Inside the Allergan trade
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Not too long ago, Canada’s Valeant Pharmaceuticals teamed up 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 get uglier. Last week, Allergan filed a lawsuit in California alleging insider trading between Ackman and Valeant. It is, as Matt Levine says, “very clever and great fun, if you’re into this sort of thing.”
Basically, the lawsuit alleges that Ackman bought a ton of Allergan stock while Valeant was preparing a tender offer — and by being in on the game together, this was insider trading. Technically, Ackman didn’t buy anything, a shell company called PS Fund 1 did (if you’re interested in the technicalities, PS Fund 1 is mostly owned by Ackman’s hedge fund, Pershing Square and 3 percent owned by Valeant. It also technically didn’t buy shares in Allergan, but zero-strike call options).
Levine explains that this isn’t a normal insider trading case, since trading on your own information isn’t illegal. However, there’s a special early-warning rule in insider trading that once a company has taken “substantial steps” to start a tender offer, anyone who knows about it can’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 a long post 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 details at the time). “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),” the memo from Wachtell, Lipton, Rosen, & Katz reads. Oops.
Alison Frankel takes a deeper look at the complaint to see if there is any new information that may have changed Watchtell’s mind on the legality. “The complaint’s allegations … are based on information Allergan already had in April or more recent evidence that seems pretty trivial,” she writes. Valeant and Ackman, meanwhile, 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. — Shane Ferro
On to today’s links: