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Apr 29, 2014

Will Valeant-Pershing Square alliance set back activism?

Just when activist shareholders are gaining more legitimacy along with added board seats, the murky alliance between Valeant Pharmaceuticals and Pershing Square Capital Management threatens to fuel new suspicion of activists' intentions. That could undermine justifiable efforts by some to exert more influence as long-term shareholders in the name of good governance.

Wachtell Lipton, in a client memo last Friday, calls this latest entry in the activist investor playbook 'symbiotic activism'. The term is an apt one for the teaming of Valeant and Pershing Square to make a hostile bid for Allergan because both parties stand to gain from it, offering each other benefits neither could realize alone.

What disturbs many M&A experts and other market observers is the craftiness with which Pershing's Bill Ackman was able to quickly accrue a 9.7 percent stake in Allergan before having to alert the SEC and the market about what he was up to, thanks to a non-public heads-up from Valeant regarding its takeover plans.

Steven Balet, managing director of FTI Consulting's strategic communications segment, believes sharing information with activists during the 10-day window allowed for a 13D filing informing the market of a 5 percent or greater stake in a company is worrisome because of its resemblance to insider trading. But an insider trading violation depends on a breach of duty, which Ackman isn't guilty of because Valeant shared information with him on the expectation he would trade on it, as the Wall Street Journal reported last week.

The insider trading net is considerably broader in the European Union, which treats mere possession of non-public market information as grounds for a violation. The SEC tried to expand the definition of insider trading years ago but was thwarted by a Supreme Court decision, as reported by the New York Times' Dealbook blog.

Wachtell Lipton has been advocating since 2011 for the SEC to shorten the 13D filing window. Ten days does seem antiquated in an era of high-frequency trading and lightning-quick social media messages. But shrinking it to something like two days wouldn't stop an activist from accruing a big stock position, says an M&A lawyer who doesn't wish to be identified.

'The bigger deal is the fact that you can disclose your intentions to others and they can trade in the stock outside of a tender offer, and that's not good,' he explains. 'You're hurting public investors that way. Is it really good from a public policy standpoint that you can get away with that kind of stuff? That whole early-warning disclosure system needs to get reworked.'

But the M&A lawyer doubts partnerships between strategic acquirers and activists is the next big trend to hit the hostile takeover market. 'Often, strategic bidders want to try to sell the target shareholders on the long-term value of the combination. And entering into an alliance with a notorious activist trader really [makes target shareholders] question that strategy,' he says.

Balet agrees there's little chance of activists widely adopting the Valeant/Pershing Square model. 'What will become more prevalent is engaging in private equity-style takeouts on their own,' he says, citing 'activist funds' increasing financial wherewithal, their access to leverage, and their increasing access to industry experts and really sophisticated advisers, people they'll need to help them run the business.'

Still, it would be unfortunate if shareholder activism, most of which is not directed at hostile takeovers, were to regain its earlier taint and put expanding investment in shareholder engagement at risk.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary