Botox maker Allergan has launched a U.S. law suit that accuses Valeant Pharmaceuticals and Pershing Square Capital of using fraud and insider trading to further their hostile takeover attempt of the California-based drug company.
They responded that Allergan's allegations are baseless and an attempt to stop Pershing Square's efforts to replace six of members of the Allergan board, which has rejected Valeant's takeover bid.
The suit, filed Friday in a U.S. district court in Central California, claims that New York-based Pershing Square and Valeant circumvented insider trading laws and violated Securities Exchange Commission rules by quietly working together to mount a $50-billion acquisition bid by Valeant, based in Laval, Que., near Montreal.
Allergan said debt-laden Valeant didn't have the money to make such a large acquisition, so it sought third-party financing assistance from Pershing Square.
The lawsuit filed with Allergan employee and shareholder Karah Parschauer names Valeant, Pershing Square Capital and its principal Bill Ackman, an activist shareholder who has challenged the boards of several public companies, including Calgary-based Canadian Pacific,
The suit says that a fund controlled by Pershing Square purchased 9.7 per cent of Allergan stock and other securities between February and April for more than $3.2-billion (U.S.), becoming the drug company's largest shareholder, without disclosing its relationship with Valeant.
Allergan said Pershing Square reaped a $1.2-billion windfall when Allergan's shares surged once the takeover offer was announced on April 22, significantly damaging selling shareholders.
Allergan said it launched the suit to protect its shareholders.
"The Allergan board of directors ... believes it is important that the rights of the company's stockholders not be infringed by the actions of one hedge fund that significantly profited (to the detriment of other stockholders and the market) by trading in Allergan securities while in possession of material non-public information regarding Allergan," it said in a news release.
Allergan also accused its rivals of releasing false and misleading proxy solicitation materials that misstate their relationship and intentions regarding a transaction and the value of the offer for Allergan shareholders.
"This case is about the improper and illicit insider-trading scheme hatched in secret by a billionaire hedge fund investor on the one hand, and a public company serial acquiror on the other hand. The purpose of the scheme was to generate windfall profits on the backs of uninformed Allergan stockholders and to park a substantial bloc of shares with a stockholder predisposed to support an acquisition proposal," the suit claims.
It is seeking an expedited decision and an order rescinding Pershing Square Capital's purchase of Allergan shares.
The company has repeatedly rejected offers as too low and rebuffed any talks, challenging Valeant's business model which has relied of more than 100 acquisitions since 2008 to fuel its growth.
Valeant and Pershing Square called the Allergan lawsuit "baseless" and said the real purpose is to interfere with efforts to call a special meeting to replace six members of the Allergan board of directors.
"This is a shameless attempt by Allergan to delay the shareholders' fundamental right to call a special meeting and vote their shares," Ackman said in a news release.
Pershing Square is hoping to deliver the 25 per cent of shareholder support it needs to call a special meeting in the middle of August. Independent proxy advisory firms are then expected to issue their recommendations.
"Allergan is threatened by our progress toward calling the special meeting. This scorched-earth approach is further evidence of the board's and management's entrenchment."
Valeant CEO Michael Pearson added he was disappointed that Allergan continues to stand in the way of its shareholders voicing their views on the transaction.
"Despite Allergan's attempted roadblocks, we remain committed to pursuing this compelling combination, which will create an unrivaled platform for growth and value creation," Pearson said.
David Maris of BMO Capital Markets said the lawsuit is another attempt by Allergan to question the tactics of Valeant and Pershing Square.
"We believe that Allergan is not doing this to delay a transaction, but rather to protect its shareholders," Maris wrote in a report, adding this is a good test case of the legality of a hedge fund and company bid.
However, the analyst said he doesn't believe a shareholder vote will take place until the suit is resolved in 2015.
"We think the suit adds yet another uncertainty, because even if an investor thinks Allergan does not stand a 100 per cent chance of winning, but 50 per cent or 30 per cent or even 10 per cent, the likelihood of a deal closing has just been reduced by whatever chance one assumes Allergan win."
On the Toronto Stock Exchange, Valeant's shares closed up $1.39 to $129.22 (Canadian) and to $118.21 (U.S.) in New York. Allergan's shares lost 82 cents to $165.62 on the New York Stock Exchange.