A California federal court judge on Tuesday handed a win to Bill Ackman's Pershing Square Capital Management LP in its efforts to vote its shares at a special meeting of Allergan Inc. (AGN) shareholders in December regarding the constitution of the Botox maker's board and whether it should engage in talks with Valeant Pharmaceutical International Inc. (VRX) regarding its $54 billion hostile tender offer.
At the same time, the ruling does not cast aside the allegation that Valeant and the activist hedge fund might have violated securities laws when the two teamed up to make their bid for Irvine, Calif.-based Allergan.
Allergan and a co-plaintiff shareholder sued Valeant and Pershing Square in U.S. District Court in California alleging a breach of securities law, the law prohibiting trading on material information about hostile takeovers. The suit claims that Pershing Square, which acquired 9.7% of Allergan shares through a joint venture with Valeant (the Canadian pharmaceutical company made a minor investment in the JV,) after Valeant made steps toward a tender offer. The lawsuit also claims that Pershing Square is not protected as an offering person or co-bidder under the rules.
Judge David Carter decided that while Allergan lacked standing to bring the claim, the co-plaintiff shareholder had the proper standing to bring the suit. The decision also said that the plaintiffs raised serious questions about whether substantial steps were taken to commence a tender offer before the Pershing fund purchased Allergan shares and whether Pershing Square was a co-offerer under the securities law.
The court refrained from enjoining Pershing Square and Valeant from voting their stake at the Dec. 18 special meeting when six dissident nominees to the Allergan nine-member board will be considered for election. Pershing Square garnered upwards of 30% of Allergan shares in support of calling the meeting, which Allergan subsequently agreed before Delaware Chancery Court to hold without obstructions.
The decision to allow Pershing Square to vote its stake could be relevant down the road. If Allergan shareholders vote for the six director nominees but the Allergan board refuses to appoint them to the board, Pershing Square's next step could be to ask the Delaware Court of Chancery to force an election, which would require a 50% vote threshold. In that circumstance, Pershing Square's being able to retain its 10% vote could make a big difference.
It also puts additional pressure on Allergan to consider the Valeant bid before the December vote or unveil an alternative to the bid.
Carter's decision, however, did not completely side with Pershing Square.
The court said that, in order to maintain its vote, Pershing and Valeant must amend their proxy disclosures for the upcoming special meeting. One aspect of that amendment must state that the parties agreed to be called co-bidders if a tender offer occurred. In addition, the court said, Pershing and Valeant must disclose that allegations of violating the securities law have been made, plus that the California court had said there were serious questions about whether the rule had been violated.
With money on the table, however, it is difficult to say if such disclosures would sway the vote. As the court decision states, Allergan shareholders would have to be "living under a rock" not to know about the insider trading claims. Still, the court said, it remains an obligation of the defendants to make the required disclosures.
Allergan and Valeant shares traded up slightly Tuesday with the value of the unsolicited bid at roughly $182.90 and Allergan shares trading at $194 for a premium of about $11.30, or 5.8%, to the bid. Valeant has hinted it would make a revised proposal that approximates $200 per share in some mix of cash and shares.
Allergan said it will appeal the decision to the U.S. Court of Appeals for the Ninth Circuit continuing to seek to block Pershing Square from voting its shares at the special meeting.
Pershing Square said in a statement, "We are pleased that the court has determined that Pershing Square will be permitted to vote its shares at the upcoming special meeting of Allergan shareholders." The hedge fund said it would promptly supplement its proxy statement disclosure in the manner determined by the court.
Valeant said the decision rightly puts the matter of its proposed merger in the hands of Allergan shareholders.
Carter's decision does not resolve the securities fraud allegations in their entirety. The court did not rule on whether a breach of securities law occurred, but merely determined that adequate disclosure was an appropriate remedy at the present time in the present case. The co-plaintiff shareholder, with standing as a "contemporaneous trader" has adequate remedies under law, typically money damages, and is precluded from seeking injunctive relief, the court said. As such, the court leaves open the issue of whether violations occurred prior to the announcement of the Valeant bid and presumably leaves Pershing Square and Valeant open to other potential claims from Allergan shareholders.