Ackman pushes unorthodox shareholder
in Washington | Published
May 30, 2014 at 4:41 PM
Activist funds, institutional investors and corporate
lawyers everywhere are keeping a close eye on the latest unusual
tactic being employed by insurgent billionaire Bill Ackman.
His approach, which on its face seems common enough,
could unleash a raft of copy-cat insurgents if it is successful.
The founder of Pershing Square Capital Management LP
announced last month that he wants to hold a shareholder referendum
and have investors vote on his nonbinding proposal to have Allergan
Inc.'s board sit down and engage in "good faith" negotiations over a
recently increased $53 billion unsolicited acquisition offer made by
Canada's Valeant Pharmaceuticals International Inc. for the Botox-maker.
Valeant made its original hostile offer in April at the same time as
it also became a minority player in a joint venture fund set up by
Ackman that acquired a 9.7% Allergan stake. It has since raised it
And while referendums on nonbinding shareholder
proposals are frequently employed as a pressure tactic in a hostile
campaign what makes Ackman's proposal so different -- and intriguing
for many activists and other onlookers -- is that he is seeking a vote
on his proposal outside of Allergan's corporate bylaw framework. The
vote won't occur at an annual meeting or special shareholder meeting
hosted by the company but at one Ackman sponsors. The approach has, as
expected, ruffled feathers at Allergan, which has called it a
"self-serving exercise" where Ackman can "dictate" his own process.
But if the gambit succeeds, other activists can be
expected to try Ackman's unorthodox governance play on their own.
People familiar with Ackman say that he expects the
Securities and Exchange Commission to approve the strategy soon,
though others are not so sure. If approved, a vote on the proposal
could occur in June.
IF ACKMAN had employed the traditional and accepted
approach to holding a special shareholder meeting, following the
company's bylaws, he would likely have had to wait until fall for it
to take place -- a delay of roughly half a year. In a letter to
independent directors Ackman said that the company's bylaws make
holding a special meeting to consider the measure "extremely
burdensome" and that Allergan's CEO David Pyott made a statement in a
meeting with shareholders that the earliest Pershing could hold such a
meeting would be in November.
The extraordinary vote could help Ackman obtain a sense
of shareholder sentiment about Valeant's hostile Allergan offer -- and
if sentiment is with him, help drive a deal much faster than if he
stayed within the company's bylaws.
But the nature of Ackman's approach has many observers
believing that institutions and key proxy advisory firms won't
participate -- rendering it ineffective.
A key consideration is whether the two
super-influential proxy advisory firms, Institutional Shareholder
Services Inc. and Glass, Lewis & Co. Inc., will render recommendations
on the subject at all. A recommendation for Ackman will clearly help
the fund's efforts but even a vote against indicates that the proxy
advisory firms are taking the approach seriously. The proxy advisers
could decide to make a recommendation if they are pressured to do so
by a large number of their institutional clients. They also could be
motivated, according to one observer, to make a recommendation knowing
that it could spawn a cottage industry of similar activist efforts --
outside of proxy season -- all of which would improve business for the
ISS told The Deal that it hasn't yet determined whether
it will issue research on the referendum. "It's not a meeting at which
official company business will be conducted, so it's not clear whether
clients are required to 'vote' under their ERISA [Employee Retirement
Income Security Act] obligations," said an ISS director. "Part of our
consideration will be how compelling the current offer is; part will
be our assessment of the appropriateness of the Allergan board's
response thus far." Glass Lewis did not return calls for comment.
Meanwhile, institutional investors, proxy solicitors
and other activists are scratching their heads about the Ackman
approach. The unofficial nature of the referendum means that
institutional investors don't have systems set up to vote their
Gary Lutin, chairman of the Shareholder Forum in New
York, pointed out that Ackman's proposal is not for a real corporate
vote and therefore institutions don't have any duty to vote their
shares for or against it. Most views of a fund manager's fiduciary
duty to exercise shareholder voting rights would apply only to an
official corporate vote.
Lutin said he expected the vast majority of investors
responding to Ackman's petition will be those who want to show support
for Pershing. He assumes that in the absence of any duty to vote,
investors who oppose the proposal or are just indifferent will have no
reason to send a response.
Lutin also said that the unorthodox nature of the
meeting means that it will not be governed by the usual state law,
SEC, and bylaw rules for real corporate meetings of shareholders. As a
result, Pershing will have to develop its own procedures to assure the
integrity of the process.
"It's not a vote, it's a petition," he said. "And it's
not a real corporate shareholder meeting, either. This is a meeting by
and for a factional proponent."
People familiar with Pershing pointed out that Ackman
plans to employ a traditional independent inspector of elections to
certify the results and verify the share ownership of participating
IT IS UNCLEAR at this stage whether the meeting will be
a short one simply to tally and announce the preliminary results or if
it will be a broader town hall style meeting that will allow for
debate and discussion. Pershing has employed the town hall approach
previously and people familiar with the fund said that if Allergan
hasn't responded to Valeant in a "productive manner" Ackman will
likely want to make it into a forum for debate and discussion of the
Joseph Mills, a managing director at Morrow & Co., a
proxy solicitor, argued that whether institutional investors and proxy
advisory firms will support the measure is a "wild card" because they
aren't technically obliged to do so. He noted that even though the
question posed by Ackman is an easy one to answer institutions might
be wary about participating because it could be interpreted as a vote
in favor of a deal.
"Some investors may not want to hamstring their ability
to negotiate," he said. "The question is an easy one -- of course the
board should talk to anyone who is offering to create shareholder
value. That is what Ackman is banking on. But will institutions want
to answer such a narrow question and, in doing so, tip the scales in
favor of Valeant? Seems like a risk because the vote is open to
interpretation," he said.
Steve Wolosky, a top legal adviser to insurgents and a
partner at Olshan Frome Wolosky LLP in New York, said he has
considered advising his activist fund manager clients that they might
want to hold this kind of shareholder referendum in certain
circumstances. He agreed there is a question about whether
institutions will vote to support the nonbinding proposal and he also
wonders whether ISS and Glass Lewis will issue a recommendation on it
"because it is so unusual." Another issue, Wolosky said, is that some
institutions that have shares on loan may not call in their shares for
a vote, which could hurt turnout or votes in favor of the dissident.
However, it could be useful in situations where a company's bylaws are
particularly egregious in limiting action by written consent or
special meeting. He added that if it is successful it could put
pressure on Allergan's independent directors to negotiate with Valeant.
"I think you use it when there is no other viable
alternative to get a sense of shareholder sentiment," he said.
Mills argued that the main advantage of the non-binding
referendum approach is that it will keep Valeant's offer in the news
in what could be a long process of breaking down Allergan's
resistance. He compared it to asking investors to make the symbolic
gesture of tendering into a hostile offer that has unmet conditions or
is being blocked by a poison pill. However, investors in that case are
backing a specific tender offer price while Ackman's proposal is broad
enough for investors to support the insurgent's efforts but not
necessarily the price Valeant is seeking.
"The question being asked is non-specific, so the
outcome can and likely will be spun either way. It is designed to
leverage the proxy process where once a vote is called, and the vast
majority of institutions automatically respond," Mills said.
Mills contended that Allergan, on its own, is likely
trying to get a feel as to where their shareholders line up on the
Valeant offer. "Shareholders who feel strongly about it are surely
letting them know. They are probably getting lots of input from the
event crowd, while a potentially meaningful percentage of the large
institutions may keep their cards closer to the vest," he said. "In a
nutshell, Ackman is trying to make transparent what is normally a
behind the scenes process. And it is not certain that institutions
will want it to be transparent."
THE MOVE RAISES KEY questions on securities rules.
According to one well-known activist who employs traditional
nonbinding proposals frequently, Ackman's approach is "clever" because
it allows him to approach other institutional investors to discuss the
Valeant bid in a way that does not violate the company's 10% poison
pill, which was installed in April in response to the hostile bid.
"He needs to be able to speak to the shareholders and
he is concerned that if he's not in a solicitation period under the
proxy rules that the company may argue that he is acting as a group
with other shareholders," the activist said. "This gives him cover
because if you are in a solicitation period then you are not acting as
a group, you are soliciting."
However, Lutin's Shareholder Forum pointed out that
some investors will want to ask their lawyers whether participating
could result in a triggering of the company's 10% poison pill or SEC
13D reporting requirements. His forum observed in guidance it released
recently that some lawyers may argue that exceptions to the SEC's
"acting in concert" definitions cannot apply because there is no
legally conducted corporate meeting that is actually subject to those
proxy voting regulations.
In any event, Ackman is waiting for the proposal and
meeting to be cleared by the SEC. And while a number of observers,
including people close to Pershing, believe that SEC approval is not
necessary, others are not so sure. Last week, the congressman from
Allergan's Orange County district, Rep. Ed Royce, R-Calif., sent a
letter to SEC Chairwoman Mary Jo White expressing concern about
Ackman's meeting, calling it a "shadow shareholder referendum" that
comes at the "expense" of shareholder transparency. Royce urged White
to have the SEC perform a "thorough review of the details" of the
filing. The Royce letter could drive the SEC at the very least to
delay its approval. One former top official in the SEC's Division of
Corporation Finance said that Ackman's approach may give the SEC some
pause. "Putting something in front of investors and saying sign this
and deliver it to the company could be characterized as these people
joining a group" that might trigger Allergan's poison pill, he said.
The SEC declined to comment.
The unusual nonbinding proposal may not be the last
governance tactic Pershing employs to force a deal with Allergan.
Escalation is likely if Ackman's move fails. Observers familiar with
the dissident noted that the next step could be to launch an
unsolicited tender offer or have investors' act by written consent to
remove Allergan directors.
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