Allergan restrictions on shareholders’ meetings were too tough to swallow

September 16, 2014

In the middle of a status conference Friday, Delaware Chancellor Andre Bouchard asked a blunt question of Theodore Mirvis of Wachtell, Lipton, Rosen & Katz. Mirvis represents Allergan, the pharmaceutical company fending off a unique tag-team hostile bid by the Canadian drugmaker Valeant and the hedge fund Pershing Square. In late August, Pershing notified Allergan that it had amassed the requisite shareholder support to call for a special meeting to oust the company’s directors, despite the onerous consent procedures Allergan had adopted in a bylaw enacted earlier this year. On the same day, Pershing and Valeant sued Allergan in Delaware Chancery Court to force the company to schedule the special meeting.

By Friday, when lawyers for all three combatants appeared before Bouchard, Allergan had already set a date, Dec. 18, for the special meeting. But Pershing and Valeant told the chancellor that they were still worried Allergan would use provisions of the controversial bylaw – which, among other restrictions, revokes rights for shareholders who are net short on Allergan stock and requires investors to provide continuous updates on their holdings until 10 days before the special session – to call off the meeting.

Bouchard heard about the bylaw’s board-friendly features from Pershing’s lawyer, David McBride of Young, Conaway, Stargatt & Taylor, and from Valeant counsel Robert Saunders of Skadden, Arps, Slate, Meagher & Flom. Then, with Mirvis on the phone, the judge cut to the heart of their case. “Mr. Mirvis, the question I have for you is, tell me more broadly any other circumstance where a company has adopted a bylaw like this,” Bouchard said, according to a transcript of the conference. “I mean, this is quite a horse-choker of a bylaw.”

Mirvis pointed out that the bylaw was approved by shareholders, who voted for it only a few months ago at Allergan’s annual meeting in May 2014 – after Valeant and Pershing first made an offer for the company. The provisions were written to prevent “abuses that have occurred in recent years,” Mirvis said, “in which people attempted to invoke their rights as stockholders of Delaware corporations when, in fact, their economic interests, because of other positions that they held, went in the opposite direction.”

Mirvis assured Bouchard that he was ready and willing to defend the bylaw at trial, but he won’t have the chance. On Monday, Pershing and Valeant agreed to drop the Delaware suit in exchange for Allergan’s promise to convene the special shareholder meeting on Dec. 18, as scheduled.

I don’t want to suggest that this settlement is a decisive turning point in the always exciting Allergan takeover battle. Allergan’s insider-trading claims against Pershing are still out there, on a fast track to an Oct. 28 hearing in federal district court in Santa Ana, California; and there’s no predicting what novel tactics the two sides will dream up between now and Dec. 18. Who knows? Maybe if the Delaware case had actually gone through discovery and trial (a hard-to-imagine scenario, admittedly), Bouchard might have changed his mind about Allergan’s special meeting bylaw – even though, according to an analysis by the investor advisory Institutional Shareholder Services (ISS), no comparable corporation that gives shareholders the right to convene a special meeting places as many restrictions on that right as Allergan.

But in the broader context of Delaware corporations adopting bylaws that curtail shareholders’ options – often without even the fig leaf of a shareholder vote – Bouchard’s skepticism about Allergan’s special meeting provision is worth highlighting. Allergan told ISS that its willingness to propose a mechanism for shareholders to convene a special meeting was a sign of its good corporate governance, but the gesture was surely motivated, at least in part, by a nonbinding 2012 shareholder resolution to grant investors that right.

When ISS asked Allergan why the board ended up recommending a bylaw that included sky-high disclosure obligations, an unwieldy proxy process and other unusual restrictions on investors’ ability to call a special meeting, Allergan said that it was trying to balance corporate democracy and the risk that investors would abuse the right. The company told the investor service (and shareholders, through a filing with the Securities and Exchange Commission) that every one of the restrictions in its bylaw had been imposed by several other corporations.

ISS, however, found that none of those other companies imposed burdens remotely as onerous as Allergan’s. “The Allergan bylaws are far more restrictive,” ISS said, “with no discernible advantage for Allergan shareholders.”

Pershing and Valeant argued in their Delaware case that if Allergan attempted to enforce bylaw provisions and avert the special meeting, the board would be breaching its fiduciary duties to shareholders. The theory intrigued Bouchard, who pressed Allergan lawyer Mirvis on whether the hostile bidders should be permitted to take board members’ depositions to back their breach-of-duty claims. (Mirvis said that the theory was purely speculative since Allergan had already scheduled a meeting and Bouchard could rule on the validity of the bylaw based just on briefs, without the need to take discovery.)

Obviously, the settlement of the case means the end of the challenge to the bylaw and of any breach-of-duty claim based on Allergan’s enforcement of it. Nevertheless, the next Delaware corporation considering an outlier bylaw should keep in mind Bouchard’s instinctive reaction to Allergan’s provisions. As Mirvis said, Delaware law assumes that boards are fulfilling their duties to shareholders. But not always.

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