Glossary of Hostile Takeover Terms with Discussion

Court Ruling

Hello everyone:

I had a chance to read the judge's ruling regarding the Insider Trading injunction request by Allergan.

I noted that some complained here implying that the judge's ruling somehow proved my writings wrong. I think I've gone out of my way, with regard to this case, to say that as we are on uncharted legal territory, I was not going to handicap any merits decision. I also stated, in multiple posts, that a decision in either direction won't be the end of the story for either side. Well, the legal territory is a lot more charted today than a week ago, so I can be a bit less tentative with my interpretations, and, clearly, we are not at the end of the story.

Before we dive in, let's note the context of this ruling within the overall lawsuit. The suit alleges Insider Trading by V/PS and requests that the court provide justice to the victims of this wrongdoing. The suit is far from over -- probably years away. Eventually, after countless hearings, depositions, discoveries, motions, and other legal mechanics, if the matter hasn't already been mooted by reality, if the sides haven't settled, and if the judge hasn't already reduced the scope of controversy to irrelevancy, a jury will be convened to decide those issues that the judge deems still within the scope of controversy. In plain English, those questions where reasonable people can disagree will be left to the jury. I may be reluctant to predict judge rulings, but I am always happy to handicap jury decisions in civil cases -- the jury votes for the more sympathetic party; and here, there is zero doubt as to which party is more sympathetic.

Of course, with a critical shareholder meeting 6 weeks away, with the life of the corporation potentially in the balance, it's hard to be comforted by the likelihood of future sympathy of a future jury, years away, maybe. For this reason, Allergan asked the judge to block all shares controlled by V/PS from voting in that meeting.

Allergan's argument can be simplified to say:

1. V/PS committed illegal Insider Trading.
2. We are the victims (*).
3. If V/PS get to vote their shares, irreparable harm will be caused to us.
4. Since we (Allergan) are likely to eventually win (when, in some future year, a jury has ruled), the judge should stop this harm from happening now.

(*) The most direct victims of Insider Trading are those shareholders who sold during the period when the Insider knew that a hostile takeover bid is coming and the selling shareholders didn't. For this reason, Ms. Parschauer, who happened to have sold Allergan shares during that time period, was added as co-plaintiff with Allergan (she is also an employee and a lawyer for Allergan, but that didn't matter).


V/PS counter-argued all those points, and added some of their own:

1. We didn't commit illegal Insider Trading
2. Even if somehow we did, Allergan is not a victim
3. Even if somehow we did, and Allergan is a victim; freezing our share voting rights is not an appropriate remedy
4. Since we (V/PS) are likely to win, if you freeze our shares you would be doing *us* irreparable harm
5. And, Allergan's hand are unclean in this whole matter, so they shouldn't get any consideration from this court

(The suit also talks about proxy and disclosure issues -- but I don't consider that particularly important, V/PS are perfectly happy to disclose anything anyone asks them to with regard to this deal; and the voting shareholders -- 90% institutional -- are perfectly capable of making their own mind and don't really care much about those disclosures; so, I'm going to mostly disregard the whole proxy disclosure part of the suit).

So, what did the judge say?:

Direct quotes from the judge -- even if the judge is quoting someone else -- are colored BLUE to be easily identified. I cut out some dense legalese, sidetracks, legal and case background sections, and long winded discussions (not that I can complain ); but tried to preserve the essence of his words as much as I could. The entire ruling is 30 pages; so a lot more is cut than kept.​

The judge chose to address the various issues in a different order than as above.

About when an injunction is appropriate:
He first addressed the question of when an injunction would be appropriate. His answer is that the situation needs to be fairly severe, or the chance of victory high.

A preliminary injunction is an extraordinary remedy never awarded as of right.
moving party must show: (1) a likelihood of success on the merits; (2) a likelihood of irreparable harm to the moving party in the absence of preliminary relief; (3) that the balance of equities tips in favor of the moving party; and (4) that an injunction is in the public interest. [...]
Under the sliding scale test, a slightly weaker showing of success on the merits (“serious questions going to the merits”) can be outweighed by strong equitable considerations (“a balance of hardships that tips sharply towards the plaintiff.”).​

In plain English: You can get an injunction (the freezing of V/PS shares) if you have excellent chances of eventually winning and you are going to get harmed without the injunction, *or* if your chances of winning are merely good (but not necessarily excellent) and the harm you will suffer without an injunction is a lot more than the harm the other side will suffer from the injunction.

About who is the victim:
Next, he addressed the question of who, if anyone, is the victim. His ruling is that Allergan, the company, is not a victim since it didn't sell any shares. However, Ms. Parschauer who did sell shares, is indeed a victim.

only contemporaneous traders who could have purchased from or sold to the alleged inside trader can bring suit under Rule 14e-3. Here, Ms. Parschauer sold shares on February 26 and March 11, 2014, during the time period that PS Fund 1 purchased shares. Thus, Ms. Parschauer has standing to bring suit under Rule 14e-3. Allergan, however, was not a contemporaneous trader and therefore cannot bring suit under Rule 14e-3. The Court thus restricts its Rule 14e-3 analysis to Ms. Parschauer’s claim.​

This was not entirely unexpected -- in fact, this is exactly why Ms. Parschauer was added as a co-plaintiff. (A quick side note here: In my prior post, when I commented about the hearing transcript, I whined a bit about why Allergan didn't bring a non-employee shareholder victim as co-plaintiff. The Judge dinged them about it a bit during the hearing, asking aloud if an employee who got her shares at a discount was really damaged by the alleged Insider Trading. Well, there was absolutely no trace of this dinging in the ruling. Apparently Ms. Parschauer is a perfectly acceptable victim with no reduction of her victim status due to her employment with Allergan). So, we are still, in, but on the strength of Ms. Parschauer being the victim, not Allergan.

About the Insider Trading allegation:
Next, the Judge began to tackle the core question of whether Insider Trading was actually committed. Recall, from the many prior posts on the subject, that to qualify as Insider Trading, two factors must be present: (1) Valeant must have already taken some 'substantial step(s)' toward a hostile bid at the time the information was passed to PS; and (2) PS was not a part of the acquiring entity. (There is a lot of language discussion about, 'co-bidders,' 'offering person,' and the like; but, to me, it appears that the gist of the matter is if PS is, or is not, a bona fida part of the entity that is proposing to acquire Allergan). Judge Carter first addressed the question of 'substantial step(s):'

Defendants stating in a contract that they had not taken any steps toward a tender offer does not necessarily make it so.
With further discovery and upon presentation of the evidence to the jury, a jury could find for Defendants on the substantial steps issue. However, based on this record, the Court concludes that Plaintiffs have at least raised serious questions as to whether substantial steps to commence a tender offer were taken before PS Fund 1 began purchasing Allergan shares.​

So, a fairly solid victory for Allergan (technically speaking, for Ms. Parschauer) on this point. The judge is seeing right through the machination of V/PS in pretending that they were not planning a hostile bid, when they clearly were. Maybe, the judge tempers himself, a future Jury will think differently; but for now, the judge finds that there is a good chance, maybe even an excellent one, that V/PS did, in fact, take substantial steps toward a hostile bid before PS started buying Allergan shares.


Moving on to the second required component of the Insider Trading allegation, if PS is, or is not, part of the entity that is making the bid for Allergan ("offering person," in legalese). This is, and always was, the heart of the 'uncharted legal territory.' What exactly are the boundaries that separate legitimate joint bidders from anyone who would just call himself a co-bidder to circumvent the Insider Trading rules? When in uncharted legal territory, the best arguments either side can make are weak, and they just hope that the other side's argument would be weaker yet. Allergan argued that the language of the law implied that there can only be one bidder, or otherwise, the law would be meaningless as anyone could write into a contract that they are co-bidders. V/PS argued that they are co-bidders because they wrote into their contract that they are co-bidders.

the Court concludes from its review of the relevant statutory and regulatory text that the term “offering person” can include multiple persons.
The Court’s conclusion that Rule 14e-3 allows multiple persons to act as one “offering person” does not end the analysis. If a co-offering person exception is not to swallow the general rule that an offering person cannot tip off another person and other persons cannot then trade on that confidential tip, there must be certain characteristics that distinguish a co-offering person from “any other person” for Rule 14e-3 purposes. The parties have not cited nor has the Court been able to find any legal authority directly addressing how to distinguish between a co-offering person and “any other person” for Rule 14e-3 purposes. Neither Congress nor the SEC has provided guidance directly on point.

In crafting the February 25 Relationship Agreement, Defendants appear to have been trying to fit their relationship into what they hoped would be recognized as a co-offering person or “co-bidder” exception to Rule 14e-3. Neither the SEC nor the Congress has provided clear guidance in this area. Based on the existing legal authorities and the factual record currently before the Court, the Court concludes that, in this case, Plaintiffs have raised serious questions as to whether Pershing Square is a co-offering person

Based on these considerations, the Court finds that Plaintiffs have, at minimum, raised serious questions regarding whether Pershing Square is an “offering person” or “co-offering person” exempt from Rule 14e-3’s “disclose or abstain” rule.​

The judge, too, agrees that we are on uncharted legal territory. He is not buying Allergan's absolutist argument that there can only be one "offering person" or Valeant's absolutist argument that they are co-bidders because they say so in their own contract. He is however, buying Allergan's lesser argument that there has to be a boundary somewhere, and wherever it is, PS is probably on the wrong side. [The judge did go through a fairly detailed list, not reproduced here because it's long and sometimes obtuse, of the kind of factors that might be relevant to setting the boundaries -- like who will own the acquired company and what will they do with what they acquired -- and, from reading the list, it would seem fairly clear that it was Valeant that was planning to buy Allergan entirely, not PS]. Again, the judge summarized his finding that there is a good, possibly excellent, chance that Allergan will win the argument that PS is not part of the "offering person." ("raised serious questions," in legalese).

Putting one and two together:

In conclusion, the Court finds that Plaintiffs have raised serious questions going to the merits of their Rule 14e-3 claim​

So, the judge is making it clear that he thinks there is a good chance that Insider Trading has taken place!

-- At this point, it is clear that the decision to sue V/PS was a good one. Ackman's smug comments during deposition of what a waste of time this whole exercise is, and how nothing will be found, has been turned into dust. We now have a Federal Judge, in an official ruling, based on the already-known facts (and unknown facts can only move things farther alone, since Insider Trading is a sin committed in secret; whatever exculpatory evidence there may be, presumably, has already been presented, but additional incriminating evidence may yet to be found), finding that there is a good chance that Insider Trading has taken place. Vindication, if there ever to be one, is many years away. If you accept my handicapping that juries go for the sympathetic side, then this good chance ('serious questions') turns into a near-certain loss for Ackman. Judge Carter has now handed a very sharp sword to a thousand wielders with which to torment Ackman to no end. Undoubtedly, even as we speak now, a dozen law firms have begun searching for victims (shareholders who sold while Ackman was accumulating Allergan shares) to affect class action lawsuits. If the SEC, FTC, or other governmental agencies have been thinking about intervening but didn't see a clear path for doing so -- now they have one. And, of course, Allergan, in the many battles to come -- both before and after December 18 -- now has a mighty sword to use. You can be certain that any legal brief filed, here or in Delaware, will prominently label Ackman as the "judge certified serious questions Insider Trader" (not actual legalese terminology, but you get the point).

Readers of my posts know that I do not believe Valeant will win this battle. However, until now, I did believe that Ackman will be making a very handy profit no matter how things turn out. No longer. I now expect that he will make no profit on this deal, no matter how things turn out. Even if Valeant walks away tomorrow and Allergan and Ms. Parschauer agree to drop the suit; the sword unsheathed by Judge Carter can not be re-sheathed without drawing Ackman's blood. Those Class Action lawyers aren't going away without first taking with them every penny Ackman made on this deal (if the regulators don't beat them to that money, that is).

But, before we get too far ahead of ourselves, let's get back to the remedy question.

About the injunction request:
So, since the judge found that there is a good chance that V/PS did Insider Trading, one must go back to the question if an injunction is the appropriate immediate response.

The first part of Plaintiffs’ proposal—to enjoin PS Fund 1 from voting its shares on December 18, 2014 altogether, even if Defendants make corrective disclosures—is more difficult to assess. First, the Court notes that this proposal appears to be targeted at the Rule 14e-3 violation. Only Ms. Parschauer, not Allergan, has a private right of action under Rule 14e-3 because only she is a contemporaneous trader. The harm that she suffered in late February and March can be remedied through damages. Plaintiffs who have adequate remedies of law, typically money damages, are precluded from seeking injunctive relief.​

The judge basically said, no. Since Allergan is not a victim, it can't ask for anything. Ms. Parschauer, however, victim extraordinaire, can ask for money. Since Ackman has plenty of money, she is not at risk of being an uncompensated victim, so she can't get an injunction. In other words, the judge is telling Ms. Parschauer 'Your interest is secure, you [and the many Class Action attorneys waiting in the wings] are welcomed to go bleed Ackman's money dry; but you have no cause to interfere with whatever he wants to do with his shares -- whatever the legality of the way he obtained them.'

About the irreparable damage to Allergan:
The judge also addressed the question of whether Allergan is really at imminent risk of irreparable damage.

Also, at base, the harm that Allergan and its shareholders face is the possibility that, on December 18, 2014, PS Fund 1’s vote may tip the scales and lead to six of Allergan’s nine board members being removed and six replacement directors being nominated. If those two proposals pass and if Allergan’s remaining board members refuse to appoint those six nominees, then Pershing Square intends to sue in Delaware Court of Chancery to force an election. If the Delaware court orders an election and if the shareholders then elects directors friendly to Valeant, then the tender offer will be consummated. The consummation may then threaten Allergan’s existence as a company and threaten harm to Allergan’s employees, products, and customers. Or it may not. The nature of the harm that Plaintiffs fear—the end of a large company’s existence—is great and irreparable. However, Plaintiffs have not demonstrated a “likelihood” of that harm, as there are too many “ifs” between PS Fund’s ability to vote and the ultimately threatened harm to characterize the harm as certain or imminent. (“Speculative injury does not constitute irreparable injury sufficient to warrant granting a preliminary injunction. A plaintiff must do more than merely allege imminent harm sufficient to establish standing; a plaintiff must demonstrate immediate threatened injury as a prerequisite to preliminary injunctive relief.”) Accordingly, Plaintiffs also have not demonstrated that the equities tip sharply in Ms. Parschauer’s favor.​

(The Emphasis on the multiple 'if's, 'may's, and 'demonstrated' is in the original judge ruling text)
(This language is very similar to language he used in questioning Allergan's attorneys during the hearing. He referred to this long sequence as the 'parade of horribles' and implied -- as he did in the ruling -- that this is a very long list of things that must go in a particular way before there is any imminent irreparable harm. At the time I was reading the transcript, and still now, I was wondering if 'parade of horribles' is a legal jargon, pointing to the advocate's exaggeration of how bad things will be absent an action; or if the judge is accepting that this particular sequence of event is indeed 'horrible' -- meaning there is some readiness to do something about it should it materialize).
Much as all of us would have loved to see the judge issue an injunction to freeze Ackman's shares, I grudgingly have to say that I agree with the judge. There is no imminent risk of irreparable harm to the company. There are still many things that have to happen, that are each far from certainty, even if Ackman does gets to vote his shares. The judge's argument that granting an injunction, with the associated undesirable effect of applying a remedy before the trial completed, should be reserved only for situations of imminent risk of irreparable harm. We are clearly not there at this time.
I would farther read that Judge Carter, by affixing a scarlet "judge certified serious questions Insider Trader" tattoo to Ackman's forehead, is acting to affect a reduction of the likelihood of some of these parade of horribles as a form of light-touch remedy. Perhaps some of the sway-able voting shareholders will now less want to be associated with a deal that has new legal, regulatory, and monetary risks associated with it and the acquiring company (Valeant). Possibly, the DE judge will be less inclined to heed the demands of Bill, judge certified serious questions Insider Trader, Ackman. Maybe the SEC will now jump in.
A question that I do not know the answer to -- maybe there are some attorneys reading this post who would want to chime in -- is if this paragraph is effectively an invitation to come back and again ask for an injunction in the event that enough of the parade of horribles actually happens and the state of 'imminent risk of irreparable harm' is reached.

The Media, focused single-mindedly on the question of injunction-no-injunction, have declared this ruling a loss for Allergan -- as they have done for all prior rulings, both here and in DE (Of course, if Allergan has lost every single court ruling, how come V/PS are now "judge certified serious questions Insider Trader?"). I see it as Allergan asking for a lot each time, and getting only part of what they are asking for. In my world of Soft Powers and Hard Powers, Hard Powers are used to ultimately win battles; but well-played Soft Powers can keep the other side distracted and off balance for a very long time. Lawsuits, such as this one, are prime examples of Soft Power. I think that there is little question that while this suit (or any Soft Power) won't win the battle by itself, it has, is, and will continue to keep the other side distracted and off balance for a long time. In the meantime, the costs to Valeant are going up (their original bid was around $150 worth; they are now telling investors they will top $200), the options available for Allergan are increasing, and the opportunity for deal-killing events and interference are increasing with the passage of time.

So, you be the judge, as to who won?

Dan.


PS: I briefly mentioned it before, and I'll mention it again: My day job team, and sister teams, have quite a few openings now. We are not a Pharma company, but we are a major global corporation with our US headquarters in Irvine. I've already hired one recently laid off Allergan employee to my team, and referred another to a sister team. My own team is mostly interested in data analytics skills (SAS and SQL are great), but other teams have a fairly broad spectrum of openings. Obviously, I can't promise anyone that we will find you a position, but I can promise that if you get me your resume, I'll make sure it gets to the appropriate hiring manager -- and that's half the battle already. If interested, look me up on LinkedIn. I will accept all link requests from Allergan employees.