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Allergan & Darden cases highlight missing shareholder protections in the US

The Listing Rules of the UK Listing Authority have for many years included a requirement for shareholder approval of significant transactions. Whether or not a transaction is considered “significant” is set out in the Class Tests, defined in the Listing Rules. The recent cases in the US of the cash sale by Darden Restaurants of its Red Lobster subsidiary and the mooted cash acquisition by Allergan of Salix have highlighted that there are no equivalent shareholder protection provisions under the regulatory regime in the US.

Valeant & Allergan

Over recent months there has plenty of commentary on the ongoing cat and mouse game between Valeant and Allergan centering on a series of hostile bids, accusations of unsustainable business models and aggressive accounting, and shareholder activism in one of the most bitter corporate takeover battles in recent years. The role that shareholders could have, or do not have, in potential decision-making regarding the transactions involving Allergan have largely been overlooked in this debate.

Developments

In April 2014, Valeant teamed up with the activist fund Pershing Square (Pershing is led by American hedge fund manager Bill Ackman) to make an unsolicited offer for Allergan. The involvement of activist investor Ackman has led to Allergan commence legal action against Pershing and Valeant claiming insider trading. The initial offer was rejected by Allergan, and consequently the offer was raised to a consideration of $72bn in cash and shares. Allergan share price rises and shareholders seem to be in favour of accepting the deal.

BIDDER TARGET
Valeant Pharmaceuticals Allergan
Incorporated / Listed Canada/United States United States/United States
Market Cap (Dec 2013) $39.09b $33.05b
Market Cap (Oct 2014) (% change) $42.59b (+8.9%) $52.56b (+59.03%)
First Consideration $54b in cash and stock offer
Second Consideration $72b in cash and stock offer

In June, Pershing Square called for a special meeting of shareholders in an effort to change the Board. In a statement, Bill Ackman stated, “we believe the market has spoken, and that shareholders see substantial value in Valeant’s revised proposal,” adding, “to date, the board has refused to engage with Valeant in any way regarding a merger[1].” Additionally, Pershing and Allergan settled a lawsuit in Delaware that the solicitation of proxies to call a special meeting would not trigger the company’s poison pill mechanism.[2] Allergan has since announced that it has received requests from more than 25% of shareholders and as such a special meeting will be held on 18 December 2014. At the meeting shareholders will vote on proposals that would result in Valeant and Pershing controlling a majority of the Board members.

In July, Allergan’s CEO, David Pyott, announced that the Company had entered talks with Salix in respect of a $10bn cash offer for Salix. This was largely seen as a defensive strategy to hinder the deal; essentially the acquisition would make Allergan “too big to buy” forcing Valeant to borrow more money or offer more shares to effect the deal making the acquisition too expensive, and too complicated, to carry out.

Under the US regulatory regime Allergan shareholders would not have a say on the proposed offer for Salix and in fact the Salix deal could be agreed before the special meeting scheduled for 18 December.

Pershing Square threatened to sue the Company if it went through with the acquisition without a shareholder vote[3]. According to reports talks have now ceased between Allergan and Salix.

Salix itself was already subject to merger talks. Salix had entered into talks to acquire a unit of Cosmo Pharmaceuticals and reincorporate in Ireland in an inversion deal that would lower the Company’s corporate taxes. However, with recent new rules introduced by the US Treasury Department on inversions[4] Salix abandoned the plan making a possible sale to a larger competitor more attractive.

BIDDER TARGET
Allergan Salix Pharmaceuticals
Incorporated / Listed United States/United States United States/United States
Market Cap (Dec 2013) $33.05b $5.6b
Market Cap (Oct 2014) (% change) $52.56b (+59.03%) $9.62b (+71.78%)
Consideration $10b in cash

Subsequently in September 2014 Actavis emerged as a counter-bidder to Allergan and also entered talks to buy Salix.

Significant Transaction?

Given the structure of the mooted offer as a cash offer only, no shareholder approval would be technically required in the US.

If Allergan was listed in London however, shareholders would be given a vote on the Salix acquisition. Under the UKLA Listing Rules, a ‘class 1 transaction’ should be approved in a general meeting by shareholders[5]. A transaction is classified as a Class 1 transaction if any of the following Class Tests percentage ratios are greater than 25%:

  • Gross assets;
  • Profit test;
  • Consideration test; and
  • Gross capital test.

The offer for Salix meets the criteria specified in the Class Tests for a Class 1 Transaction meaning if Allergan was listed on the London Stock Exchange Main Market shareholder approval would have been required.

In contrast, the acquisition would only require shareholder approval in the US if Allergan’s offer had required the issue of new shares, where the issuance equals 20% or more of the pre-transaction outstanding shares, but as the offer was for cash only no shareholder approval was needed (NASDAQ Listing Rule 5635).

Darden Restaurants

In July 2014 Darden Restaurants sold its Red Lobster business to Golden Gate Capital (a private company) for $2.1bn in a cash only offer. In the Darden case, the Company had been in a long fight with the activist fund Starboard Value over the disposal and strategy of the Company, and the CEO actually resigned after the disposal of the Red Lobster business was completed.

This highlights that while the Board of a company may be transient many shareholder will hold investments for the long-term and therefore should have a say in major transactions that impact on the long-term health and strategy of a company.

Significant Transaction?

Darden’s market capitalisation on the day prior to the announcement was $5.9bn. Under the Class Tests applicable in the UKLA Listing Rules the consideration represented more than a 25% of the market cap of Darden Restaurant. The transaction would therefore represent a Class 1 Transaction and consequently shareholders would have had a say on the disposal in the UK.

Shareholder Protections

The investor protection measures in the UKLA Listing Rules are a key feature of the takeover landscape in the UK and given the 14 day notice period for calling meetings does not present a significant impediment to completing deals there is no such equivalent shareholder rights in the US.

Perhaps it is time for investors in US companies to lobby regulators and companies for better shareholder rights when considering significant transactions which have a long-term impact on their investments in the company.

[1] http://www.sec.gov/Archives/edgar/data/850693/000119312514220830/d737831dpren14a.htm

[2] http://www.sec.gov/Archives/edgar/data/850693/000119312514254520/d750342dex9912.htm

[3] http://www.sec.gov/Archives/edgar/data/850693/000119312514350092/d793817dex9938.htm

[4] http://www.treasury.gov/press-center/press-releases/Pages/jl2645.aspx

[5] http://fshandbook.info/FS/html/FCA/LR/10

What do you think?