The U.S. Securities and Exchange Commission and drugmaker Allergan settled claims that Allergan failed to disclose negotiations with third parties following the announcement of a hostile tender offer by Valeant and co-bidder Pershing Square.[1]

Highlights

  • The tender offer rules require the target of a tender offer to disclose whether or not, in response to the tender offer, it is engaged in negotiations that relate to a merger or acquisition transaction.

  • If no negotiations are underway at the time of the target company’s initial disclosure, disclosure laws require the target company to affirmatively state that fact and to promptly amend its filing to disclose if negotiations have later commenced, although disclosure of the possible terms of or the parties to the transaction is not required if an agreement in principle has not been reached.

  • When Allergan engaged in negotiations on price with potential M&A counterparties while Valeant’s and Pershing Square’s tender offer was pending, Allergan violated disclosure laws by failing to amend its Schedule 14D-9 to disclose to its shareholders that third-party negotiations had commenced.

  • Allergan agreed to pay a US$15 million civil money penalty to resolve the disclosure claims.

  • This is the SEC’s most recent push for disclosure in an area that has seen a number of enforcement actions over the years, including several high profile matters dating back to the 1980s.

Background

On June 18, 2014, Valeant Pharmaceuticals International Inc. and a joint venture between Valeant and Bill Ackman’s hedge fund, Pershing Square Capital Management, L.P., launched a tender offer to acquire Allergan, Inc. In response and as required by the SEC tender offer rules, on June 23, 2014 Allergan filed a Schedule 14D-9 in which Allergan’s board of directors recommended that Allergan shareholders reject Valeant’s and Pershing Square’s tender offer. The Schedule 14D-9 also noted that Allergan was not then undertaking or engaged in any negotiations in response to the tender offer that could result in an extraordinary transaction.

Thereafter, Allergan began to explore various strategic alternatives, including (1) continuing as a standalone company, (2) making a strategic acquisition that would result in a larger combined company, which would be more difficult for Valeant and Pershing Square to acquire, and (3) being acquired by a “white knight” in an alternative friendly transaction.

As a result of the consideration of these strategic alternatives, Allergan engaged in M&A negotiations with two potential counterparties throughout the summer and fall of 2014 while Valeant’s and Pershing Square’s tender offer was pending. First, Allergan engaged in negotiations with another publicly traded company, known as “Company A,” regarding a transaction pursuant to which Allergan would acquire Company A. After several proposals and counterproposals on price, the parties tentatively agreed on a price, which was subject to satisfactory completion of due diligence. However, the transaction was ultimately abandoned after Allergan reduced its offer price due to issues identified in its due diligence investigation. Allergan did not disclose to its shareholders, by amending its Schedule 14D-9 or otherwise, that it had engaged in negotiations with Company A.

Allergan also engaged in negotiations with Actavis plc, regarding a transaction pursuant to which Actavis would acquire Allergan. Over the course of several months, Allergan and Actavis exchanged several proposals on price, entered into a standstill agreement, conducted due diligence and negotiated and on November 16, 2014 executed a merger agreement. Shortly thereafter Allergan disclosed the proposed Actavis transaction to its shareholders. However, prior to such time, Allergan only disclosed to its shareholders that it had been approached by another party regarding a potential transaction and that discussions might lead to negotiations without subsequently disclosing that negotiations had commenced.

Throughout the fall of 2014, the Staff of the SEC’s Division of Corporation Finance urged Allergan to make appropriate disclosure following news reports of rumors that Allergan was negotiating a friendly M&A transaction. In response, Allergan stated that either no negotiations had taken place or discussions had commenced significantly prior to Valeant’s and Pershing Square’s offer. However, the Staff continued to question Allergan’s position and requested that Allergan confidentially submit a list of all recent M&A negotiations or discussions. After reviewing the list supplied by Allergan, the Staff again urged Allergan to expand its disclosure of discussions or negotiations regarding extraordinary transactions being considered and the steps Allergan had taken to date. Nevertheless, Allergan, upon the advice of counsel, asserted that further disclosure was not required and noted that its board of directors had determined that premature disclosure might jeopardize continuation of any discussions or negotiations.

Applicable SEC Rules

Under applicable SEC rules, a public company that is the target of a tender offer is required to express a position on the tender offer by filing a solicitation or recommendation statement on Schedule 14D-9 with the SEC. In addition, Item 7 of Schedule 14D-9 (which incorporates Item 1006(d) of Regulation M-A) requires the target of the tender offer to disclose whether or not it has entered into negotiations “in response to the tender offer” that relate to an “extraordinary transaction,” including a merger or acquisition transaction. If no negotiations are underway at the time of the initial filing of the Schedule 14D-9, the target of the tender offer is required to affirmatively state that fact. The instruction to Item 1006(d)(1) also notes that if an agreement in principle has not been reached, no disclosure of the possible terms of or the parties to the transaction is required if, in the opinion of the target company’s board of directors, disclosure would jeopardize continuation of the negotiations. The instruction further notes that, in such a case, “disclosure indicating that negotiations are being undertaken or are underway and are in the preliminary stages is sufficient.” After a Schedule 14D-9 is filed, Rule 14d-9(c) obligates the target company to promptly amend the Schedule 14D-9 to disclose any material changes that have occurred, including to disclose that negotiations in response to the tender offer have commenced.[2]

SEC Order

In anticipation of the institution of cease-and-desist proceedings, Allergan consented to the issuance of an administrative cease-and-desist order by the SEC, in final settlement of the SEC’s investigation into Allergan’s alleged disclosure violations relating to its negotiations with Company A and Actavis. The SEC order included the following key findings:

  • When Allergan received the first counterproposal on price from Company A, Allergan was required to amend its Schedule 14D-9 to disclose that negotiations were being undertaken or were underway and were in the preliminary stages.

  • When Allergan first indicated a price level to Actavis following Actavis’s initial offers, Allergan was required to amend its Schedule 14D-9 to disclose that negotiations were underway even though they were in the preliminary stages.

  • Disclosure by Allergan of possible terms of or the counterparty to the potential transactions was not required unless and until an agreement in principle was reached if, in the opinion of Allergan’s board of directors, disclosure would jeopardize continuation of the negotiations.

The SEC order reiterated the importance of the disclosures required by Item 7 of Schedule 14D-9, noting that in the 1979 release announcing the adoption of Rule 14d-9, the SEC stated that “the major developments referred to in Item 7 can be one of the most material items of information received by security holders.” The SEC order also noted that no finding of scienter is necessary to establish a violation of Section 14(d) or Rule 14d-9.

In addition to agreeing not to engage in future violations of certain reporting provisions of the federal securities laws, Allergan also agreed to pay a civil money penalty of US$15 million to resolve the disclosure claims.

Prior SEC Enforcement Actions

The SEC has previously instituted proceedings against target companies and in some cases their counsel for failing to disclose third-party negotiations. For example, in 1986 the SEC instituted proceedings against Allied Stores Corporation and its counsel for failing to amend its Schedule 14D-9 to disclose negotiations that had taken place following Campeau Corporation’s unsolicited bid for Allied.[3] The SEC also instituted proceedings against Revlon, Inc. in 1986 when Revlon failed to disclose that friendly M&A negotiations were underway while Revlon was attempting to fend off a tender offer by Pantry Pride, Inc. In the SEC’s Revlon order, the SEC emphasized that the term “negotiations” for purposes of Item 7 “includes not only final price bargaining, but also applies to substantive discussions between the parties or their legal and financial advisers concerning a possible transaction.”[4]

Conclusion

Targets of a tender offer should carefully consider disclosure requirements when participating in third-party discussions or negotiations regarding a potential alternative transaction. If no negotiations are underway at the time of the target company’s initial disclosure, the target company is required to affirmatively disclose that fact and to promptly amend its filing to update that disclosure if negotiations later commence. In the case of Allergan, the SEC appears to have taken the view that once the first counterproposal on price is communicated (whether a specific dollar amount or a price level), then negotiations are considered “underway” for purposes of Item 7 of Schedule 14D-9 and disclosure of such fact by the target company to its shareholders is required. When participating in such discussions, target companies should consider whether it is advisable to engage in substantive negotiations on price and, if so, should be prepared to determine whether disclosure to shareholders that negotiations are underway is required.