There are several items in the lawsuit filed by Allergan (NYSE:AGN) against Valeant (NYSE:VRX) and Ackman's Pershing Square that I find fascinating. It's a real page-turner. According to Vault, Allergan has the best law firm in the country working for them (Wachtell, Lipton, Rosen & Katz).
The court where the lawsuit was filed is 7 miles from Allergan's headquarters. Looks like Ackman and Valeant will have to fly all the way from New York and New Jersey, while Allergan doesn't even need the freeway. The lawsuit is quite interesting; if you want to learn how to become a billionaire, wouldn't it be good to learn how billionaires think and act?
Disclaimer: What follows are my opinions and interpretations of the lawsuit and I don't know any law.
Did Valeant's board know the takeover would have to be hostile before tipping off Ackman?
Pearson and Ackman first met on February 4, 2014. On February 6, 2014, they hired not one, not two, but three law firms. Starting February 7, Valeant's board met six times to discuss the Allergan takeover. On February 9, Pearson confirmed that Allergan was the target. On February 11, Ackman and Valeant opened their shell company (PS Fund 1). On February 16 and February 21, Valeant's board met to discuss the Allergan takeover. Ackman started buying up Allergan calls and derivatives on February 25.
Would Ackman, Pearson and Valeant's board be required to testify? Can they be quizzed on what they discussed in all their meetings? So far we only have Pearson's admission on June 17 that they had suspected right from the start that the acquisition would turn hostile. If Ackman, Pearson and Valeant's board are required to testify, more details about the hostile takeover attempt would emerge. In my opinion, it might turn out that Valeant's board and Ackman knew that it was a certainty that the takeover attempt would turn hostile right from the beginning.
After all, even before the Valeant board meetings in February, according to the lawsuit, Allergan's CEO said that a deal with Valeant "wasn't a good fit". Allergan's CEO had rejected Valeant's overture in 2012 itself (Valeant went on to acquire Medicis and eventually get badly beaten in the neuromodulator and filler market by Allergan). Robert Ingram was on both Valeant's and Allergan's board at the time that Valeant first made its approach on Allergan in 2012. Therefore, Ingram might have known how opposed Allergan was to Valeant. I believe this can really undermine Valeant's claim that they had not been contemplating a tender offer.
In my opinion, if it turns out that Valeant knew that the takeover would have to be a hostile one because Allergan was opposed to it, and despite knowing this they tipped off Ackman, Valeant and Ackman could be in trouble. I think escaping the Williams Act will be harder if this turns out to be the case. This is why Pearson says he thought it would be a friendly deal - but cross-examining board members about discussions they had regarding Allergan from September 2012 to February 2014 might reveal a different picture. Even before Ackman and Valeant set up their shell company, Allergan's CEO kept telling analysts that he didn't want Valeant acquiring Allergan because the value of Valeant's stock was suspect.
I believe if this case goes to trial and Valeant's board is subpoenaed, it can be highly dangerous to Valeant and Ackman, depending on what Valeant's board had been discussing ever since Allergan rejected Valeant's overtures starting September 2012.
If Allergan ferrets out more details in the course of the lawsuit, it might shame the SEC into conducting its own investigation.
Williams Act and "tender offer"
This is my opinion and I haven't studied law. It seems to me that Valeant and Ackman violated the spirit of the Williams Act. Williams Act was passed in 1968 and the language used then was a "tender offer". I think what they meant by "tender offer" in 1968 was what we would call an acquisition offer today. Paragraph 72 of the lawsuit quotes from that Williams Act (italics are mine):
...Commission has previously expressed and continues to have serious concerns about trading by persons in possession of material, nonpublic information relating to a tender offer. This practice results in unfair disparities in market information and market disruption. Security holders who purchase from or sell to such persons are effectively denied the benefits of disclosure and the substantive protections of the Williams Act. If furnished with the information, these security holders would be able to make an informed investment decision, which could involve deferring the purchase or sale of the securities until the material information had been disseminated or until the tender offer had been commenced or terminated.
If you read books from the 19th century, you will find that connotations of words have changed. Similarly, in the 46 years since the Williams Act was passed, the usage of the term "tender offer" has changed. The connotation has changed. If you replace "tender offer" with "acquisition offer" in the above passage, I think you will see that the passage makes a lot more sense.
This is why Valeant and Ackman pointedly said they didn't plan to make a "tender offer" before Ackman started buying up Allergan calls. But the lawsuit says that what Valeant and Ackman did was a "de facto" tender offer.
Would the jury study the environment of the 1960s and the vocabulary that was then in vogue to determine the spirit of the law? Valeant and Pershing Square seem to be relying on the modern day interpretation of "tender offer".
The Williams Act was meant to prevent the unjust transfer of wealth. It seems to me that such a transfer of wealth is precisely what happened when unsuspecting Allergan shareholders sold to Pershing Square - that is how Pershing Square made more than $1 billion in profit in a few weeks. The SEC seems to have gone on vacation for the last few months.
Why Ackman and Valeant used a shell company
To further protect themselves from the Williams Act, Ackman and Valeant are trying to appear as one entity. The Rule 14e-3 they are attempting to escape is described at this link. They created a shell company called PS Fund 1 to pretend to be one single entity.
But the lawsuit points out that in the frequent letters sent by Ackman to Allergan's board and in Ackman's TV appearances, Ackman writes and speaks as an Allergan shareholder, instead of as an acquirer of Allergan. That is, to escape 14e-3, Ackman pretends to be an acquirer of Allergan, but when Ackman appears on TV or writes his open letters, he portrays himself as an Allergan shareholder.
How does the law work in such cases? I wonder. The lawsuit quotes from several of Ackman's letters and TV appearances.
Allergan has an Article 15 in its certificate of incorporation that says that a business combination can be approved only if there is a two-thirds vote by disinterested shares. To prevent Ackman from being called an Interested Shareholder, Valeant filed an S-4 in which it says it has no control over the shares owned by PS Fund 1.
In paragraph 92, the lawsuit points out that Valeant is itself relinquishing the status of co-acquirer in the S-4 to get around Allergan's articles of incorporation. The lawsuit says that Ackman and Valeant pretend to be co-acquirers to escape certain laws, but deny being co-acquirers when it suits them.
Valeant and Ackman have been contradicting themselves.
Role of Robert Ingram
Robert Ingram is the former Chairman of Valeant. He was on the boards of both Valeant and Allergan from 2005 until December 2012. Pearson first approached David Pyott (Allergan's CEO) about buying Allergan on September 20, 2012. Due to this conflict of interest, Ingram was allowed to attend further Allergan board meetings only because he told Allergan board members that he would resign from Valeant's board by December 2012. Instead, Ingram resigned from Allergan's board and continues to serve on Valeant's board.
It seems there was an Allergan board meeting in September 2012 that Ingram attended, but Valeant had authorized an acquisition of Allergan even before Allergan's September 2012 board meeting. The lawsuit also says that after Ackman announced his hostile offer, Valeant edited Ingram's bio on its website to remove mention of his service on Allergan's board and corrected the edited bio after Allergan's lawyer wrote to Ingram.
The lawsuit says:
Here, there is a significant possibility that Valeant is being advised by a former Allergan director in possession of Allergan's nonpublic information, and the nature of that advice is material to an Allergan stockholder evaluating Valeant's offer; the nature of Mr. Ingram's role in this transaction must be fully investigated and disclosed.
If I had to guess, if Valeant board members are required to testify, more juicy details might emerge.
Does Allergan have a PR firm?
I got contacted by an M&A PR firm that represents Valeant. They wanted me to make a minor edit to one of my articles that I happily made (regarding Valeant publishing the transcript for their June 17th event).
Allergan said they hired investment banks, law firms and forensic accounting firms. But I didn't see any PR firm.
Are arbs fleeing?
I don't see why arbs would hang on after reading the lawsuit. That explains why AGN was down and VRX was up on Friday. Arbs must have been unwinding their long Allergan-short Valeant positions.
The fall in Allergan's stock price is making it attractive to long-term investors. AGN is now trading at just 20 times 2015 earnings. As arbs get out, long-term investors should get in.
I wonder what the proxy-advisory firms will say after reading the lawsuit. Allergan should mail a copy of the lawsuit to all its shareholders.
Whatever the outcome of the lawsuit, it promises to be very entertaining. Whether Valeant and Ackman beat the rap or not, Valeant is sure to come out badly bruised and damaged.
Ackman and Valeant have no choice but to put on a brave face. If they try to settle, the SEC's suspicions would be aroused.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.