Valeant Pharmaceutical’s soon-to-be sweetened $47 billion bid for Allergan has been called “a weird textbook for the Future of Mergers & Acquisitions”: It’s the first deal in which an activist hedge fund investor, William Ackman of Pershing Square Capital, has teamed up with an operating company on a bid; and the first in which hostile bidders have convened an unofficial shareholder meeting and proxy vote to scare their target into negotiations. Ackman and Valeant are adding new steps to the old M&A dance — and shareholder class action lawyers are trying to figure out how to keep up with their moves.
On Tuesday, Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer filed their second declaratory judgment complaint against the Allergan board in Delaware Chancery Court. Two weeks after suing directors for supposedly promulgating a misinterpretation of a proposed bylaw amendment that would serve to entrench the board, the shareholder firms are back with a new theory and a new client. This time around, the lead plaintiff is the Police Retirement System of St. Louis and the allegation is that the Allergan board intends to rely on a “constituency” clause in its certificate of incorporation to rebuff a takeover offer that benefits shareholders. (Hat tip to the great Chancery Court newsletter, Chancery Daily.)
Allergan’s constituency provision, according to the complaint, permits the board to consider the interests of groups other than shareholders — such as customers and employees — in evaluating a takeover offer. The suit claims that the provision is contrary to Delaware’s doctrine, which holds that the board’s primary obligation is to maximize shareholder value. The plaintiffs’ firms, including Robbins Arroyo, are asking Delaware Chancellor Andre Bouchard to declare that Allergan’s constituency provision is void and to enjoin the board from relying on it.
So far, the plaintiffs firms aren’t lining up directly with Valeant and Pershing; the new complaint specifically says that shareholders need the declaratory judgment in case a strategic white knight shows up to rescue Allergan from the hostile bidders. But the two suits, which will almost certainly be consolidated into one case, position shareholders for a breach-of-duty claim if the Allergan directors can’t find a way to deliver shareholders the premium that Valeant and Pershing are promising. That’s what happened in the Sotheby’s M&A litigation, when Bernstein Litowitz and Grant & Eisenhofer ended up suing the board and supporting activist investor Daniel Loeb of Third Point.
It’s a new development, as I’ve said before, for public pension funds and the shareholder class action bar to wade into activist investor spats and deal negotiations before there is an announced merger. Usually, they snap into action only after a deal is announced, claiming that directors have breached their duties by agreeing to an inadequate price. I’ve heard arguments, in fact, that the class action bar’s post-merger interests conflict with those of activist investors: Shareholder lawyers want to hold up deals and get paid for improving terms; activist investors want to push deals through on the terms that benefit them, which aren’t necessarily the best possible terms for other shareholders.