Back to News list

Judge Mulls Insider Trading Argument in Allergan Takeover

Daily Journal

In April, when Valeant Pharmaceuticals International Inc. and the hedge fund Pershing Square Capital Management LP announced a joint bid to acquire Irvine-based Botox maker Allergan Inc., the corporate world took notice. The partnership between an acquiring company and a hedge fund led by the prominent activist investor William A. Ackman was widely regarded as the first of its kind, prompting a flurry of questions about whether others could follow in their footsteps. Such a development would have profound effects on how hostile takeovers are conducted.

Many of those novel issues were distilled in a Santa Ana courtroom this week, where Allergan, Valeant, Pershing and their attorneys argued over whether the actions taken by Allergan's would-be acquirers constituted a violation of federal securities laws. The outcome of the $53 billion cash and stock proposal could hinge on the court's ruling, attorneys said.

U.S. District Judge David O. Carter hasn't specified when he intends to rule, but his decision is being watched closely.

"I have a feeling it could end up in the 9th Circuit if not beyond," said Pearson, Simon & Warshaw LLP senior counsel George S. Trevor, who is not involved in the case. The key issue in the case is whether the atypical strategy Valeant and Pershing employed to launch their unsolicited takeover bid for the company ran afoul of insider trading laws. Allergan Inc. v. Valeant Pharmaceuticals International Inc., CV14-01214 (C.D. Cal., filed Aug. 1, 2014).

Allergan is seeking to enjoin Pershing from voting its majority stake in the company at a special shareholder meeting slated for December that could unseat directors opposed to the deal, thereby catalyzing it.

Allergan's counsel, co-led by Latham & Watkins LLP partners Peter A. Wald in San Francisco and Michele D. Johnson in Costa Mesa, have argued that Pershing's move to amass a 9.7 percent stake in the company without disclosing its relationship with Valeant and its knowledge of the coming deal amounted to trading based on insider information. Wald and Johnson declined to comment on the matter.

Keker & Van Nest LLP partner Michael D. Celio called their tack an "extremely aggressive approach."

"It's aggressive because you have two parties who were pretty open from what I can tell that they intended to do this," Celio said. "To go immediately to 'you are lawbreakers and therefore your strategy is completely invalid' is a litigation equivalent of the nuclear option."

In late February, Valeant contributed capital to the fund Pershing used to build its position in Allergan, according to securities filings.

Allergan contends that Pershing violated Securities and Exchange Commission Rule 14e-3, which prevents "persons" from trading stock in a company based on nonpublic knowledge of a bidder's intent to make a tender offer.

"[Rule] 14e-3 is an aggressive legal theory, and it's pretty unlikely to succeed given the facts as the defendants tell them," Celio said.

Valeant and Pershing have defended their actions as legal under current securities laws and have characterized Allergan's suit as a "baseless" effort to forestall the shareholder vote. Los Angeles-based Sullivan & Cromwell LLP partner Robert A. Sacks and special counsel Edward E. Johnson are leading the representation of Valeant. Neither could be reached for comment.

Pershing Square is receiving counsel from Kirkland & Ellis LLP. Los Angeles partners Mark C. Holscher and Michael J. Shipley are leading the firm's litigation team. Neither could be reached for comment

Valeant and Pershing contend they are "co-bidders" in the bid for Allergan - a key distinction for the purposes of securities regulations. By asserting themselves as cobidders they each become an "offering person," they say, freeing them from insider trading restrictions.

"The insider information that you're going to do a tender offer doesn't apply if you're the person making the offer," Trevor said.

Allergan, however, disputes Pershing's status in the deal, claiming that labeling itself as a co-bidder does not, in fact, automatically mean it's an "offering person" given the SEC's narrow definition of the term. Restricting Pershing's status to a "co-bidder" but not an "offering person" would not immunize it from rules barring trading before the deal was announced without extensive disclosures.

Celio is skeptical that a win for Valeant and Pershing would immediately embolden others to strike up similar partnerships for hostile takeovers. But a win for Allergan, he said, has potentially far-flung consequences.

"It would be a big weapon in the hands of boards trying to fight off a proxy war," he said. "It would factor in uncertainty that you can go to court and make allegations of 14e-3 violations or something similar. "It's a potent argument if they're able to prevail on it. I've never seen it done in quite this way, but that doesn't mean it couldn't work."