New Role for Activist Investor

Deal between Valeant and Pershing points to an evolution in the way proxy wars are waged

By Brian Burton

M&A LAWYERS SAY Pershing Square Capital Management will supply cash and US strategy in the $50-billion bid by Montreal-based Valeant Pharmaceuticals International Inc. to buy Botox maker Allergan Inc. of Irvine, California. But Allergan is a savvy opponent, likely to put up a tough and lengthy battle that shows considerable potential for descending into a proxy fight, they say. If that happens, says M&A specialist Elizabeth Harrison of Farris Vaughan, Wills & Murphy LLP, “you'll no doubt be in court every second day. It's not going to be quiet.”

As battle lines form, nearly every major law firm in Canada is steering clear of public comment on the unprecedented deal between a bidder and a shareholder. One lawyer who asked not to be named offered a simple reason for that — because Allergan is looking for a white-knight offer and law firms are loath to say anything that might put them offside with any potential new entrant into the fray.

Valeant is an emerging Canadian pharmaceutical giant whose multi-year, $19-billion buying binge has captured more than 30 companies, amassing $10 billion in debt by the 2013 fiscal year end. Pershing, for its part, is the US hedge fund that recently forced six new directors and a new chief executive onto the board of Canadian Pacific Railway Ltd.

Media pundits have questioned Valeant CEO Mike Pearson's decision to make common cause with Pershing's Bill Ackman, one of the most feared investor activists in the United States. But Harrison says the Valeant/Pershing deal appears to make very good sense, because it enables the leveraged Valeant to use Pershing cash.

Pershing first purchased 4.7 per cent of Allergan and notified its board of directors. The hedge fund then acquired another 5 per cent of Allergan during the 10-day regulatory window before it was required to publicly disclose its position.

Harrison says this move was consistent with the terms under which Valeant and Pershing formed an LLC to pursue Allergan. She says LLC documents require Pershing to fund 98 per cent of the cost of the takeover and to hold all its Allergan shares within the LLC. Pershing is required to instruct the LLC to vote for the Valeant takeover and to accept Valeant shares in trade for Allergen stock. In the event a white knight outbids Valeant for Allergan, Valeant is to receive 50 per cent of Pershing's profit on Allergen stock as a de facto break fee.

“Pershing knows how to amass shares quickly and quietly,” Harrison says. “And they know how to operate a proxy fight.” Other benefits to Valeant are greatly reduced cash cost of a successful deal, a lock on 9.7 per cent of Allergan shares that might dissuade a white-knight intervention, the potential break fee and the recent rise in the price of Valeant shares, which may be partially attributable to the Pershing alliance, Harrison says.

Observers agree the Valeant-Pershing alliance is unprecedented and, at the very least, raises questions about the degree to which a would-be acquirer and a shareholder in a publicly traded company can act in concert prior to disclosure of their bid.

For the moment, Allergan's shareholder rights plan appears to have frozen Pershing's share-buying activities, increasing potential for a proxy fight as a way for Valeant to force acceptance of its bid. But that could take time, since an Allergan slate of directors was locked in before Valeant's bid and elected without opposition at the May 6 Allergan annual general meeting.

Valeant can try to propose new directors, but Harrison says that could take between four and 12 months, depending on how Allergan bylaws are interpreted — and that's plenty of time for Allergan to court a white knight. Another potential defence could see Allergen make a substantial acquisition of its own, in a bid to become too big for Valeant to swallow.