In the $45.6 billion takeover battle for Allergan, there has been much speculation about what will be the next steps.
But a quirk in Allergan’s governing documents about who can replace removed directors may halt the pursuer, Valeant Pharmaceuticals, and its ally, William A. Ackman’s Pershing Square, in their tracks.
Allergan made the first, predictable move in this battle by adopting a poison pill that is set off if someone acquires 10 percent or more of its shares . This effectively froze the bidders’ stake at 9.7 percent.
More important, because of a so-called “beneficial ownership†provision in the pill that groups together shares of parties acting together, Allergan has effectively limited Pershing Square’s and Valeant’s ability to speak to other shareholders. The two bidders do not want to risk being grouped with those other shareholders and inadvertently tripping the poison pill.
The poison pill effectively forces Pershing Square and Valeant to run a proxy contest to remove directors and redeem the poison pill if they want to force Allergan into a deal. And while these contests seldom go the full distance to an actual vote, the potential of this threat is a stick that Pershing Square and Valeant can use to prod Allergan unwillingly to the table to negotiate.
This leaves the two sides to plot moves around this goal. This is where that quirk comes up.
Allergan has an annual meeting scheduled for May 6. The date for nominations of directors has passed, and so the directors will be up for election unopposed.
This would ordinarily force Pershing Square and Valeant to wait a year to nominate new directors. But the certificate of incorporation and by-laws allow for shareholders holding 25 percent of the shares to call a special meeting. At the meeting, Allergan shareholders can remove directors, but a vote of 50 percent of all the shares is required.
In addition, Allergan’s board has proposed amending the company’s certificate of incorporation at the May 6 meeting to allow shareholders to act by written consent, that is without a meeting and simply by asking shareholders to send in their consent to remove and replace Allergan’s directors. For Valeant and Pershing Square to collect written consents, the two first need 25 percent of Allergan’s shares to agree to begin this process.
Since Allergan’s board put forth the written consent amendment as something its shareholders wanted, the board will have a hard time justifying removing the written consent proposal, and it is now very likely to be adopted.
If passed, this would give Valeant and Pershing Square two routes to remove Allergan’s directors â€" either by soliciting written consents of shareholders or by holding a special meeting.
This sets up an interesting choice. With a special meeting, there is a single date to focus on winning over shareholders. The Allergan board, however, has the right to call its own special meeting within 120 days. If Valeant and Pershing Square picks the special meeting route, Allergan will likely do this to postpone the meeting for another four months.
In the alternative, Pershing Square and Valeant can elect to go without a meeting and just try and collect shareholder consents. Once started, the solicitation of written consents takes a maximum of about three months. Since a solicitation by written consent is likely to go more quickly and give more control of the process to Pershing Square and Valeant they will likely go the written consent route.
So don’t be surprised if Allergan tries to postpone the meeting adopting this amendment or otherwise has the gumption to pull the proposal.
Valeant and Pershing Square cannot begin to gather shareholders to call a special meeting or act by written consent until the meeting happens, giving further incentive to Allergan to postpone.
In either case though, there is that quirk in Allergan’s organizational documents that may give the company a real defense. The documents unusually bar “an identical or substantially similar item†from being presented to shareholders if that item was presented any other meeting of stockholders “within one year prior†to the request.
Allergan’s directors are up for election in May. Would a bid to remove and replace them during the 12 months after the meeting be a similar request to unseating them?
Allergan is aware of this issue and setting itself up to take this position. In a filing made after the unsolicited bid was made public, the company stated that “the election of directors by written consent would be†similar to what is occurring at the annual meeting and therefore barred. However, “the removal of directors by written consent would not.â€
Allergan here is doing something very tricky â€" trying to take up the position that if shareholders do adopt the written consent provision, they are also adopting this position.
I may be over-reading this statement, but Allergan also appears to be saying that you can remove our directors, but not elect replacement directors.
If Allergan is correct, the question then becomes what happens if Valeant and Pershing Square do succeed in removing Allergan directors? Presumably, if all the directors are removed, then those directors may just call a new meeting to elect their replacements, but that is uncertain. It’s also unclear whether Allergan’s position that new directors can’t be replaced by the bidders would be legal under Delaware law.
This is all likely to mean a bigger defense position than initially thought for Allergan and more possible delay with likely litigation over what this provision means and how it affects any attempt by Pershing Square and Valeant to remove the Allergan directors. Allergan may even be successful blocking an attempt to put new directors on its board.
Whatever the outcome, though, it likely means that any contest to unseat Allergan’s directors may culminate in the fall at the earliest. This will give Allergan time to sharpen its case, look for another potential acquirer or even try for its own acquisition to bulk up and make itself too expensive to be acquired.
The question now is what will Allergan do with its time?
