Valeant Pharmaceuticals and its hostile takeover partner William Ackman of Pershing Square Capital have a phalanx of lawyers working on their $47 billion bid for Allergan – Kirkland & Ellis for Ackman; Sullivan & Cromwell and Skadden, Arps, Slate, Meagher & Flom for Valeant- so I don’t know who deserves credit for the tactic they announced yesterday. But whoever came up with the idea of holding an unofficial meeting and proxy vote to give Allergan shareholders an opportunity to urge the board to enter discussions with Valeant is quite a strategist. The Ackman/Valeant proxy is apparently the first time a hostile bidder has called for a non-binding straw poll of shareholders but I bet it won’t be the last. This is a win-win proposition for Ackman and Valeant, and here’s why.
To start, the unofficial meeting and proxy vote permit Allergan’s bidders to avoid two different sorts of obstacles: the company’s board-friendly corporate framework and its recently-adopted poison pill. Matt Levine at Bloomberg View did a great job Tuesday of explaining why Ackman — who holds about 9.7 percent of Allergan’s stock through Pershing — can’t talk directly to other shareholders for fear of crossing the 10 percent “beneficial ownership” threshold and triggering the poison pill. But the pill, Levine explained, has an exception for proxy solicitations like the one Ackman just launched. So the unofficial proxy vote permits Ackman and Valeant to show Allergan what major investors think without actually talking to shareholders.
Plus, Ackman and Valeant don’t have to worry about satisfying requirements in Allergan’s corporate charter and bylaws for shareholder meetings. To convene a special meeting of shareholders – which they would have to do, since Allergan’s regular annual meeting took place on May 6 – they’d have to obtain written consent from 25 percent of the shareholders. (Ronald Barusch of The Wall Street Journal’s Dealpolitik detailed the special meeting process last week, after Valeant mentioned that it might go that route in a conference call with analysts.) Shareholders can bind the corporation through votes at special meetings, though there’s a chance Allergan would claim that a newly-adopted bylaw amendment bars shareholders from replacing directors through a meeting convened by written consent. (It’s complicated, but one pension fund shareholder explained why in a complaint filed last week against Allergan’s board in Delaware Chancery Court.)
None of that matters under Ackman’s unofficial meeting strategy. The shareholder vote Ackman has launched doesn’t seek to bind Allergan’s board. It’s just an advisory vote.
So what does the vote accomplish? After all, even if a majority of Allergan shareholders vote yes on the Ackman resolution and request that the board enter discussions with Valeant – a high hurdle, considering that shareholders just elected nine board members by wide margins – the board is not bound by the vote. Allergan’s official statement on the Ackman proxy hints that the company won’t be influenced by the outcome of what it called “a self-serving exercise” that ignores “the mechanism approved by the Allergan shareholders to call a special meeting.”