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 In a civil lawsuit filed in federal court in California, Allergan
said Ackman's Pershing Square Capital Management and Valeant
"hatched" an "improper and illicit insider-trading scheme" that
allowed the hedge fund to buy Allergan shares, knowing about
Valeant's planned $51 billion takeover bid.
Valeant and Pershing Square said the complaint was intended to
prevent them from calling a special meeting of Allergan shareholders
to vote on their board nominees.
"This is a shameless attempt by Allergan to delay the shareholders'
fundamental right to call a special meeting," Ackman said in a
statement. "Allergan's determination to waste money on a baseless
lawsuit against its largest shareholder further demonstrates why
this board of directors should be removed."
Without a shareholder meeting, Pershing Square and Valeant may not
have the support they need to remove Allergan's "poison pill"
measure or to ensure the success of a tender offer.
The lawsuit marks the latest twist in an increasingly hostile battle
between the two drugmakers and one of the world's most prominent
activist investors. Allergan has been fighting the takeover bid
since it was announced on April 22.
From the beginning, outside lawyers said the structure of the Ackman
partnership with Valeant was novel but not illegal. Now some experts
say the suit could allow Allergan to seek fresh evidence to press
its case and make life tougher for the $15 billion hedge fund.
The timing for Ackman's Pershing Square is also inopportune as it
works to list one of its funds on an exchange in Europe.
"This lawsuit brings a set of plausible but difficult complaints
that Ackman's lawyers will likely not be able to get dismissed right
away," said Erik Gordon, a professor of law and business at the
University of Michigan.
"Defending against this suit is going to cost money and time and be
unpleasant for Ackman," he said. "It may give Allergan discovery
rights to dig in and see if there is more evidence."
The value of Pershing Square's 9.7 percent stake in Allergan, built
up between February and April, jumped $1.2 billion once the takeover
bid became public. Allergan said the hedge fund improperly enriched
itself at the expense of shareholders.
Insider trading cases typically turn on whether a breach of duty or
trust to the source of information has occurred. In this case, the
insider trading allegations focus on Securities and Exchange
Commission, or SEC, regulations surrounding the dissemination of
information related to tender offers.
"There is a technical SEC rule, Rule 14e-3, that prohibits the use
of material tender offer information, unless you are the offering
person," Alan Palmiter, a law professor at Wake Forest University,
in Winston-Salem, North Carolina said.
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"There could be a plausible argument that Ackman may have violated
this rule even if he bought Allergan shares with Valeant's
permission, because the rule does not require a breach of a duty of
trust or confidence."
DELAY IN SHAREHOLDER MEETING
Allergan's gains helped Pershing Square produce some of the hedge
fund industry's strongest performance numbers so far this year,
investors said.
Allergan asked the U.S. District Court for the Central District of
California to rescind Pershing Square's purchase of the Allergan
shares, arguing they were illegally acquired.
The lawsuit said heavily indebted Valeant lacked the resources to
buy Allergan, so it sought financing from Ackman and Pershing
Square. By the time they reached a financing agreement, Valeant had
already taken concrete steps toward a tender offer for Allergan, it
added.
For Ackman, who invests for institutional investors including state
pension funds as well as wealthy individuals, the lawsuit comes at a
critical time as he presses forward with an activist campaign
against Herbalife and works to attract investors to the new Pershing
Square fund planned for Europe.
Privately investors have said they are sticking with Ackman for now,
but industry analysts said this lawsuit could eventually make
investments with his fund tougher.
"Any credible allegations of insider trading is not something you
want when you are mounting a road show," Gordon said. "In this case
Bill Ackman is the road show and he's put on quite a show already."
(Reporting by Svea Herbst-Bayliss in Boston Ransdell Pierson,
Jonathan Stempel and Caroline Humer in New York; Editing by
Bernadette Baum, Bernard Orr, Tom Brown and Andre Grenon)
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