DealLawyers.com Blog

Here’s a note from Chris Cernich, Head of ISS’ M&A and Proxy Contest Research – it’s derived from a recent M&A Edge research note:

In the five months since Valeant Pharmaceuticals went public with its premium offer for Allergan, and over the three months since Allergan’s largest shareholder began soliciting support to give shareholders a vote on the offer, and during the five weeks since valid consents were delivered from more than a third of outstanding shares requesting a special meeting for that purpose–as well as, apparently, for the remaining three of four additional months before the board is finally required to hold that special meeting and give shareholders a voice–the Allergan board, though refusing to engage with the bidder, has repeatedly reassured Allergan shareholders that it is aligned with shareholders and focused on “enhancing stockholder value.”

We may be about to find out.

Since the Valeant announcement, Allergan has repeatedly indicated it is looking for acquisitions to help create shareholder value. But a large acquisition would also likely kill off the Valeant offer by making Allergan too big–regardless of whether that acquisition actually adds meaningful, let alone greater, value to shareholders. On Sept. 22, media reports began circulating that the board had not only declined an all-cash offer from another potential buyer, but was “in advanced talks to buy Salix Pharmaceuticals” for an all-cash consideration presumably rich enough to persuade the Salix board to call off its planned merger with Cosmo Pharmaceuticals.

Allergan’s largest shareholder, Pershing Square, which has been pushing the Allergan board to engage with Valeant, quickly warned it would sue directors for breach of fiduciary duty if such a transaction were announced. Over the subsequent days, three more of the company’s top 12 shareholders also issued public statements pointedly expressing, as T Rowe Price put it, their “growing concern [at] the corporate governance practices of the Allergan board.”
To point out that the board has authority to approve an all-cash acquisition without shareholder approval is to point out the irrelevant: the question is not what the board can do, but what the board should do.

When more than a third of outstanding shares consent to call a special meeting–particularly amid a thicket of bylaw restrictions so onerous as to nearly frustrate the exercise of that “right”–there’s credible reason to believe that the board should give shareholders a real and binding choice between the buyout offer and the new strategic plan assembled in response.

When nearly a fifth of outstanding shares, increasingly uneasy about the board’s stewardship, feel compelled to publicly reiterate that point, there is a credible argument to be made that the board should give shareholders a deciding vote on any large, buyout-blocking acquisitions if the board is simultaneously rejecting premium offers for the company.

Absent the announcement of a large, irrevocable acquisition, though–absent, that is, an irrevocable breach of faith–shareholders cannot know whether the board’s public professions of alignment were principles or platitudes. They cannot even know, with any certainty, that the board has rejected other compelling offers, or is negotiating a buyout-blocking transaction. They can, instead, only look at the board’s past behaviors, and whether its public statements address or sidestep the significant issues being raised, to gauge whether there is a credibility gap.
That record is not reassuring.

The board’s public response to this highly unusual airing of concern from its major shareholders has been only to reiterate generically its “focus” on “enhancing stockholder value”-with nary a word addressing the more crucial question raised by each of those major shareholders of whether it will enable or frustrate a decisive shareholder vote on the competing strategic alternatives.