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From Securities Regulation Daily, June 13, 2014

Hedge fund seeks ruling that pharmaceutical company’s poison pill is invalid

By Lene Powell, J.D.

After Allergan’s board of directors voted to reject a takeover bid, Allergan’s largest shareholder, an affiliate of a hedge fund run by activist investor William Ackman, has filed suit in the Delaware Court of Chancery seeking a declaration that the fund’s attempts to call a special meeting to remove a number of directors will not trigger Allergan’s poison pill. If the court determines that the fund’s actions do trigger the poison pill, the fund seeks a declaration that the poison pill is invalid as a matter of law, because it is inconsistent with the contractual right of stockholders to call a special meeting (PS Fund 1, LLC v. Allergan Inc., June 12, 2014).

Offer. PS Fund 1 is a joint entity formed by the hedge fund Pershing Square Capital Management and Valeant Pharmaceuticals to acquire ownership of Allergan stock. On April 21, 2014, the entity announced it was the largest stockholder of Allergan, with ownership of about 9.7% of outstanding shares. The following day, PS Fund 1 made a public offer to acquire Allergan for $48.30 in cash and .83 shares of Valeant for each Allergan share. That same day, the Allergan board adopted a Rights Plan, or poison pill, providing that if any shareholder became the beneficial owner of ten percent of company shares, the poison pill would be triggered, allowing all remaining shareholders to exercise their rights to purchase additional Allergan stock.

On May 12, the board rejected the merger proposal. Over the next several weeks, Valeant increased its offer twice. On June 2, Pershing Square filed a preliminary proxy statement with the SEC to solicit proxies from Allergan shareholders to call a special meeting in order to remove and replace a majority of the board, as well as amend the bylaws to remove certain special meeting provisions and ask that the board promptly engage in good faith discussions with Valeant about the merger offer. To allay concerns that Allergan might characterize efforts to obtain the required 25% shareholder threshold for calling a special meeting as triggering the 10% Beneficial Owner threshold in the poison pill, Pershing Square sent Allergan a letter on June 6 seeking confirmation that this was not the case. In response, Allergan said generally that the fund’s solicitation and receipt of proxies for the purpose of calling a special meeting would not in and of itself trigger the pill. However, Allergan did not answer any of the more specific questions asked in the letter.

The Allergan board rejected Valeant’s revised offer on June 10, saying it significantly undervalued Allergan.

Spectre of poison pill. Under the Rights Plan, action by Pershing Square and other shareholders to call a special meeting should not make Pershing Square a beneficial owner of those shareholders’ securities, said the fund. Further, Pershing Square’s solicitation statement falls within the Section 14 exclusion to the definition of “Beneficial Ownership” under the Rights Plan. However, Allergan’s failure to confirm that the fund’s actions would not trigger the poison pill has created uncertainty, and this has deterred stockholders from exercising their rights by leaving a lingering concern that the draconian effects of the poison pill could apply, at a time when a potentially lucrative and advantageous merger is at stake. A declaratory judgment that the relevant provisions of the Rights Plan are invalid is necessary to avoid frustration of the stockholders’ right to call a special meeting or petition the court for relief in the event that a majority of directors are removed at the special meeting. Shareholders cannot be adequately compensated by monetary damages for the value and lost opportunity cost for the merger, the fund contended.

The fund noted that no single stockholder holds the necessary 10% ownership to petition the court under Section 223(c) of the General Corporation Law, but if solicitation to achieve 10% would not trigger the poison pill or is exempt under the Section 14 exclusion, the fund would have no difficulty finding the additional .3% necessary to get to 10%.

The case is PS Fund 1, LLC v. Allergan Inc.

Attorneys:David C. McBride (Young Conaway Stargatt & Taylor LLP) for PS Fund 1, LLC. Jay P. Lefkowitz (Kirkland & Ellis LLP) for Allergan, Inc.

Companies: PS Fund 1, LLC; Allergan, Inc.

MainStory: TopStory CorporateGovernance MergersAcquisitions DelawareNews

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