SEC chair Mary Jo White called out activist investor Bill Ackman, the CEO of Pershing Square Capital, during a speech at Tulane’s Corporate Law Institute in New Orleans this week.
Without actually naming names, White referenced the Pershing Square Capital/Valeant Pharmaceuticals hostile takeover attempt of botox-maker Allergan last year.
In that deal, Ackman teamed up with Valeant, providing the company with cash so that it could acquire another pharmaceutical company, Allergan. Ackman also purchased a 10% stake in Allergan.
There were a lot of questions about the deal when it was announced. It was legal, but Dealbook’s Andrew Ross Sorkin called it “too clever by half.” Business Insider’s Linette Lopez wrote that it was an example of Wall Street’s famous, ‘heads I win, tails you lose’ deals. White seems to agree.
“I recognise, of course, that highly sophisticated strategies have come to dominate proxy fights and takeover bids; I have been involved in them as a private sector lawyer. And it is not my intent to threaten the vibrancy of anyone’s practice area. But I do think it is time to step away from gamesmanship and inflammatory rhetoric that can harm companies and shareholders alike,” she said.
Here’s the excerpt from White’s speech where she discusses the Valeant/Ackman deal (emphasis ours):
While I am on the topic of disclosure, it was implicated in an interesting way in a recent takeover bid this past year — a bid with which you are likely familiar. In that bid, we saw a unique pairing of a strategic bidder and an activist hedge fund in which the parties took novel and, for some, controversial steps that generated significant interest. Initially, the hedge fund publicly sought to call an informal meeting of the target company’s shareholders and filed a proxy statement with the Commission for a solicitation in connection with such a meeting, which it referred to as a “shareholder referendum” — a mechanism not provided for in the company’s bylaws. The objective was to seek shareholder support in favour of a non-binding resolution to request that the target’s board promptly engage in good faith negotiations about an acquisition of the company.
Some questioned whether a shareholder has the ability to call a meeting of shareholders outside of a company’s bylaw framework, hold a non-binding vote by way of a proxy solicitation, and file a purported proxy statement under the proxy rules. Specific questions were raised about whether communications relating to such a shareholder referendum should be allowed to be filed as soliciting materials under the Commission’s proxy rules. The concern was that doing so could give the disputed materials a form of official imprimatur. All fair questions.
SEC rules do not specifically address shareholder referendums. And it is state law and a company’s corporate instruments that provide the rules for shareholder meetings and specify what are proper matters for shareholder action. Whether a shareholder referendum is a form of proper corporate action under state law is thus a question best left to state legislatures and the courts. For our part, the Commission has long taken steps to facilitate shareholders communicating with one another. Our federal proxy rules, which quite broadly define the term “solicitation,” provide procedural protections that support the exercise of voting rights granted under state law.
To fully effectuate that objective, the staff has a longstanding practice of accepting and looking at all filings, even if it is unclear whether the filing was required under our rules as a “solicitation.” Whenever a filing is made, we expect it to fully comply with the applicable disclosure requirements, and filers assume potential liability under the federal securities laws. The staff’s goal in such a situation is to ensure that the filing complies with the applicable rules and that shareholders are provided with complete and accurate material information. The alternative in this context would be for the referendum to go forward under the radar, without public disclosure, without SEC staff oversight, and without the protection of our rules.
Ultimately, the shareholder referendum I mentioned was abandoned and the hedge fund called a special meeting of the target company’s shareholders pursuant to the company’s bylaws. We do not know whether other activist shareholders will try the shareholder referendum approach in future campaigns. If they do, you can expect the SEC staff to perform its oversight role of ensuring that investors receive timely, complete and accurate disclosure.
Even though the SEC staff does not act as a “merits or behaviour referee,” parties should still take a hard look at their actions and rhetoric and consider whether they are engaged in a constructive dialogue and facilitating a constructive resolution. I recognise, of course, that highly sophisticated strategies have come to dominate proxy fights and takeover bids; I have been involved in them as a private sector lawyer. And it is not my intent to threaten the vibrancy of anyone’s practice area. But I do think it is time to step away from gamesmanship and inflammatory rhetoric that can harm companies and shareholders alike. Fortunately, by some accounts, companies and activists are starting to make positive progress, as they increasingly engage with each other and negotiate outcomes that seem more mutually beneficial.
In the end, all of Ackman and Valeant’s offers for Allergan were rejected.
However, Ackman made more than $US2.28 billion on his position in Allergan after the company was acquired by Actavis in a $US66 billion deal.
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