Inside the Allergan trade

August 5, 2014

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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:

Unsolved Problems
Sugary drinks should be thought of like cigarettes and alcohol. And taxed accordingly -Roberto Ferdman

Charts
Apple and Samsung have 108% of smartphone industry operating profits - Jay Yarow

So Hot Right Now
The latest in trade policy is data protectionism - FT

Millennials
The kids might be moving out soonish (maybe) - Cardiff Garcia

Big Pharma
“To the extent that there is an ethical case for developing drugs for the poor it’s a burden that falls on all of us” - Alex Tabarrok

The Internet
The potato salad Kickstarter project by the numbers - Kickstarter

Freelance Nation
“Hipster twats who think they can sock it to ‘The Man’ by tweaking their ‘lifestyles’ aren’t as stupid as they look” - Chris Dillow

Long Reads
“There’s got to be a way to get witnesses to testify against the mob.” A history of witness protection - Priceonomics

Totally Unsurprising
The internet is getting more expensive – the average bill is up 20% in two years - Zach Seward

That’s Totally Reasonable
If you really do believe technology is disruptive, you have to worry about its consequences - Albert Wenger

Study Says 
The slowdown in healthcare spending is largely because of the recession - Jason Millman

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