For more information on the settlements discussed below, please login to the CCC client portal, or call 312-204-6970 to speak to one of our account executives.
A pair of settlements could take some wrinkles out of the portfolios of Allergan investors. Allergan, the maker of Botox, was almost purchased by Valeant Pharmaceuticals in 2014. Plaintiffs allege that Valeant tipped off activist investor and hedge fund manager Bill Ackman of their scheme, and that despite the bid's failure he and his firm reaped $2.2 billion in illegal profit.
In their complaint, plaintiffs argued that this profit was thanks to insider trading: "The scheme began in February 2014 when William Ackman, hedge fund billionaire and fearsome 'activist' investor, and Michael Pearson, the CEO of cash-strapped but acquisition hungry Valeant, struck a simple but unlawful bargain. In exchange for inside information regarding Valeant’s plans to launch a hostile takeover and tender offer for fellow pharmaceutical company Allergan, Ackman agreed to secretly acquire nearly 10% of Allergan’s stock and commit those shares to support Valeant’s bid."
Valeant announced its unsolicited $51 billion bid for Allergan on April 22, 2014. Valeant was later outbid by Actavis, who acquired Allergan for $66 billion in Novermber of 2013. Valeant's failure was, nevertheless, Pershing's gain.
Ackman does not deny knowing about Valeant's plan, but claims this was not a conspiracy—it was a partnership. A key part of Ackman's argument is that his firm, Pershing Square, is a hedge fund and therefore not subject to rules that would apply to a specific person, i.e., to a trader. Further, Pershing was not simply an investor in Allergan but in fact a "co-offerer" for the company. Pershing had not, in other words, been an investor covertly gobbling up shares with secret knowledge of a imminent payday. They were a co-party in an overt effort to merge two companies.
This is the second key part of Ackman, Pershing, and Valant's defense: that they were planning a merger, and not a tender offer. In a merger, the buyer or company approaches the target company's board directly with its offer. In a tender offer, the buyer targets shareholders in an effort to sway the board. Ackman would be a logical target for a tender offer as a 10% shareholder— but on the other hand, he would never have become a 10% shareholder had he not been buying shares for two months with full knowledge of Valeant's plan.
The plaintiffs' argument for insider trading lies there, as does Ackman's defense. By May of 2014 the bid for Allergan had become a tender offer, and Ackman was then in a perfect spot to reap the rewards. Ackman claims that this was simply a shift in tactics once the board had rebuffed the bid. Plaintiffs claim that was the plan all along. (Matt Levine of Bloomberg is sympathetic to Ackman's argument.)
Despite Ackman's and Valeant's vociferous and perhaps "fearsome" defenses, they agreed to settle both the shareholder suit and a derivative suit in late 2017. Pershing Square will set aside $193.75 million for the settlements and Valeant will pay $96.25 million.
I can't imagine Bill Ackman enjoyed writing those checks. However, the nice thing about making $2.2 billion in a failed merger is that even if you have to cough up nearly $200 million to settle a case you claim has "absolutely no merit," you still get to keep $2 billion. And change.*
*In this context, "change" = $6.5 million.