(Adds lawyer on tender offer)
By Svea Herbst-Bayliss and Caroline Humer
Aug 1 Botox maker Allergan Inc on Friday
accused rival Valeant Pharmaceuticals International and
billionaire investor William Ackman of violating securities laws
by using insider information as they prepared a takeover bid for
the drug company.
In a civil lawsuit filed in federal court in California,
Allergan said Ackman's Pershing Square Capital Management and
Valeant "hatched" an "improper and illicit insider-trading
scheme" that allowed the hedge fund to buy Allergan shares,
knowing about Valeant's planned $51 billion takeover bid.
Valeant and Pershing Square said the complaint was intended
to prevent them from calling a special meeting of Allergan
shareholders to vote on their board nominees.
"This is a shameless attempt by Allergan to delay the
shareholders' fundamental right to call a special meeting,"
Ackman said in a statement. "Allergan's determination to waste
money on a baseless lawsuit against its largest shareholder
further demonstrates why this board of directors should be
Without a shareholder meeting, Pershing Square and Valeant
may not have the support they need to remove Allergan's "poison
pill" measure or to ensure the success of a tender offer.
The lawsuit marks the latest twist in an increasingly
hostile battle between the two drugmakers and one of the world's
most prominent activist investors. Allergan has been fighting
the takeover bid since it was announced on April 22.
From the beginning, outside lawyers said the structure of
the Ackman partnership with Valeant was novel but not illegal.
Now some experts say the suit could allow Allergan to seek fresh
evidence to press its case and make life tougher for the $15
billion hedge fund.
The timing for Ackman's Pershing Square is also inopportune
as it works to list one of its funds on an exchange in Europe.
"This lawsuit brings a set of plausible but difficult
complaints that Ackman's lawyers will likely not be able to get
dismissed right away," said Erik Gordon, a professor of law and
business at the University of Michigan.
"Defending against this suit is going to cost money and time
and be unpleasant for Ackman," he said. "It may give Allergan
discovery rights to dig in and see if there is more evidence."
The value of Pershing Square's 9.7 percent stake in
Allergan, built up between February and April, jumped $1.2
billion once the takeover bid became public. Allergan said the
hedge fund improperly enriched itself at the expense of
Insider trading cases typically turn on whether a breach of
duty or trust to the source of information has occurred. In this
case, the insider trading allegations focus on Securities and
Exchange Commission, or SEC, regulations surrounding the
dissemination of information related to tender offers.
"There is a technical SEC rule, Rule 14e-3, that prohibits
the use of material tender offer information, unless you are the
offering person," Alan Palmiter, a law professor at Wake Forest
University, in Winston-Salem, North Carolina said.
"There could be a plausible argument that Ackman may have
violated this rule even if he bought Allergan shares with
Valeant's permission, because the rule does not require a breach
of a duty of trust or confidence."
DELAY IN SHAREHOLDER MEETING
Allergan's gains helped Pershing Square produce some of the
hedge fund industry's strongest performance numbers so far this
year, investors said.
Allergan asked the U.S. District Court for the Central
District of California to rescind Pershing Square's purchase of
the Allergan shares, arguing they were illegally acquired.
The lawsuit said heavily indebted Valeant lacked the
resources to buy Allergan, so it sought financing from Ackman
and Pershing Square. By the time they reached a financing
agreement, Valeant had already taken concrete steps toward a
tender offer for Allergan, it added.
For Ackman, who invests for institutional investors
including state pension funds as well as wealthy individuals,
the lawsuit comes at a critical time as he presses forward with
an activist campaign against Herbalife and works to
attract investors to the new Pershing Square fund planned for
Privately investors have said they are sticking with Ackman
for now, but industry analysts said this lawsuit could
eventually make investments with his fund tougher.
"Any credible allegations of insider trading is not
something you want when you are mounting a road show," Gordon
said. "In this case Bill Ackman is the road show and he's put on
quite a show already."
(Reporting by Svea Herbst-Bayliss in Boston Ransdell Pierson,
Jonathan Stempel and Caroline Humer in New York; Editing by
Bernadette Baum, Bernard Orr, Tom Brown and Andre Grenon)