Why did Allergan change its mind about Ackman and insider trading?

August 4, 2014

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 trouble).”

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 laws.” 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 then?

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 SEC.

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 is now.

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.

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