Allergan files federal lawsuit against Valeant, Pershing Square
Allergan has filed a lawsuit against Valeant Pharmaceuticals International, Pershing Square Capital Management and its principal, William A. Ackman, alleging that Valeant, Pershing Square and Ackman violated federal securities laws prohibiting insider trading, engaged in other fraudulent practices and failed to disclose legally required information.
The complaint alleges, between February and April, Pershing Square purchased Allergan stock and securities then valued at over $3.2 billion from unknowing company stockholders while fully aware of Valeant's nonpublic takeover intentions, thereby securing for itself and depriving the selling stockholders of value appreciation worth approximately $1.2 billion upon Valeant's announcement of its initial offer on April 22.
Allergan is seeking, among other remedies, a declaration from the court that Pershing Square and Valeant violated insider trading and disclosure laws, and an order rescinding Pershing Square's purchase of the Allergan shares it acquired illegally. Allergan reserves the right to seek additional remedies against all appropriate parties.
The complaint alleges, among other things, that:
- Valeant always directed the unsolicited transaction to acquire Allergan toward a tender offer. Valeant's chairman and CEO, J. Michael Pearson, confirmed that June 17, when he said of Valeant's initial proposal: "We suspected at the time it would ultimately have to go directly to Allergan shareholders. We were correct."
- Debt-laden Valeant did not have the resources to acquire Allergan, and therefore sought third-party financing assistance from Ackman and his hedge fund, Pershing Square, which are wholly separate persons from Valeant.
- By the time Valeant and Pershing Square entered into their financing agreement, Valeant had taken what prior courts have held to be substantial steps toward a tender offer, including: hiring financial and legal advisors, holding multiple board and committee meetings and negotiating the respective financial commitments of the parties.
- After Valeant shared its nonpublic takeover intentions with its third-party financier, and after taking these substantial steps toward a tender offer, an LLC entity formed and controlled entirely by Pershing Square—PS Fund 1—purchased significant amounts of Allergan stock and other securities using zero-strike price call options and equity forwards, without disclosing Valeant's intentions to the market. As a result, the parties who sold such securities to PS Fund 1 significantly were damaged.
- An examination of trading activity between February and April establishes that PS Fund 1, at the direction of Ackman and Pershing Square, was the sole purchaser of Allergan stock and other securities, and that Valeant purchased no shares of Allergan stock or other securities.
- Valeant belatedly added PS Fund 1 as a de minimis investor. By the time Valeant was added as a member of and contributed capital to PS Fund 1, the fund had already acquired more than 11 million Allergan shares or options.
- The terms of the parties' agreement and the parties' subsequent actions make clear that Valeant, and not PS Fund 1, Pershing Square or Ackman, was and has continued to be the sole person seeking to acquire Allergan.
- Ackman has repeatedly represented that he was simply "Allergan's largest shareholder" interested in "maximiz[ing] value for all Allergan shareholders," whether through a transaction with Valeant or by "identifying a superior transaction with another company."
- PS Fund 1's rapid acquisition of a total of 9.7% of outstanding Allergan stock, while in possession of material nonpublic information, violated Rule 14e-3.
- Valeant and Pershing Square's construction of a shell entity through which to act, and their self-serving description of that relationship through which they have sought to mask these facts, does not and cannot legitimize their unlawful conduct.
Rule 14e-3, promulgated by the SEC under the Exchange Act, provides that, where any "offering person" has taken "a substantial step or steps" to commence a tender offer of a target company, any "other person" who is in possession of material nonpublic information relating to that tender offer is prohibited from purchasing or selling any securities of the target company, unless the information is publicly disclosed within a reasonable time prior to the purchase or sale.
The complaint alleges Valeant, who was and is the "offering person" within the meaning of this rule, took substantial steps to commence a tender offer for Allergan and tipped Ackman (and the entities he controls)—the "other person" within the meaning of this rule—to those otherwise undisclosed intentions, and that Ackman then traded in Allergan securities on the basis of this material, nonpublic information.
The complaint also alleges that in their takeover efforts, Valeant and Pershing Square have:
- Released demonstrably false and misleading proxy solicitation materials that misstate their relationship and intentions regarding a transaction
- Repeatedly misstated the certainty of the proposed transaction and the value of the consideration being offered to Allergan stockholders, among other material facts—information that is critical to Allergan stockholders in considering whether to deliver consents in favor of a special stockholder meeting, and whether to tender their shares to Valeant in an exchange offer.