Friday, November 14, 2014

Carter's Corrective Disclosures

After an objection made by Allergan recently, Judge Carter issued orders preventing Pershing Square and Valeant from soliciting proxies until corrective disclosures "have been filed with the SEC and have been communicated to Allergan’s shareholders". Additionally the court clarified that Pershing and Valeant may vote any proxies they gained prior to the court's preliminary injunction on November 4th without having to re-solicit those proxies. Interestingly, in Allergan's original objection to the proposed disclosure they cited various sources of case law noting that proxy solicitation rules are broad and generally that a proxy solicitation exists when a challenged communication which is measured in the totality of the circumstances, is reasonably calculated to influence the shareholders votes. Allergan even pointed out that aside from run of the mill solicitations, such as meetings, mailings, and telephone calls that even Regulatory Communications (such as the SC 13D Pershing filed on November 7th) could be counted as proxy solicitations. Allergan continued that they if Pershing and Valeant "engaged in such communications before making corrective disclosures, they do so at their own peril, and Plaintiffs reserve all available rights and remedies." Who knows if Allergan will seek any remedies or act on that threat in any way, but given all of the information that Pershing hosts on Advancing Allergan as well as the letter Ackman sent to the Allergan BoD, Allergan will probably seek to block any proxies obtained after the preliminary injunction. As of this evening, Pershing has already filed those corrective disclosures with the SEC so I have to wonder whether or not Bill is scrambling around trying to engender support for his bid in the face of an imminent offer from Actavis. Either that or he just had a date lined up with a smoking-hot Allergan shareholder. 

Judge Carter's order is a small, but important victory for the Allergan camp. After Judge Carter issued his preliminary injunction on November 4th, Pershing Square and Valeant filed their proposed corrective disclosures to Judge Carter. Six days later, Allergan filed their objections to the proposed corrective disclosures, stating that Pershing's proposal was "insufficient" and that the proposal did not come close to meeting the court's mandate because it 
"does not even attempt to disclose “that they were cognizant of potential liability under Rule 14e-3 when structuring the Relationship Agreement,” which the Court specifically found a material omission."
Although Judge Carter didn't give Allergan everything they wanted, Carter ordered Valeant and Pershing Square to beef up the disclosure to their September 24th proxy statement with three key changes. Today's order memorialized that: 
  1. both Allergan and Ms. Parshauer raised serious questions whether Valeant and Pershing violated Rule 14a-9
  2. Pershing Square and Valeant needed to provide more information about the Relationship Agreement
  3. Pershing Square and Valeant needed to provide more information about their exposure to liability under Section 14(e) and Rule 14e-3
*For the detail oriented, below is a blackline version showing the Pershing/Valeant's disclosure that will be included in the "Legal Proceedings" section of the updated proxy materials. In RED are the modification Judge Carter's order made to Pershing's proposed disclosure.

Today's order raises some interesting points. Specifically it forces Pershing and Valeant to inform the public that the District court is concerned they made false and/or misleading statements or omitted material facts in their solicitation. It also forces these entangled co-bidders to expressly admit that even if they pull off this hostile bid for Allergan, the new owners could face a huge potential liability, from potential private lawsuits, private stockholder class actions, which could result in significant damages awards or disgorgement of profits.

Disgorgement is not the kind of preamble you want when soliciting proxies around the start of the Holiday season. Its looking more like Bill may end up with more than one Turkey this Thanksgiving!

The Securities Lawsuit. As described above, on August 1, 2014, Allergan and Karah M. Parschauer, an employee of Allergan, filed a complaint in the United States District Court of the Central District of California against Valeant, Pershing Square, its principal William A. Ackman, PS Fund 1 and certain of their affiliates (collectively, the “Defendants”), captioned Allergan, Inc., et al. v. Valeant Pharmaceuticals International, Inc., et. al. (Case No. SAC 14-1214 DOC(ANx). The complaint alleges that the Defendants violated Rule 14e-3 under the Exchange Act by causing PS Fund 1 to acquire shares of Company Common Stock between February and April 2014 without publicly disclosing information about Valeant’s  plans for a tender offer. The complaint seeks, among other remedies, a declaration from the court that Pershing Square and Valeant violated insider trading and disclosure laws and an order rescinding Pershing Square’s purchase of the Allergan Shares that it acquired., and attorneys’ fees and costs. Ms. Parschauer also seeks money damages. On August 19, 2014, Valeant and Pershing Square answered the complaint and filed counterclaims against Allergan, asserting violations of Federal securities laws prohibiting false and misleading disclosures. Allergan filed its answer on September 2, 2014. Allergan and Ms. Parschauer thereafter filed a motion for a preliminary injunction seeking to enjoin PS Fund 1 from exercising any of the privileges of ownership attaching to its 9.7% stake in Allergan, including voting or acting at the
Special Meeting and voting any proxies solicited by Defendants. On November 4, 2014, the Court issued an order granting in part and denying in part Plaintiffs’ motion. The Court declined to enjoin Defendants from voting their Company Common Stock. The Court found that Ms. Parschauer raised serious questions as to whether the Defendants’ conduct between February and April 2014 violated Rule 14e-3 under the Exchange Act., and that both Allergan and Ms. Parschauer had raised serious questions as to whether Defendants’ conduct violated Rule 14a-9, which prohibits the use of false or misleading statements or omissions in soliciting proxies. The Court ordered Defendants to make certain additional disclosures about the LetterRelationship Agreement, the facts underlying Defendants’ exposure to potential liability under Section 14(e) and Rule 14e-3 thereunder, and the claims brought by Plaintiffs. Risk Factors. Should Valeant and Pershing Square ultimately be found to have violated Section 14(e) and Rule 14e-3, they will face additional risks and exposures, including but not limited to potential private lawsuits, including private stockholder class actions, which could result in significant damages awards or disgorgement of profits.