Since April 2014 activist investor Bill Ackerman has been trying to facilitate a takeover of Allergen Inc. (“Allergan”) by Valeant Pharmaceuticals International Inc. (“Valeant”). An earlier edition of this Newsletter contains an account of Ackerman’s plan for an unorthodox, unofficial shareholder meeting to advance his goal. His efforts were thwarted in midNovember, when Allergan’s board of directors voted to be acquired by Actavis plc (“Actavis”), a transaction that is valued at $66 billion. However, before the Actavis bid was accepted, Allergan attempted to ward off Ackerman and Valeant’s advances by enjoining them from voting their shares at an Allergan special shareholder’s meeting in which they had hoped to elect new, Valeant-sympathetic directors.

In its complaint,  Allergan  alleged that  Ackerman and Valeant violated various sections of the US Securities Exchange Act of 1934 (the  “Exchange Act”), as well as rules promulgated    thereunder,      including prohibitions  in  Section  14(e)  against insider trading. Ackerman  formed  a  shell  subsidiary  of  his  hedge fund   (Pershing   Square   Capital   Management   LP), called PS Fund 1, LLC (“PS 1”), with which he acquired Allergan shares starting in late February 2014. In early April 2014, PS 1’s operating agreement was amended to include a 3% membership interest by Valeant, and PS 1 began a more aggressive Allergan purchasing initiative that resulted in ownership of 9.7% of Allergan’s outstanding stock by April 21, 2014. Allergan alleged that, during this period, Ackerman had inside, nonpublic knowledge of the impending tender offer by Valeant. Rule 14e-3(a) provides that once an offering person has “taken a substantial step or steps to commence a tender offer […] it shall constitute a fraudulent, deceptive or manipulative act or practice” for any person who is in possession of material nonpublic information relating to the tender offer (other than the acquiring person) to acquire shares in the target. Ackerman and Valeant countered that until June they were preparing for a “negotiated merger,” rather than a tender offer and therefore had taken no substantial steps toward a tender offer at the time the shares were purchased. Additionally, Ackerman and Valeant contended that they were operating as a single “acquiring person” due to Valeant’s membership interest in PS 1.

On November 4, 2014, in the Central District of California, U.S. District Judge David Carter denied Allergan’s requested injunction. The judge ordered that Ackerman disclose the nature of his relationship with Valeant to Allergan shareholders and solicit new proxy votes. The judge noted that Allergan had raised “serious questions” as to whether Ackerman had violated insider trading rules, but found that it would be too difficult to determine whether and how Allergan shareholders would be harmed by an injunction enjoining PS 1 from voting. Although Ackerman and Valeant’s court victory did not ensure a Valeant takeover of Allergan because they were ultimately outbid by Actavis, the effort does offer an example of creative hostile-takeover tactics and associated risks.