Glossary of Hostile Takeover Terms with Discussion

Lawsuit Developments

Hi everyone.

Here is a summary of legal developments in the past week and a half:

1. PS has (or is about to) cross 35% for the special meeting request -- which means they have the votes to call a meeting even if their own shares are invalidated.
2. The Federal court agreed to hold discovery immediately and an injunction hearing (where they will decide if PS shares are substantially invalidated) on October 26.
3. PS and Allergan agreed that the December 18 meeting day is final, and the DE Chancery suit is thus settled.

From a legal perspective, Allergan can claim that this was a pretty good week. The meeting will be held on the day Allergan has set all along (which is just about the latest allowable date under the Bylaws), a Federal judge will have an opportunity to make a merits ruling on the Insider Trading case (which means a massive discovery -- with the potential of finding out all sort of skeletons -- over the next 40 days), and the potentially hostile DE Chancery judge off it's back, at least for now. PS will undoubtedly also try to claim victory, by saying that Allergan was going to play games with the meeting date; and now it agreed not to.

(For those who've been reading my posts about these cases all along; you may remember that after the Federal court denied the expedite motion from Allergan, the media described it as a key loss while I said that Allergan got more than they could even ask for -- because the Federal courts won't let PS take over the company and moot justice to the victims without first being cleared; and by not expediting, it is allowing the clearing process to potentially take years. Well, by holding the injunction hearing in October, it is setting the stage for exactly this scenario to transpire. If judge Carter believes that there is a decent chance of the Insider Trading suit winning, he will grant the injunctions; and without the expedite, it may take years for PS to clear it out).

If Judge Carter rules against PS (and the setting of the schedule makes it clear he is taking a serious look at that possibility), the meeting would still likely happen, but without PS and Valeant in the room it would be like holding a wedding rehearsal in a ballroom while the bride and groom are under arrest at the jailhouse with bail denied and the trial far away.

None of this changes the basic hard-power-soft-power equation. Allergan still needs to come up with a hard power play that a majority of shareholders will find superior to the Valeant offer (and, for that matter, any hypothetical future bidder who likewise will claim they can run Allergan more profitably by shutting down R&D). It does, however, change the capacity of PS to interfere with any hard power play by Allergan. PS threatened to sue if Allergan were to make a large acquisition or other play that removes Valeant's capacity to buy the company. With the DE case shut down, they would have to bring a new suit (rather than make it a motion in an existing case). If they sue, as a shareholder, while the Federal case is still pending, they will find it that much harder to argue that they are a co-bidder (the core of their defense).

Dan

PS. Family and I were on vacation, hiking in Moab, Utah, for the past week. Highly recommended!

 

My understanding is that the remaining Board has the authority to appoint replacement board members -- they can even reappoint, as silly as this may sound, exactly the same individuals just ousted.

Ackman playbook, as publicly explained very early in the process, is that Allergan won't be so bold as to take an action directly in the face of a rebuke voted by a majority of the shareholders. His earlier (now long abandoned) effort to call for a "non-binding shareholder referendum" was based on exactly such thinking (that the Board would be cowed by an incontrovertible expression of the will of the shareholders). I think (speculative), that he is just starting to realize how much he underestimated the determination of this management and board.

Assuming Ackman's is not frozen by an injunction from the Federal Court, and assuming the Valeant offer is still alive by December 18, and assuming the special shareholder meeting takes place as currently agreed, and assuming Ackman wins the motion to oust the board members, and then the remaining board votes to appoint equally anti-Valeant new Board members (even if not the same individuals just ousted); then Ackman will likely go to court to try to force his nomination slate to the board. At which point, an entirely new set of arguments will come into play. Allergan will argue that the interest of the shareholders are not best served by a board dominated by appointees beholden to Ackman since Ackman's interest is for Valeant to buy Allergan as cheaply as possible (consequent to his agreement to accept a fixed number of Valeant shares for his Allergan stake); whereas for all other shareholders the interest is to get as much value as possible (either from Valeant or any other alternative, including staying independent). Since the shareholders have merely voted to oust existing board members (under this scenario), Ackman will not have an iron-clad argument that the will of the shareholders has been determined to actually favor his slate. This suit will probably dwarf all the prior suits in ferocity. While the DE Chancery judge, based on his comments thus far (no merit decisions thus far), appears to be more receptive to Ackman than Allergan; I don't see him dealing a death blow to a $50B company with less than a full trial. Full trials, even under the maximum expedite rules, take multiple months. [There is a fascinating, but extremely remote, possibility that the judge will appoint his own advisers as interim directors -- until the next shareholders' meeting -- thus assuring impartiality.]

BTW, if Ackman's shares are frozen by the Federal court; they are not just prevented from voting in favor of ousting the board members, they are effectively forced to vote against it -- quite the irony -- because in a special meeting, all non-voting shares are deemed to be voting against every motion.

Dan.

 

A special dividend can be a useful hard power play in combination with other hard power plays, but, by itself, it will only make it easier for Valeant to win.

Valeant, with junk bond status, can borrow about 4 years worth of profits. Furthermore, by shutting down R&D and getting rid of most Allergan employees, Valeant (at least in the short term) will be generating a lot more profit from the Allergan products than Allergan will. This is how Valeant is able to borrow $72 per Allergan share to finance the cash portion of their offer. Allergan, with top bond rating, and requiring shareholder approval to reduce it's credit rating, can only borrow, maybe, 2-3 years worth of profit -- or about $20-30 per share.

Therefore, if Allergan were to borrow $20-30 per share and hand it over to the shareholders; Valeant will simply reduce the cash portion of their offer by an equal amount and continue with their effort as if nothing happened. The Allergan shareholders will still be getting the same amount for their shares (between the Valeant exchange offer and the Allergan special dividend) and the total new debt will still be the same (between the borrowing Allergan would have done to finance the special dividend -- to be inherited by the acquiring Valeant -- and the borrowing by Valeant to finance the cash portion of their offer). Effectively a non-event -- except that it will take away all the borrowing power Allergan could have otherwise used for other hard power plays (such as acquisitions) -- thus making Valeant's life easier, not harder.

(The same applies if Allergan were to use borrowed money for a shares buyback. Valeant will have less borrowing power, but will also need to buy less Allergan shares, so they will be able to offer substantially the same deal -- but with a different cash/stock mix -- and end up buying as many shares as before using about the same debt and equity as offered before)

All that said, there is an available play along the lines of special dividends. I don't think it's an attractive play (because it will seriously damage the surviving Allergan), and I don't think management will seriously contemplate it (for this same reason), but it is an available play: The play is to "out-Valeant" Valeant. Specifically, borrow even more money than Valeant is prepared or able to (say, $140 per share); reducing Allergan's credit to the bottom of the junk category (even worst than Valeant). Possibly do more cost-cutting and/or divestitures to finance that amount. The shareholders will need to approve, but shareholders almost always vote to take cash. After that, Valeant will only be able to acquire Allergan on a straight shares-for-shares exchange (no cash), and Valeant's own credit rating will suffer if it were to assume Allergan's new huge debt. Even if Valeant doesn't walk away (or forced to walk away by the covenants of their current lenders) from the now toxic Allergan, the Allergan shareholders (with the cash securely in their pockets) will see no reason to exchange their shares of heavily indebted Allergan (but run by a management team that knows how to monetize the Allergan products) for the equally heavily indebted Valeant (who may or may not know how to run Allergan's business -- and if not, would be a short walk from bankruptcy wiping out all shareholders).

Dan.

 

1: In a regular shareholder meeting, a majority of shares voting is required to pass a resolution; in a special meeting, a majority of all shares are required. This is a fairly standard practice (not just Allergan). Special meetings are intended for very unusual situations where the desires of the shareholders is so overwhelming and the issue at hand so urgent that the shareholders are willing to go outside the established corporate governance routine (of having a regularly scheduled annual meeting). To protect all shareholders from a minority taking advantage of the special meeting mechanism to impose rules that might not actually have majority support, the bar for approving any resolution in a special meeting is set higher.

2: Ackman has said, since almost the start, that if Allergan tries to make a big acquisition (without shareholders approval), he'll sue. I'm not aware of any other Ackman plans with regard to stopping Allergan from Acquiring. The essence of the suit (which will be in DE) would be that the Board is disenfranchising the shareholders by forcing upon them an acquisition and the loss of the valuable Valeant offer without ever giving the shareholders a chance to voice their own views. However, this was before he himself was sued for Insider Trading where the core of his defense is that he is a co-bidder with Valeant, rather than a regular shareholder. Maybe he can find some legal gymnastics that somehow he is both an arms length seller and a buyer at the same time; but this is uncharted legal territory, so the more unusual the position he takes, the less likely the judges will agree.

Dan.

 

Not at all. There are many hard power plays. Some work better in combinations, some only work in combinations, and some are mutually exclusive. The core of each such play is that the shareholder will get a better value for their shares than under the Valeant deal. Here is a far-from-exhaustive list of possible plays:

Growth-oriented plays:

• Acquisition (buy a company or product line)
• License-in deals (license someone else's technology)
• Technology deals (we pay someone else to do promising R&D and they share/give us the results)

Contraction-oriented plays:

• Spin offs (sell a division or product line)
• License-out deals (license our technology to someone else)
• Cost-cutting (reduce more expenses)

Recapitalization-oriented plays:

• Sell the company ("white knight")
• Management buyout
• Shares buyback
• Special dividends

The media has been focusing on acquisitions, and from everything I heard Allergan management saying publicly; it seems that this is what Allergan is focusing on too. However, many other hard power options are available; and, hopefully, someone is seriously looking at every one of them.

My favorite, which no one seems to be discussing, is management buyout.

Dan.