Ackman ditches referendum and launches proxy contest

by Ronald Orol in Washington  |  Published June 2, 2014 at 3:39 PM

Ronald Orol Senior Editor, Financial Regulation

Facing mounting concerns from institutional investors, billionaire activist Bill Ackman on Monday ditched an unorthodox effort to hold a referendum of Allergan Inc.'s shareholders and replaced it with a proxy contest to take control of the company's board.

Ackman, who runs Pershing Square Capital Management LP, has been pressing to have Allergan sell itself to Canada's Valeant Pharmaceuticals International Inc. The new effort comes after Valeant for the second time increased its unsolicited offer to buy Allergan. The revised offer, which was made Friday, is for $54 billion. Pershing set up a joint venture with Valeant and owns most of a 9.7% stake in Allergan.

On Monday, Pershing filed a preliminary proxy statement seeking to hold a special meeting that would remove six members of Allergan's nine-person board and replace them with six of his own as part of a consent solicitation contest.

The move replaces an unorthodox referendum approach Ackman had been seeking in recent weeks to have investors vote at a meeting set up outside of Allergan's bylaws on a nonbinding proposal that would urge Allergan's board to engage in "good faith" negotiations with Valeant. The referendum could have given Ackman a sense of shareholder sentiment -- and support for striking a Valeant-Allergan deal -- quickly because the vote could have taken place as soon as this month.

However, Ackman canceled plans for the referendum after a number of institutional investors told him last week that they were worried the unorthodox approach could trigger Allergan's recently installed 10% poison pill if they voted to support the nonbinding proposal, according to people familiar with the insurgent. A number of hedge funds and other shareholders told Pershing that they should instead work within Allergan's bylaws and hold a special shareholder meeting that way instead, these people said.

"Lawyers for some institutional investors have said that voting for the [referendum] is too risky because it could trigger the poison pill," said a person close to Pershing. "There is doubt about whether the pill would be triggered or not. The risk is too great for some institutional investors."

Ackman had considered employing the traditional bylaw approach prior to launching the referendum effort but was hesitant because the drug-maker's corporate rules are set up in such a way that gives Allergan the ability to delay a vote significantly. Ackman's new meeting and proxy contest -- working within the bylaws -- will likely not take place until November, a delay of roughly six months over when a his referendum could have taken place.

Also, to call a special shareholder meeting at Allergan within the company's bylaws would require support of 25% of the outstanding shares so Ackman would need the backing of an additional 15.3% to have one take place.

Pershing could put pressure on Allergan's independent directors to support the deal if he can cobble together a substantial vote of shareholders to support his effort to call a special shareholder meeting, significantly beyond the minimum he needs to obtain for the meeting to take place. Pershing expects its next set of proxy materials for the contest will be released between June 16 and June 26 and that it expects to deliver to the company the consent of enough shareholders for the special shareholder meeting to go forward between June 30 and July 24, according to people familiar with the activist. It is unclear how long the Securities and Exchange Commission will take to review their materials so the exact timing of the delivery of consents is uncertain.

One person familiar with the situation said that if Ackman receives only the bare minimum to call a meeting it would send a strong message: "Allergan can tell Ackman to go away."

Gary Lutin, chairman of the Shareholder Forum in New York, said that Ackman could succeed at sending a message to Allergan's board simply by obtaining the backing of a large number of investors to have a special shareholder meeting. "If he can get a majority of investors supporting an official meeting, that's the same message as a majority of investors supporting his unofficial referendum," he said.

One other issue with the referendum approach was whether the two super-influential proxy advisory firms Institutional Shareholder Services Inc. and Glass, Lewis & Co. LLC would have rendered recommendations on the referendum at all because of the unofficial nature of the approach and the fact that institutional investors don't have any duty to vote their shares for or against it.

However, people familiar with Ackman said they believed that the proxy advisory firms would have issued opinions and that one of the reasons Pershing had originally sought to hold a referendum was because it would have given the advisory firms an early opportunity to say what they think about the unsolicited offer. Recommendations in favor of Ackman would have put additional pressure on Allergan to engage with Valeant.

In addition, most observers agreed that the SEC would have approved the referendum approach but wouldn't have given investors any certainty about whether they would trigger Allergan's pill by voting for Ackman's nonbinding proposal. In addition, institutions raised questions about whether participating in the petition would also have required them to make an activist schedule 13d disclosure filing with the SEC. With a traditional special shareholder meeting, institutional investors don't have to worry about forming a group with Ackman and triggering the poison pill.

Had Ackman called for a special meeting to discuss shareholder views without having a vote on a proposal he likely would have had less opposition from institutions. Lutin added that the concept of holding a meeting or a vote to determine shareholder views is useful to investors as well as company managers who listen. "Everybody, including the SEC, likes the idea of investors being able to exchange views, as long as it's done fairly. And institutional investors will definitely show up if they don't have to worry about being subpoenaed by the company for it," Lutin said.