DealLawyers.com Blog

November 5, 2014

Federal Court Decision Undermines Legality of Valeant/Pershing Square Bid

Here’s news from Wachtell Lipton’s David Katz & William Savitt (and here’s the related WSJ article):

A federal district court today ruled that serious questions existed as to the legality of Pershing Square’s ploy to finance Valeant’s hostile bid for Allergan. Allergan v. Valeant Pharmaceuticals Int’l, Inc., Case No. SACV-1214 DOC (C.D. Cal. November 4, 2014). As we wrote about in April, Pershing Square and Valeant hatched a plan early this year attempting to exploit loopholes in the federal securities laws to enable Pershing Square to trade on inside information of Valeant’s secret takeover plan, creating a billion dollar profit at the expense of former Allergan stockholders that could then be used to fund the hostile bid. Since then, Pershing Square and Valeant have trumpeted their maneuver as a new template for activist-driven hostile dealmaking.

Today’s decision makes clear that the securities laws, and the equities that underlie the ban on insider trading, are not so easily evaded. Ruling on a motion for preliminary injunction brought by Allergan and one of its individual stockholders, Judge David O. Carter of the Central District of California held that there existed serious doubt as to legality of the Pershing Square-Valeant gambit. The judge refused to credit each of the defendants’ technical defenses to insider trading under Section 14(e) of the Securities Exchange Act, holding that Allergan had raised serious questions regarding both whether Pershing Square had taken “substantial steps” to commence a tender offer before it began its trading program and whether Pershing Square could possibly be an “offering person” exempt from the insider trading rules, given that it not purchasing stock in Valeant’s offer and is not bound to participate in Valeant’s offer. The court thus determined that Allergan and its stockholder had “raised serious questions going to the merits of their Rule 14e-3 claim” for insider trading. Judge Carter concluded that the practice was reminiscent of the practice of “warehousing” shares for the benefit of a hostile offer, which the SEC has disapproved as “unfair to investors who are trading at an information disadvantage.”

The Court also found serious questions as to the sufficiency of Pershing Square and Valeant’s public disclosures under Section 14(a) of the Exchange Act. Judge Carter enjoined Pershing Square from voting its shares at Allergan’s forthcoming Special Meeting unless and until it discloses “the facts underlying Defendants exposure to liability” for insider trading and other details of its conduct. The Court declined to consider more searching relief because he found that Allergan did not have standing under Rule 14e-3 (a finding now subject to appeal).

The District Court’s decision indicates that the Pershing Square/Valeant maneuver is not a sustainable blueprint for activist dealmaking. It is neither fair, nor legal, nor responsible corporate law, to allow activist investors to finance hostile takeovers on the strength of ill-gotten profits derived from inside information.