Stay current on changes and developments in corporate law with a wide variety of resources and tools.
Companies entering into merger negotiations after fending off hostile takeovers should heed Allergan Inc.’s recent $15 million settlement with the SEC.
The drugmaker in January resolved Securities and Exchange Commission allegations that it failed to timely disclose talks with “potentially friendly merger partners” after rejecting a hostile joint tender offer from Valeant Pharmaceuticals International Inc. and Pershing Square Capital Management LP in June 2014.
The SEC invoked a little-used provision under the securities laws—1934 Securities Exchange Act Rule 14d-9—appearing to make a point about corporate communications with shareholders when there is an open invitation to buy their shares.
The Allergan case offers a “good glimpse at the commission’s views on the murky interplay of the desire for confidentiality and the requirement of full disclosure in contested M&A deals,” Georgetown University law professor Donald Langevoort told Bloomberg BNA. Langevoort teaches and writes about the federal securities laws.
The settlement is another reminder that dealmakers’ affirmative disclosure requirements and their fiduciary duty to maximize returns for investors is a “dangerous intersection to navigate,” Jonathan Shapiro, a Baker Botts LLP partner in San Francisco, told Bloomberg BNA.
“To some extent, all white knight discussions are subject to this sort of regulatory scrutiny because premature disclosure” is generally detrimental to both potential targets and their friendly suitors, said Shapiro, a litigator specializing in securities and corporate transaction cases.
According to Bloomberg Law data, this is only the SEC’s second cease-and-desist action under Rule 14d-9 since 2000. In 2014, Lions Gate Entertainment Corp. agreed to pay $7.5 million to settle SEC allegations that it failed to fully disclose efforts to stymie a hostile takeover bid by Carl Icahn.
After Allergan rejected Valeant and Pershing Square’s tender offer, it had a continuing obligation to disclose it was pursuing alternatives, said Adam Pritchard, a securities law professor at the University of Michigan. The company had a duty to disclose material changes, which included letting shareholders know it had started negotiating with other potential bidders, Pritchard said.
Allergan ignored repeated requests by commission staff to provide more information about the developments, according to the SEC’s order.
“The SEC is sending a message to other companies that they need to comply when the staff says they have not disclosed enough,” Pritchard said.
Allergan ultimately entered into merger discussions with Actavis plc, which acquired it in March 2015 in a deal valued at about $70.5 billion. The combined company became Allergan Plc.
Allergan spokesman Mark Marmur, when contacted for comment, reiterated a statement issued after the enforcement action that the SEC’s order didn’t make any finding of intentional wrongdoing or include any charges against Allergan Plc.
The SEC didn’t respond to a request for comment.
Beyond the hostile takeover context, the SEC action highlights the tensions often at play in M&A negotiations—between the legitimate desires of M&A parties to keep negotiations confidential, and those of interested stakeholders, be they investors, customers, or federal regulators, said deal attorney Daniel Avery, director of Goulston & Storrs in Boston. “Balancing these interests is an inherent challenge in most M&A transactions, and often the fix is neither simple nor static,” he told Bloomberg BNA.
Another takeaway from the case is that dealmakers and their counsel should always “articulate clearly the rationale beyond disclosure judgments, and document their thinking in case it is later criticized on hindsight,” Shapiro said.
According to a Paul Weiss release, hostile or unsolicited mergers are decreasing in the U.S. In 2014, 15.7 percent of U.S. public mergers were hostile, compared to 13.9 percent in 2015 and 13 percent in 2016.
To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com
To contact the editor responsible for this story: Yin Wilczek at email@example.com
The SEC's order is available at https://www.sec.gov/litigation/admin/2017/34-79814.pdf.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)