On the Settlement:
Basically, Allergan and Ackman agreed that the act of calling a special shareholder meeting does not trigger the Poison Pill (see glossary).
To a large extent, this lawsuit was a tempest in a teapot; but in this hyper-hostile battle, everyone is extra careful -- looking for ambushes in every direction. In a normal hostile takeover, when cordiality rules still apply, no one would even be concerned with a poison pill blocking a shareholder meeting (as mentioned in my prior post, the right to a special shareholder meeting is enshrined in the Bylaws, whereas a poison pill is a mere board of directors resolution); and if they were even minimally concerned, they would ask the board for assurances and the board would give such; and even if they didn't, they'd call the meeting anyway and the board won't trigger the pill over it (because it would be immediately reversed by the Chancery court and the board would get on the judge's bad side for other battles that are more important). In this hyper-hostile battle, with the other (beside Ackman) pro-merger shareholders all scared that Allergan might be just waiting in ambush to trigger the poison pill on them at the slightest excuse, they weren't ready to sign up for the special meeting until they got an explicit assurance from either the board or a judge that it won't happen. Allergan, in a "why should we help you?" kind of maneuver, didn't provide the assurance; so Ackman asked a judge to do it. In all likelihood, a judge would have, but it would have burned about 3 weeks to get there (any delay is to Allergan's benefit -- it gives Valeant more time to break, and gives Allergan more time to find options).
Question: Why did Allergan agree to everything that Ackman asked for?
Answer: Because the judge would have agreed with Ackman anyhow. Notice that this isn't a loss for Allergan. A loss is when a side takes a position and then ordered by a judge (or reach agreement) to reverse that position. Allergan never said that calling a special shareholder meeting triggers the poison pill, they just didn't say that it won't. If they had gone in front of a judge, with some (losing) argument to the contrary, then it would have been a loss. What's worse, the judge might have openly disciplined Allergan from the bench (telling Allergan that he doesn't want to again waste his time overruling a delay tactic). Having not (yet) been disciplined by the judge, Allergan can still pull some stunts (like trigger the poison pill on some borderline excuse -- other than the calling of a shareholder meeting), with the penalty being no worse than the reversal of the stunt (while wasting a lot of time, which is what Allergan wants).
Question: If this was a delay tactic all along, why settle with still a week left?
Answer: This one baffles me too. A week is not a lot, but when playing delay tactics, why not wait to the last day? Since the lawyers making the deals are no dummies, I have to assume there is a well-though out reason. Possibly to save some judge-good-will for future testy situations ("your honor, we are not just using bad faith delay tactics; as evidenced by our agreement over the poison pill a week before the hearing"). Another possibility is that they are readying activation of the poison pill over a different issue, and want to clear the docket before firing (now that Paulson, a pro-merger hedge fund, has amassed about 2% of Allergan Shares; the slightest evidence of collusion with Ackman's 9.7% could give Allergan an excuse to trigger the poison pill).
Question: Can this agreement be viewed as a thaw between Allergan and Ackman; potentially signalling that deal negotiations are already starting in the background?
Answer: Absolutely not. One must remember, that the agreement is about mechanisms to remove the board, not about how the board and Ackman can cooperate on anything.
So, what's next:
Ackman will continue with the torturous path toward a special shareholder meeting, a shareholder vote to replace board members, appointment of new board members, and making a deal with Valeant. At each step, expect stiff opposition, delay tactics, and skirmishes lawsuits like this one, from Allergan board and management. In concert, Allergan is already deploying it's "soft powers" (doctor's letters, media barrage, congressional attention, and other attacks-by-others on Valeant), but has yet to use any of it's heavy guns (acquisitions, shares buyback, management LBO, and other actions that would change the nature of its capitalization). In my opinion, it is essentially a certainty that no gun will be left untouched before this is over.
Dan.
