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A "Valeant" Scheme Causes Investor Losses

April 1, 2015

Kessler Topaz is serving as Co-Lead Counsel in a securities class action against William A. Ackman (“Ackman”), his hedge fund Pershing Square Capital Management, L.P. (“Pershing Square”), and the pharmaceutical company Valeant Pharmaceuticals International, Inc. (“Valeant”) regarding insider trading conducted in connection with a secret takeover bid for the pharmaceutical company Allergan, Inc. (“Allergan”). 

The case, In re Allergan, Inc. Proxy Violation Sec. Litig., No. 8:14-cv-02004-DOC-AN (C.D. Cal.), alleges that the defendants violated Section 14(e) of the Securities Exchange Act of 1934 and Rule 14e-3 promulgated thereunder, and is pending in the United States District Court for the Central District of California. Rulings in this important action may implicate disclosure obligations to a target corporation’s stockholders in future takeovers.

The investor class action follows a separate action brought against Valeant and Pershing Square by Allergan, which chiefly sought to prevent the takeover from occurring. See Allergan, Inc. v. Valeant Pharmaceuticals Int’l, Inc., No. SACV 14-1214 DOC(ANx) (C.D. Cal.). On November 4, 2014, Judge David O. Carter ordered Valeant and Pershing Square to halt any attempts to further their takeover bid until certain corrective measures could be made. See Allergan, Inc. v. Valeant Pharms. Int’l, Inc., 2014 U.S. Dist. LEXIS 156227 (C.D. Cal. Nov. 4, 2014). The allegations described herein are set forth in that order and the complaints filed by Allergan and Allergan shareholders in their respective actions.

Valeant is a Canadian pharmaceutical company that has been labeled a “serial acquirer” by certain analysts due to its business model in recent years of buying companies with established medical products and then cutting costs to drive growth. Since 2010, Valeant has spent billions of dollars purchasing multiple drug and health care companies, including Bausch & Lomb (for $8.7 billion), Medicis (for $2.6 billion), and Natur Produkt (for $180 million). By the beginning of 2014, Valeant had set its sights on Allergan — a California-based pharmaceutical company that makes the injectable wrinkle-treatment Botox and other drugs. However, Valeant knew that any attempt to acquire Allergan would likely be difficult, as Valeant’s initial merger overtures to Allergan in 2012 had been flatly rejected. Moreover, because of its growing debt burden, Valeant enlisted the help of Ackman and his $13 billion hedge fund, Pershing Square, in order to jointly carry out the takeover of Allergan.

As set forth in Judge Carter’s November 4, 2014 order, Pershing Square agreed to provide the necessary funding and support to Valeant in its effort to acquire Allergan. In order to generate the return Ackman desired from the acquisition, Valeant and Ackman agreed to obtain a 10% stake of Allergan that Valeant would use to launch a hostile takeover of Allergan. As indicated by documents that only later became public, Valeant and Ackman knew that acquiring a significant interest in Allergan was necessary because, as they correctly expected, Allergan’s board would take defensive measures against the takeover bid once they became aware of it. Indeed, the 10% stake was important because, as stated in Judge Carter’s November 4, 2014 order, it would “go a long way” toward securing the 25% shareholder vote needed to call a special meeting during which Pershing Square could vote its shares to replace Allergan’s board, thereby increasing Valeant’s probability of closing the deal.

To execute their plan, on February 11, 2014, Ackman and Pershing Square, with Valeant’s approval, formed a shell entity they termed “PS Fund 1” to secretly accumulate their stake in Allergan. While the federal securities laws require investors holding 5% or more of a company’s stock to disclose their holdings, investors are provided a 10-day window to disclose that they have crossed the 5% threshold. Valeant and Pershing Square were well aware of these restrictions, and took a series of careful steps to avoid detection of their plans in light of these requirements.

For example, rather than buying Allergan stock directly, PS Fund 1 bought zero-strike price “call options” in less visible over-the-counter transactions — options that gave PS Fund 1 essentially the same ownership rights as if it had purchased the shares directly. By April 8, 2014, PS Fund 1 had acquired a 4.99% stake in the Company through these transactions — i.e., an amount just shy of the SEC’s 5% reporting requirement threshold. In the 10-day window that immediately followed — from April 11 through April 21, 2014 — PS Fund 1’s buying spree accelerated with PS Fund 1 acquiring almost 14 million Allergan shares. By April 21, 2014, PS Fund 1 held 9.7% of Allergan’s outstanding stock. These machinations enabled Ackman, Pershing Square, and Valeant to accumulate a massive stake in the Company prior to making any disclosures to the marketplace.

Then, after trading closed on April 21, 2014, the very last day of the 10-day window, Valeant and Pershing Square disclosed their Allergan holdings and revealed that Valeant would seek to acquire Allergan. On the following day, Valeant and Pershing Square further disclosed that they would offer $48.30 in cash per Allergan share and an exchange of 0.83 Valeant shares per Allergan share. The price of Allergan shares immediately shot up in response to the offer by $21.65 per share (or approximately 15%).

While Ackman, Pershing Square, and Valeant initially tried to characterize the takeover as a “merger” on April 21, 2014, the plan, from the beginning, was to launch a tender offer. Indeed, Valeant’s aggressive and hostile tactics from the outset showed that Valeant’s proposed merger was a tender offer in everything but name. For example, when Allergan did not immediately agree to negotiate a merger, Valeant sought, with Ackman’s help, to persuade stockholders that a deal was “inevitable,” hosting media and investor events claiming that “time [was] of the essence” and that Allergan promptly needed to respond to the offer. When Allergan’s board rejected Valeant’s offer, Valeant immediately raised the offer by $10 per share on May 28, 2014 and, without waiting for another denial, again bumped the price even higher and raised the cash portion of the offer dramatically to $72 per share on May 30, 2014.

On June 2, 2014, Defendants revealed their true intentions. Specifically, Pershing Square filed a proxy statement with the SEC in contemplation of calling a special meeting of stockholders in order to: (i) remove and replace six unspecified directors from the Allergan Board; (ii) propose an amendment to Allergan’s bylaw provisions regarding special stockholder meetings; and (iii) request that the Board promptly engage in merger discussions with Valeant. In a presentation to investors that day, Valeant abandoned the pretense of “negotiations” with the Allergan board, revealing that it was “preparing to launch an exchange offer.”

Finally, on June 18, 2014, Valeant filed documents with the SEC formally announcing what Valeant and Ackman had planned all along — an initiation of a tender offer to acquire Allergan. Indeed, in a press conference held the day before, Valeant’s Chief Executive Officer, J. Michael Pearson, admitted that Valeant always knew it would have to launch a tender offer to acquire Allergan, stating that “[o]n April 22nd, we announced our offer for Allergan. We suspected at the time it would ultimately have to go directly to Allergan shareholders. We were correct.

Throughout the Class Period (February 25, 2014 through April 21, 2014), Allergan shareholders were intentionally kept unaware of both the forthcoming tender offer by Valeant and PS Fund 1’s agreement to acquire Allergan shares on Valeant’s behalf. Thus, Allergan shareholders who sold shares during the Class Period — while Pershing Square was secretly amassing massive quantities of Allergan shares on the basis of material, non-public information about Valeant’s planned tender offer for Allergan — did so at artificially deflated and unfair prices based on unequal access to inside information.

Allergan subsequently filed suit against Valeant and Pershing Square accusing the companies of insider trading, among other securities violations. That lawsuit sought: (1) a preliminary injunction preventing PS Fund 1 from exercising any of the privileges of ownership attaching to its stake in Allergan; and (2) a preliminary injunction preventing PS Fund 1, Valeant, and Pershing Square from voting any false proxies solicited by them in violation of Section 14(a) or Rule 14a-9 until corrective disclosures were made. On November 4, 2014, Judge Carter granted in part Allergan’s motion for a preliminary injunction against Valeant and Pershing Square, and found, inter alia, that “serious questions were raised” as to whether Valeant and Pershing Square had violated the federal securities laws. See Allergan, Inc. v. Valeant Pharms. Int’l, Inc., 2014 U.S. Dist. LEXIS 156227, at *27, 43 (C.D. Cal. Nov. 4, 2014). Judge Carter also noted that investors who sold Allergan shares while Valeant and Pershing Square were conducting their insider trading scheme may have “a private right of action under Rule 14e-3” and “suffered” harm as a result of Valeant and Pershing Square’s scheme. See id. at 51-52. Allergan’s action was voluntarily dismissed after Allergan was acquired by Actavis plc on March 17, 2015.

Investors’ securities class action against Ackman, Pershing Square, and Valeant remains ongoing, and Kessler Topaz was appointed as Co-Lead Counsel in the securities class action by Judge Carter on May 5, 2015. The outcome of the investor class action could have broad implications for the duties owed to shareholders in future takeover bids, as any adverse rulings against Valeant and Pershing Square could push other companies contemplating a similar strategy toward full compliance with the spirit and letter of federal disclosure obligations. 

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