No downside in Allergan 'meeting'

By Alison Frankel, Reuters

Thursday, May 15, 2014

Valeant Pharmaceuticals and its hostile takeover partner William Ackman of Pershing Square 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 [May 13].

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 explaining 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 detailed 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.

'Self-Serving Exercise'

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 Allergan's shareholders?

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."

— Alison Frankel

The opinions expressed here are those of Alison Frankel, a columnist for Reuters.