No downside in Allergan 'meeting'
By Alison Frankel, Reuters
Thursday, May 15, 2014
Valeant Pharmaceuticals and its hostile takeover partner
Capital Management have a phalanx of lawyers working on
their $47 billion bid for Allergan – Kirkland & Ellis for Ackman; Sullivan
& Cromwell and Skadden, Arps, Slate, Meagher & Flom for Valeant – so I
don't know who deserves credit for the tactic they announced yesterday
But whoever came up with the idea of holding an unofficial meeting and
proxy vote to give Allergan shareholders an opportunity to urge the board
to enter discussions with Valeant is quite a strategist. The Ackman/Valeant
proxy is apparently the first time a hostile bidder has called for a
non-binding straw poll of shareholders but I bet it won't be the last.
This is a win-win proposition for Ackman and Valeant, and here's why.
To start, the unofficial meeting and proxy vote permit Allergan's bidders
to avoid two different sorts of obstacles: the company's board-friendly
corporate framework and its recently-adopted poison pill.
Matt Levine at Bloomberg View did a great job Tuesday of
why Ackman, who holds about 9.7 percent of Allergan's stock through
Pershing, can't talk directly to other shareholders for fear of crossing
the 10 percent "beneficial ownership" threshold and triggering the poison
pill. But the pill, Levine explained, has an exception for proxy
solicitations like the one Ackman just launched.
So the unofficial proxy vote permits Ackman and Valeant to show Allergan
what major investors think without actually talking to shareholders.
Plus, Ackman and Valeant don't have to worry about satisfying requirements
in Allergan's corporate charter and bylaws for shareholder meetings.
An Advisory Vote
To convene a special meeting of shareholders – which they would have to
do, since Allergan's regular annual meeting took place on May 6 – they'd
have to obtain written consent from 25 percent of the shareholders.
(Ronald Barusch of The Wall Street Journal's Dealpolitik
the special meeting process last week, after Valeant mentioned that it
might go that route in a conference call with analysts.)
Shareholders can bind the corporation through votes at special meetings,
though there's a chance Allergan would claim that a newly-adopted bylaw
amendment bars shareholders from replacing directors through a meeting
convened by written consent. (It's complicated, but one pension fund
shareholder explained why in a complaint filed last week against
Allergan's board in Delaware Chancery Court.)
None of that matters under Ackman's unofficial meeting strategy. The
shareholder vote Ackman has launched doesn't seek to bind Allergan's
board. It's just an advisory vote.
So what does the vote accomplish? After all, even if a majority of
Allergan shareholders vote yes on the Ackman resolution and request that
the board enter discussions with Valeant – a high hurdle, considering that
shareholders just elected nine board members by wide margins – the board
is not bound by the vote.
Allergan's official statement on the Ackman proxy hints that the company
won't be influenced by the outcome of what it called "a self-serving
exercise" that ignores "the mechanism approved by the Allergan
shareholders to call a special meeting."
But if Ackman and Valeant persuade even a sizable minority of Allergan
shareholders that the board ought to talk to them, they'll have both a
public relations victory and an argument that the board isn't living up to
its fiduciary duties to shareholders.
You can already envision Ackman's future Delaware Chancery Court class,
asserting that Allergan board members disregarded a shareholder directive
to explore Valeant's offer.
I'm not saying Ackman would win the case based just on an advisory vote,
but I'm sure Allergan's directors and their lawyers at Latham & Watkins
will be thinking about the prospect of litigation when they decide how to
respond to the proxy vote.
That's the considerable upside for Valeant and Ackman if the vote goes
their way: forcing talks through P.R. and the board's fear of litigation
and liability. But what if Ackman's resolution gets only weak support from
Here's the real beauty of Ackman's proxy play: Valeant probably wouldn't
even have to report a bad outcome to the Securities and Exchange
Commission, according to former SEC lawyer Seth Taube of Baker Botts.
Obviously, the Allergan bid is material to Valeant, a public company. But
an unfavorable result in a non-binding, unofficial shareholder vote, Taube
said, is probably not material. "I would think it's not a disclosable
risk," Taube said.
He also pointed out that the shareholders who vote on Ackman's resolution
are likely to be those who support it. So there ought to be ways for
Ackman and Valeant to spin the outcome even if they obtain support from a
relatively small number of shareholders, by presenting yes votes as a
percentage of the total votes rather than the total float.
You really can't ask for a smarter strategy than one that lets Ackman and
Valeant reach out to other shareholders without triggering the pill and
positions them for a litigation challenge while costing them nothing more
than the expense of a proxy contest. No wonder Matt Levine at Bloomberg
has called the Allergan takeover battle "a weird textbook for The Future
of Mergers & Acquisitions."
The opinions expressed here are those of Alison Frankel, a
columnist for Reuters.
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