Inside the Allergan trade
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Not too long ago, Canadaâ€™s Valeant PharmaceuticalsÂ teamed upÂ with Bill Ackman to launch a hostile takeover effort for Allergan, the maker of Botox. The tag team effort was novel, but the story was pretty Ackman-esque: he announced he owned 9.7 percent of Allergan; the company adopted a poison pill to keep him from gaining control over any more. Throughout the summer, the fight continued to getÂ uglier. Last week, Allergan filed a lawsuit in California alleging insider trading between Ackman and Valeant. It is, asÂ Matt LevineÂ says, â€śvery clever and great fun, if you’re into this sort of thing.â€ť
Basically, theÂ lawsuitÂ alleges that Ackman bought a ton of Allergan stock while Valeant was preparing a tender offer â€” and by being in on the game together, this was insider trading. Technically, Ackman didnâ€™t buy anything, a shell company called PS Fund 1 did (if youâ€™re interested in the technicalities, PS Fund 1 is mostly owned by Ackmanâ€™s hedge fund, Pershing Square and 3 percent owned by Valeant. It also technically didnâ€™t buy shares in Allergan, butÂ zero-strike call options).
Levine explains that this isnâ€™t a normal insider trading case, since trading on your own information isnâ€™t illegal. However, thereâ€™s aÂ special early-warning ruleÂ in insider trading that once a company has taken â€śsubstantial stepsâ€ť to start a tender offer, anyone who knows about it canâ€™t trade on that information without first publicly disclosing it. So the question in the lawsuit is: Did Ackman and Valeant violate that special rule?
Perhaps not. Back in April when Valeant and Ackman announced the hostile takeover, a lawyer for one of the two firms representing Allergan in this suit wrote aÂ long postÂ about how terrible it is that Valeant and Ackman found a way through the numerous loopholes in securities law (Matthew Zeitlin and Mariah Summers dug into the detailsÂ at the time). â€śThe 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),â€ťÂ the memoÂ from Wachtell, Lipton, Rosen, & Katz reads. Oops.
Alison FrankelÂ takes a deeper look at the complaint to see if there is any new information that may have changed Watchtellâ€™s mind on the legality. â€śThe complaintâ€™s allegations â€¦ are based on information Allergan already had in April or more recent evidence that seems pretty trivial,â€ť she writes. Valeant and Ackman, meanwhile,Â claimthat the lawsuit is just an attempt to block a special shareholder meeting set to be called in mid-August. But, as Frankel says, insider trading seems like a bit much if all Allergan wanted to do was block a shareholder meeting. So maybe the juicy details have yet to come. â€”Â Shane Ferro
On to todayâ€™s links: