Ackman pushes unorthodox shareholder proposal

by Ronald Orol in Washington  |  Published May 30, 2014 at 4:41 PM

Ronald Orol Senior Editor, Financial Regulation

Activist funds, institutional investors and corporate lawyers everywhere are keeping a close eye on the latest unusual tactic being employed by insurgent billionaire Bill Ackman.

His approach, which on its face seems common enough, could unleash a raft of copy-cat insurgents if it is successful.

The founder of Pershing Square Capital Management LP announced last month that he wants to hold a shareholder referendum and have investors vote on his nonbinding proposal to have Allergan Inc.'s board sit down and engage in "good faith" negotiations over a recently increased $53 billion unsolicited acquisition offer made by Canada's Valeant Pharmaceuticals International Inc. for the Botox-maker. Valeant made its original hostile offer in April at the same time as it also became a minority player in a joint venture fund set up by Ackman that acquired a 9.7% Allergan stake. It has since raised it twice.

And while referendums on nonbinding shareholder proposals are frequently employed as a pressure tactic in a hostile campaign what makes Ackman's proposal so different -- and intriguing for many activists and other onlookers -- is that he is seeking a vote on his proposal outside of Allergan's corporate bylaw framework. The vote won't occur at an annual meeting or special shareholder meeting hosted by the company but at one Ackman sponsors. The approach has, as expected, ruffled feathers at Allergan, which has called it a "self-serving exercise" where Ackman can "dictate" his own process.

But if the gambit succeeds, other activists can be expected to try Ackman's unorthodox governance play on their own.

People familiar with Ackman say that he expects the Securities and Exchange Commission to approve the strategy soon, though others are not so sure. If approved, a vote on the proposal could occur in June.

IF ACKMAN had employed the traditional and accepted approach to holding a special shareholder meeting, following the company's bylaws, he would likely have had to wait until fall for it to take place -- a delay of roughly half a year. In a letter to independent directors Ackman said that the company's bylaws make holding a special meeting to consider the measure "extremely burdensome" and that Allergan's CEO David Pyott made a statement in a meeting with shareholders that the earliest Pershing could hold such a meeting would be in November.

The extraordinary vote could help Ackman obtain a sense of shareholder sentiment about Valeant's hostile Allergan offer -- and if sentiment is with him, help drive a deal much faster than if he stayed within the company's bylaws.

But the nature of Ackman's approach has many observers believing that institutions and key proxy advisory firms won't participate -- rendering it ineffective.

A key consideration is whether the two super-influential proxy advisory firms, Institutional Shareholder Services Inc. and Glass, Lewis & Co. Inc., will render recommendations on the subject at all. A recommendation for Ackman will clearly help the fund's efforts but even a vote against indicates that the proxy advisory firms are taking the approach seriously. The proxy advisers could decide to make a recommendation if they are pressured to do so by a large number of their institutional clients. They also could be motivated, according to one observer, to make a recommendation knowing that it could spawn a cottage industry of similar activist efforts -- outside of proxy season -- all of which would improve business for the advisers.

ISS told The Deal that it hasn't yet determined whether it will issue research on the referendum. "It's not a meeting at which official company business will be conducted, so it's not clear whether clients are required to 'vote' under their ERISA [Employee Retirement Income Security Act] obligations," said an ISS director. "Part of our consideration will be how compelling the current offer is; part will be our assessment of the appropriateness of the Allergan board's response thus far." Glass Lewis did not return calls for comment.

Meanwhile, institutional investors, proxy solicitors and other activists are scratching their heads about the Ackman approach. The unofficial nature of the referendum means that institutional investors don't have systems set up to vote their shares.

Gary Lutin, chairman of the Shareholder Forum in New York, pointed out that Ackman's proposal is not for a real corporate vote and therefore institutions don't have any duty to vote their shares for or against it. Most views of a fund manager's fiduciary duty to exercise shareholder voting rights would apply only to an official corporate vote.

Lutin said he expected the vast majority of investors responding to Ackman's petition will be those who want to show support for Pershing. He assumes that in the absence of any duty to vote, investors who oppose the proposal or are just indifferent will have no reason to send a response.

Lutin also said that the unorthodox nature of the meeting means that it will not be governed by the usual state law, SEC, and bylaw rules for real corporate meetings of shareholders. As a result, Pershing will have to develop its own procedures to assure the integrity of the process.

"It's not a vote, it's a petition," he said. "And it's not a real corporate shareholder meeting, either. This is a meeting by and for a factional proponent."

People familiar with Pershing pointed out that Ackman plans to employ a traditional independent inspector of elections to certify the results and verify the share ownership of participating investors.

IT IS UNCLEAR at this stage whether the meeting will be a short one simply to tally and announce the preliminary results or if it will be a broader town hall style meeting that will allow for debate and discussion. Pershing has employed the town hall approach previously and people familiar with the fund said that if Allergan hasn't responded to Valeant in a "productive manner" Ackman will likely want to make it into a forum for debate and discussion of the unsolicited offer.

Joseph Mills, a managing director at Morrow & Co., a proxy solicitor, argued that whether institutional investors and proxy advisory firms will support the measure is a "wild card" because they aren't technically obliged to do so. He noted that even though the question posed by Ackman is an easy one to answer institutions might be wary about participating because it could be interpreted as a vote in favor of a deal.

"Some investors may not want to hamstring their ability to negotiate," he said. "The question is an easy one -- of course the board should talk to anyone who is offering to create shareholder value. That is what Ackman is banking on. But will institutions want to answer such a narrow question and, in doing so, tip the scales in favor of Valeant? Seems like a risk because the vote is open to interpretation," he said.

Steve Wolosky, a top legal adviser to insurgents and a partner at Olshan Frome Wolosky LLP in New York, said he has considered advising his activist fund manager clients that they might want to hold this kind of shareholder referendum in certain circumstances. He agreed there is a question about whether institutions will vote to support the nonbinding proposal and he also wonders whether ISS and Glass Lewis will issue a recommendation on it "because it is so unusual." Another issue, Wolosky said, is that some institutions that have shares on loan may not call in their shares for a vote, which could hurt turnout or votes in favor of the dissident. However, it could be useful in situations where a company's bylaws are particularly egregious in limiting action by written consent or special meeting. He added that if it is successful it could put pressure on Allergan's independent directors to negotiate with Valeant.

"I think you use it when there is no other viable alternative to get a sense of shareholder sentiment," he said.

Mills argued that the main advantage of the non-binding referendum approach is that it will keep Valeant's offer in the news in what could be a long process of breaking down Allergan's resistance. He compared it to asking investors to make the symbolic gesture of tendering into a hostile offer that has unmet conditions or is being blocked by a poison pill. However, investors in that case are backing a specific tender offer price while Ackman's proposal is broad enough for investors to support the insurgent's efforts but not necessarily the price Valeant is seeking.

"The question being asked is non-specific, so the outcome can and likely will be spun either way. It is designed to leverage the proxy process where once a vote is called, and the vast majority of institutions automatically respond," Mills said.

Mills contended that Allergan, on its own, is likely trying to get a feel as to where their shareholders line up on the Valeant offer. "Shareholders who feel strongly about it are surely letting them know. They are probably getting lots of input from the event crowd, while a potentially meaningful percentage of the large institutions may keep their cards closer to the vest," he said. "In a nutshell, Ackman is trying to make transparent what is normally a behind the scenes process. And it is not certain that institutions will want it to be transparent."

THE MOVE RAISES KEY questions on securities rules. According to one well-known activist who employs traditional nonbinding proposals frequently, Ackman's approach is "clever" because it allows him to approach other institutional investors to discuss the Valeant bid in a way that does not violate the company's 10% poison pill, which was installed in April in response to the hostile bid.

"He needs to be able to speak to the shareholders and he is concerned that if he's not in a solicitation period under the proxy rules that the company may argue that he is acting as a group with other shareholders," the activist said. "This gives him cover because if you are in a solicitation period then you are not acting as a group, you are soliciting."

However, Lutin's Shareholder Forum pointed out that some investors will want to ask their lawyers whether participating could result in a triggering of the company's 10% poison pill or SEC 13D reporting requirements. His forum observed in guidance it released recently that some lawyers may argue that exceptions to the SEC's "acting in concert" definitions cannot apply because there is no legally conducted corporate meeting that is actually subject to those proxy voting regulations.

In any event, Ackman is waiting for the proposal and meeting to be cleared by the SEC. And while a number of observers, including people close to Pershing, believe that SEC approval is not necessary, others are not so sure. Last week, the congressman from Allergan's Orange County district, Rep. Ed Royce, R-Calif., sent a letter to SEC Chairwoman Mary Jo White expressing concern about Ackman's meeting, calling it a "shadow shareholder referendum" that comes at the "expense" of shareholder transparency. Royce urged White to have the SEC perform a "thorough review of the details" of the filing. The Royce letter could drive the SEC at the very least to delay its approval. One former top official in the SEC's Division of Corporation Finance said that Ackman's approach may give the SEC some pause. "Putting something in front of investors and saying sign this and deliver it to the company could be characterized as these people joining a group" that might trigger Allergan's poison pill, he said. The SEC declined to comment.

The unusual nonbinding proposal may not be the last governance tactic Pershing employs to force a deal with Allergan. Escalation is likely if Ackman's move fails. Observers familiar with the dissident noted that the next step could be to launch an unsolicited tender offer or have investors' act by written consent to remove Allergan directors.