. You’ll recall that Allergan’s accusations of insider trading stem from the Williams Act, which prohibits anyone except an acquirer from trading on material non-public knowledge that the acquirer has taken “a substantial step” toward launching a tender offer.
Pershing and Valeant said they’d worked around both prongs of the prohibition by making a joint offer for Allergan and by acquiring shares of Allergan before beginning to plan a tender offer.
Allergan’s new brief argues that for the purposes of insider trading, there is no such thing as co-bidders. The only reference to co-bidders in the securities laws, according to Allergan, is in disclosure provisions intended to prevent two or more buyers from secretly working together to amass a stake in a public company.
The insider trading provisions, by contrast, hold that only an “offering person” - in the singular - is permitted to buy shares in advance of a tender offer.
According to Allergan, there’s no room in the statutory language or the legislative history of the insider trading provision for more than one acquirer.
Pershing, it says, is more like the financier of Valeant’s bid than a co-bidder - and bankers aren’t permitted to trade based on inside information.
“If one of the banks that is financing Valeant’s hostile bid had, at Valeant’s urging, purchased a substantial block of Allergan’s shares in the weeks before the bid was announced and agreed to accept the inevitable post-announcement stock price appreciation in lieu of standard financing fees,” Allergan said, “there would be no question that Valeant and the bank had engaged in insider trading. This case is no different.”
Allergan also argues that as soon as Valeant began plotting a hostile bid for Allergan, hiring lawyers and consultants and discussing financing with Pershing, it was taking “substantial steps” toward about a tender offer.
Enforcement actions by the Securities and Exchange Commission, Allergan said, have established a quick trigger for the ban on trading in advance of a tender offer. According to Allergan, the prohibition was activated before Pershing bought a single share of the company.
FOREVER CHANGE OWNERSHIP? Mostly, Allergan is arguing that if Judge Carter doesn’t stop Valeant and Pershing, the loophole they exploited will expand until it swallows the law that’s supposed to prevent insiders from trading in advance of a hostile tender offer.
“Valeant and Pershing Square have invented a hostile takeover plan that, if found lawful, would forever change the way public companies are owned and acquired in the United States, at the expense of ordinary stockholders,” the brief says.
Interestingly, Allergan also says that its own ordinary stockholders have fled in droves since the Valeant takeover fight began.
Allergan loyalists who don’t want to get stuck with Valeant shares - Valeant’s offer for Allergan is part cash, part stock - have, according to Allergan’s brief, sold off their shares to speculators betting that Allergan’s stock price will be driven up by Valeant’s offer.
The injunction Allergan is seeking would protect these Allergan-described arbitrageurs from tendering their shares without knowing enough about Pershing’s allegedly illegal trades.
Now you might think that opportunists sufficiently savvy to buy Allergan shares in order to capitalize on Valeant’s Pershing-backed bid would be just the kind of investors who would already have factored in the risk that Pershing has violated insider trading laws, considering that Allergan first made those accusations two months ago. But Allergan seems to think that even arbitrageurs need its help.
I guess the idea is that there’s a difference between its accusations and a judge’s findings. And, of course, there are those Pacific atoll shareholders to think about.
Pershing and Valeant, represented by Kirkland & Ellis and Sullivan & Cromell, respectively, will respond to Allergan’s brief next week. The preliminary injunction hearing is set for Oct. 28.
Reporting by Alison Frankel. Editing by Ted Botha.