(The opinions expressed here are those of Alison Frankel, a
columnist for Reuters.)
By Alison Frankel
NEW YORK Aug 4 A few days after the Canadian
pharmaceutical company Valeant announced that it had
teamed up with the activist investor William Ackman to bid for
Botox maker Allergan, Wachtell, Lipton, Rosen & Katz wrote a
teeth-gnashing client alert about the new threat to corporate
targets from the unholy alliance of a strategic bidder with an
activist hedge fund.
Commentators were already raising questions about whether
Ackman and Valeant had engaged in insider trading, because
Ackman secretly accumulated Allergan shares based on his
knowledge of Valeant's imminent takeover bid. But in that early
memo, Wachtell didn't claim Valeant and Ackman had broken
insider trading rules. Instead, the firm bemoaned Valeant and
Ackman's "conspicuously structured" stratagem that "took express
pains to sidestep" the Williams Act's bar on trading in advance
of a tender offer.
Unfortunately for Allergan and future target
companies, Wachtell said, "The structure is crafty, and good for
Valeant and Pershing Square (as long as no bad facts emerge,
such as undisclosed arrangements, that could get them in
A prophetic parenthetical? On Friday, Wachtell - now acting
as counsel to Allergan, along with Latham & Watkins - filed a
complaint in federal court in Los Angeles that accuses Valeant
and Ackman of executing an "improper and illicit insider-trading
scheme ... flouting key provisions of the federal securities
The suit not only claims that Valeant and Ackman didn't make
adequate disclosures to Allergan shareholders - reviving an old
takeover defense tactic from the 1980s - but also pushes the
novel theory that Ackman violated a provision of the Williams
Act prohibiting anyone except an acquirer from trading on
material non-public knowledge that the acquirer has taken "a
substantial step" toward launching a tender offer.
Ackman, according to the complaint, violated both pieces of
the provision. First, he isn't really the strategic co-acquirer
he and Valeant have purported him to be in filings with the
Securities and Exchange Commission, according to Allergan. The
target's suit portrays Ackman as a money man who saw the
co-bidder arrangement as an opportunity to realize quick gains
from Valeant's takeover bid, but who may later walk away if his
interests diverge from Valeant's.
And both Valeant and Ackman, according to Allergan, have
long known that Valeant's unsolicited takeover bid for Allergan
would end up as a hostile tender offer, not least because
Allergan rebuffed advances from Valeant back in 2012. According
to the complaint, Ackman has done precisely what the Williams
Act provision prohibits, cashing in on inside knowledge that
someone else is planning a tender offer.
That's obviously quite a different read than Wachtell had in
April, when it begrudgingly acknowledged the "crafty" structure
Valeant and Ackman had devised to get around the Williams Act.
So what do Allergan and Wachtell know now that they didn't know
Not much, by my read of the complaint. When Pershing
surfaced with a 4.9 percent stake in Allergan in late April,
Ackman's filing at the Securities and Exchange Commission
attached the Feb. 25 agreement that established his partnership
with Valeant and reported the specific trades in which their
joint acquisition vehicle, PS Fund 1, acquired Allergan shares.
The Ackman filing also noted that Pershing and Valeant had first
executed a confidentiality agreement in February, though neither
that agreement nor an amended version of it was disclosed to the
A TOUGH SELL
Allergan's complaint contends that Ackman's failure to
reveal those confidentiality agreements was a violation of
disclosure provisions of federal securities laws. The suit also
implies that there may be something in those undisclosed
agreements, which aren't attached as exhibits to the complaint,
that would expose the sham of the co-bidder structure.
Otherwise, the complaint's allegations about the supposedly
sham facade of partnership between Valeant and Ackman are based
on information Allergan already had in April or more recent
evidence that seems pretty trivial.
That evidence includes a statement Ackman made in a July
interview with CNBC, when he said Valeant had sole control over
what it would pay for Allergan; and Valeant's initial failure to
name Pershing as a co-bidder when it first notified the SEC that
it was commencing a tender offer for Allergan on June 18.
Pershing was "belatedly" added in a July 23 amendment, according
to the Allergan complaint.
Are those new developments enough to discredit the co-bidder
acquisition structure designed to permit Ackman and Valeant to
get around the Williams Act? (I'm not even going to get into the
specifics of Allergan's claims that Valeant and Ackman violated
the second prong of the insider trading clause because Valeant
took steps beginning in February to launch a tender offer.)
Seems like a tough sell to me, based on what's in the
complaint. Valeant, Ackman and their lawyers - Sullivan &
Cromwell and Skadden, Arps, Slate, Meagher & Flom for Valeant;
Kirkland & Ellis for Pershing and Ackman - deliberately crafted
a deal structure to avoid the insider trading bar, as even
Wachtell acknowledged in that client alert back in April.
Wachtell didn't suggest the deal was illegal then, and I didn't
see much new evidence in Friday's complaint to indicate that it
Valeant and Pershing, meanwhile, claim that the true purpose
of Allergan's suit is to avert a special meeting of Allergan
shareholders, which the bidders are trying to convene in
connection with the tender offer.
As Allergan explained in a letter to Chancellor Andre
Bouchard of Delaware Chancery Court filed Friday along with its
suit against Valeant and Pershing, under Allergan bylaws,
shareholders can't convene a special meeting if they've violated
disclosure laws. Allergan's letter suggests that it sued Valeant
and Pershing to tee up future Delaware Chancery arguments that
they can't convene a shareholder meeting because of their
alleged disclosure failures.
On the other hand, Allergan didn't also have to throw down
insider trading allegations if it just wanted to block the
shareholder meeting. Allergan didn't get any discovery from
Valeant and Pershing in its short-lived and recently settled
litigation over Allergan's poison pill. But maybe some of those
"bad facts" and "undisclosed arrangements" Wachtell speculated
about in April will turn up in the new case. Allergan seems to
be counting on it.
(Reporting by Alison Frankel; Editing by Ted Botha)