On the Allergan Vs Valeant and Pershing Square Lawsuit
Hello again.
I got a chance to read the entire text of the filed Allergan lawsuit -- 193 allegations and claims paragraphs and 9 requests for relief. I'm not a lawyer, but I was able to read and understand almost all of it (except the really obtuse statements identifying various legal codes by section number).
The main claim is that Pershing Square acquisition of 9.7% of Allergan shares prior to the announced takeover attempt amounts to Insider Trading (see Glossary entry). Paragraph #2 summarizes this claim in plain English:
"This case is about the improper and illicit insider-trading scheme hatched in secret by a billionaire hedge fund investor on the one hand, and a public-company serial acquiror on the other hand. The purpose of the scheme was to generate windfall profits on the backs of uninformed Allergan stockholders and to park a substantial bloc of shares with a stockholder predisposed to support an acquisition proposal. The method the Defendants chose was to operate in secret, flouting key provisions of the federal securities laws designed to protect investors from precisely this type of predatory conduct" (P#2)
There are also many minor infractions outlined (I didn't count, but easily over 100). The minor infractions are presented less in a manner of complaining about the infractions themselves, but rather in support of the main claim. For example, "[Valeant's Salespeople] Visited Allergan customers, announcing that they were Allergan’s new sales representatives" (P#124) is presented as evidence that "Valeant’s aggressive and hostile tactics from the outset – as detailed herein – constituted a de facto tender offer in everything but the actual name" (P#116). (In the context of this lawsuit, "Tender Offer" is effectively synonymous with "Hostile Takeover Attempt")
The idea that PS acquisition of 9.7% of Allergan constitute Insider Trading is not new. In fact, from the moment PS announced their position, the Wall Street media immediately started speculating loudly that this sure looks like illegal Insider Trading. The prevailing opinion in the security legal community settled on the notion that it does not meet the legal definition of Insider Trading because Pershing Square is effectively a co-bidder and not in violation of any fiduciary duty. The media then dogged Ackman asking if, even if not illegal, isn't he simply profiting from a loophole in the Insider Trading law (at the expense of those who sold him shares cheaply without the Insider knowledge he had). His answer was that no shareholder was hurt -- all the shareholders are benefiting from the price increase his action has caused, even the ones who sold him share during his accumulation phase were benefiting from the upward pressure on share price his rapid acquisitions were causing; and even the ones who sold him the first shares, did no worst than where they would have been had the PS-Valeant offer never existed.
In general, trading on insider information that was provided without violation of fiduciary trust (for example two co-bidders agreeing to buy shares together before announcing their bid), does not constitute Insider Trading. However, in the specific event of an upcoming "Tender Offer," fiduciary trust or not, no one who knows about it, except the entity making the offer, may buy any shares. Period.
Valeant couldn't secretly buy $3B worth of Allergan on their own because they had too much debt ("Because of the crippling debt required to finance its many previous acquisitions, Valeant was unable to borrow enough money to acquire Allergan" -- P#6) and also because, as a competitor, they would have to disclose it under anti-trust rules ("Under the Pershing Agreement, Valeant agreed to contribute $75.9 million – the maximum allowed without triggering antitrust disclosure requirements – to the purported “co-bidder entity” " -- P#59); so they needed PS.
So the key questions are:
1. Are Valeant and PS separate entities?
2. Did PS know that a hostile takeover is being prepared by Valeant?
If the answer to both questions is "Yes," than, wholla, we got "Insider Trading."
While, it would seem fairly obvious that the answer to both is "Yes," the smart lawyers working for Valeant/PS did a lot of preparatory work trying to turn both answers to "No." They created a jointly-owned entity: "On February 11, 2014, Pershing Square formed shell entity PS Fund 1 to acquire Allergan stock, an entity controlled entirely by Pershing Square and in which Valeant later made a relatively miniscule investment. Hidden behind this shell fund, Valeant blatantly tipped Pershing Square regarding Valeant’s tender offer, and Pershing Square – through its shell entity PS Fund 1 – embarked on a massive acquisition of Allergan stock on that inside information." (P#7). They also started out by saying that they were looking for a friendly takeover: "In its first communications, Valeant carefully avoided disclosing that it planned to launch a “tender offer,” but instead claimed to be interested in a friendly merger. " (P#14).
So, we are back to the core question: Did the structure of the PS/Valeant deal manage to outsmart the Insider Trading rules, or are their maneuverings merely facades to pretend one thing while, in all actuality, doing the opposite?
The equally smart lawyers at Allergan, have presented a vast amount of evidence that show the opposite. It shows that whenever Ackman speaks with Allergan shareholders, including when calling the special meeting, he claims that he is just another Allergan shareholder (in fact, the largest one), acting in the interest of all Shareholders. How can that square with being the same entity as the buyer? Allergan also provided vast evidence that Valeant (and, for that matter, everyone) knew from the start that there is no possibility of a friendly takeover and were preparing a hostile takeover right from the start.
So, how will this go? Hard to handicap. The Valeant/PS route for a hostile takeover is on entirely unexplored legal territory, so not much case law or precedents to go by. But this may be Allergan's strongest card: Because this is a new play, the likelihood of a judge throwing it out of court (or ordering some minor corrections issued to proxy material) is less than for a typical skirmish technicalities-violations lawsuit. If it is not thrown out of court, than this could be bottled up for years, with discovery rights, and multiple legal maneuvers. In the mean time, Allergan can refuse to recognize the affected shares (the 9.7% PS shares) as valid for calling special meetings and votes. PS can ask the Delaware Chancery Court (which is also a Federal court, but a separate one, focused on corporate governance issues) to over-rule; but getting two Federal courts to argue about which trumps which is never going to speed anything up.
Incidentally, this was exactly the crux of a hearing in Congress a week before the suit. Congressman Royce (Republican, from a district near Irvine) asked: “Does labeling the takeover offer a joint bid insulate the firm from insider trading charges?,” making it clear he is talking about Allergan. “That’s a question I don’t think the commission or the courts has answered on weather two parties getting together constitutes insider trading,” SEC Director Higgins responded.
And there you have it. Whether this is a speed bump (if the case is thrown out of court), a major detour (if it is not), or game-changer (if the suit actually wins); I can not tell.
One last point: If PS committed Insider Trading, Allergan wouldn't be the victim; it's shareholders would be. In particular, any shareholder who sold during PS accumulation phase (when PS knew a bid was coming, but the seller didn't). To have a standing to sue in civil court, you have to show that you've been damaged. For this reason, Allergan is co-suing with one such victim shareholder (Karah H. Parschauer). "Ms. Parschauer exercised and sold Allergan stock options on February 26, 2014, for a price of $127.60 and on March 11, 2014, for a price of $129.08" (P#21). (BTW, Karah is not a random victim, she is a VP and an attorney working at Allergan). The day after the bid was announced, the share price went to $163, so she lost about $35 per share. The suit doesn't say how many shares she sold; but probably not a huge number (she is an employee exercising and selling some stock options, not some big-time market mover). Let's say it's 1000 shares. Then, she lost $35K -- maybe a lot of money for an employee (even a VP) -- but in the overall context of this battle; pocket change. One would think that it would be easiest for PS to just give Karah $35K and then she is no longer a victim and can't sue (and therefore Allergan can't either), but that won't work. Because then every shareholder who sold during the acquisition period would have gained the legal right for an equal amount (and since for every share that PS bought, many more changed hands at pre-takeover-announcement price, this will be a staggering number of shares -- many times the value of PS).
Dan.
