(Article from Securities Law Alert, November 2014)
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On November 4, 2014, the Central District of California found that a tender offer “bidder” for purposes of Section 14(d) of the Exchange Act is not necessarily an “offering person” exempt from SEC Rule 14e-3’s insider trading restrictions, which apply in the tender offer context. Allergan, Inc. v. Valeant Pharm. Int’l, Inc., 2014 WL 5604539 (C.D. Cal. 2014) (Carter, J.). The court determined that an “offering person” for Rule 14e-3 purposes must have “some degree of control over the terms of the tender offer and over the surviving entity.”
Background
On February 25, 2014, Valeant Pharmaceuticals International Inc. and hedge fund management company Pershing Square Capital Management entered into a relationship agreement (the “Relationship Agreement”) to pursue a merger between Valeant and Allergan, a California-based pharmaceutical company. Over the next several months, a newly-created Pershing Square-owned entity, PS Fund 1, acquired 9.7% of Allergan’s shares. In late April 2014, Valeant submitted a bid to acquire all of Allergan’s remaining shares. Allergan’s board rejected Valeant’s proposal. In June 2014, Valeant announced a tender offer. At the urging of Pershing Square, a special shareholder meeting was scheduled to be held on December 18, 2014 to consider a proposal to remove six of Allergan’s nine current board members. In light of subsequent developments involving Actavis PLC’s proposed acquisition of Allergan, Pershing Square withdrew its request for this shareholder meeting.
On August 1, 2014, Karah Parschaeur, an individual who sold Allergan stock during the time that PS Fund 1 purchased Allergan shares, and Allergan (collectively, the “plaintiffs”) brought suit in the Central District of California against Valeant, Pershing Square and PS Fund 1 (collectively, the “defendants”) alleging that PS Fund 1’s acquisition of Allergan shares constituted insider trading in violation of Section 14(e) of the Exchange Act and SEC Rule 14e-3. Plaintiffs further asserted that defendants had violated Section 14(a) of the Exchange Act and SEC Rule 14a-9 by not disclosing this insider trading to Allergan shareholders in connection with the tender offer. Plaintiffs moved for a preliminary injunction (1) to enjoin PS Fund 1 from voting at the December 18, 2014 special shareholder meeting; and (2) to enjoin defendants from voting any proxies solicited by them pending corrective disclosures concerning the alleged insider trading violations.
To obtain preliminary injunctive relief in the Ninth Circuit, plaintiffs must, among other things, at least demonstrate “serious questions going to the merits” of their claims.
Court Finds Plaintiffs Raised “Serious Questions” as to Whether Pershing Square and PS Fund 1 Engaged in Insider Trading in Violation of Section 14(e) and Rule 14e-3
The court first addressed plaintiffs’ “core” insider trading allegations under Section 14(e) and Rule 14e-3. “Section 14(e) prohibits ‘fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer.’” Allergan, 2014 WL 5604539 (quoting 15 U.S.C. § 78n(e)). “Under Rule 14e-3(a), once an ‘offering person’ ‘has taken a substantial step or steps to commence ... a tender offer,’ ‘any other person who is in possession of material information relating to such tender offer’ that he knows or has reason to know is nonpublic and that he received directly or indirectly from the offering person must either abstain from trading or disclose the information to the public before trading.” Id. (quoting 17 C.F.R. § 240.14e-3(a)). Notably, the “offering person” itself is not subject to Rule 14e-3’s “abstain or disclose” rule. See 17 C.F.R. § 240.14e-3(c).
As an initial matter, the court explained that “only contemporaneous traders who could have purchased from or sold to the alleged inside trader can bring suit under Rule 14e-3.” The court determined that the individual plaintiff, Karah Parschaeur, had standing because she sold Allergan shares “during the time period that PS Fund 1 purchased shares.” However, the court found that Allergan had no standing under Rule 14e-3 because it was not a contemporaneous trader.
The court then considered allegations that Pershing Square had violated Section 14(e) and Rule 14e-3 when it “possessed nonpublic information [concerning Valeant’s plan to acquire Allergan] and did not disclose that information to the public before causing PS Fund 1 to purchase Allergan shares” prior to the tender offer. The parties disputed “whether any substantial steps toward a tender offer [had been] taken by then” as required under Rule 14e-3. In other words, was ”the nonpublic information in Pershing Square’s possession … related to a tender offer at that point”? The parties also disagreed on the question of “whether PS Fund 1 and other Pershing Square [d]efendants were ‘offering person[s]’” exempt from the “disclose or abstain” requirements of Rule 14e-3.
Court Finds Plaintiffs Raised “Serious Questions” as to Whether Defendants Took Substantial Steps to Commence a Tender Offer Prior to PS Fund 1’s Purchases of Allergan Shares
To evaluate whether defendants had taken any substantial steps to commence a tender offer prior to PS Fund 1’s purchases of Allergan shares within the meaning of Rule 14e-3, the court first turned to the SEC’s adopting release on tender offers. The release explains that “‘substantial … steps to commence a tender offer include, but are not limited to, … the formulation of a plan or proposal to make a tender offer by the offering person … or activities which substantially facilitate the tender offer.’” Id. (quoting Tender Offers, 45 Fed Reg. 60,410, 60,413 n.33 (Sept. 12, 1980)).
The Central District of California observed that “[c]ourts have interpreted” the SEC’s adopting release as providing “only a list of examples.” The court noted that in both SEC v. Ginsburg, 362 F.3d 1292 (11th Cir. 2004) and SEC v. Mayhew, 121 F.3d 44 (2d Cir. 1997), circuit courts had “found that substantial steps toward a tender offer had taken place even though the offeror had not yet settled on a tender offer as the form of the merger.”
In the case before it, the Central District of California determined that plaintiffs had “at least raised serious questions as to whether substantial steps to commence a tender offer were taken before PS Fund 1 began purchasing Allergan shares.” The court deemed it significant that the Valeant-Pershing Square Relationship Agreement “specifically provided that Valeant and Pershing Square would form a ‘Co-Bidder Entity’ and would be named as ‘co-bidders’ if a tender offer was launched for Allergan’s shares.” The court found that defendants had “not adequately explained why” the Relationship Agreement specifically addressed the possibility of a tender offer “if there was no plan for a tender offer at that time, or at least a strong possibility at that time that their actions would lead toward and facilitate a tender offer.”
Notably, the court considered it immaterial that the Relationship Agreement expressly stated that no steps had been taken toward a tender offer and required both parties’ consent prior to launching a tender offer. The court explained that “[d]efendants stating in a contract that they had not taken any steps toward a tender offer does not necessarily make it so.”
Court Finds Plaintiffs Raised “Serious Questions” as to Whether Pershing Square Was an “Offering Person” or “‘Co-Offering Person’” Exempt from Rule 14-e3’s “‘Disclose or Abstain’” Rule
The court next considered defendants’ contention that “Pershing Square and Valeant are collectively an ‘offering person’” exempt from Rule 14e-3(a)’s “‘disclose or abstain’” requirement. The court first determined that “the term ‘offering person’ can include multiple persons.” While the court acknowledged that the SEC has not made this “clear in the text of Rule 14e-3,” the court found that the SEC “indicated through Regulation 14D that more than one person can act together to make a tender offer for purposes of Section 14(e).” The court explained that “Regulation 14D’s definition of ‘bidder,’ which also contemplates multiple persons acting as one tender offeror, applies to … Section 14(e) of the Exchange Act.” Moreover, the court noted that “Congress explicitly contemplated that tender offers could be made by co-offerors working together as a partnership or a group.”
The court then turned to the question of who may be deemed a “co-offering person” for purposes of Rule 14e-3. The court explained that “[i]f a co-offering person exception is not to swallow the general rule that an offering person cannot tip off another person and other persons cannot then trade on that confidential tip, there must be certain characteristics that distinguish a co-offering person from ‘any other person’ for Rule 14e-3 purposes.” Finding no Congressional or SEC guidance on this issue, the court agreed with plaintiffs that the term “‘offering person’ cannot be defined identically as ‘bidder’ or ‘offeror’” for purposes of Regulation 14D’s disclosure requirements.
The court found “persuasive” plaintiffs’ contention that “ensur[ing] that investors have access to the material information they need to decide how they will respond to a tender offer … requires defining ‘bidder’ broadly to ensure broad disclosures under Sections 13(d) and 14(d) [of the Exchange Act] while defining ‘offering person’ [under Rule 14e-3] narrowly to restrict the number of persons allowed to trade on insider information about tender offers.” Adopting plaintiffs’ “proposed test for distinguishing an ‘offering person’ from a ‘bidder’ or ‘offeror,’” the court held that “an offering person should be more than a financier” and “should actually make an offer to purchase shares and … have some degree of control over the terms of the tender offer and over the surviving entity.”
Applying this test, the court acknowledged that “Pershing Square was active as a strategist and financier to Valeant” and had to “give its consent before a tender offer could be formally launched.” However, “Pershing Square [would have] had no control over the price to be offered to Allergan’s shareholders, whether the tender offer would involve cash and/or an exchange of stock, or even whether to call off the tender offer at some point.” The court also found it significant that Pershing Square would not have “actually acquire[d] any Allergan stock through the tender offer.” “Based on these considerations,” the court found that plaintiffs had “at minimum, raised serious questions regarding whether Pershing Square [was] an ‘offering person’ or ‘co-offering person’ exempt from Rule 14e-3’s ‘disclose or abstain’ rule.”
Court Requires Corrective Disclosures, But Declines to Enjoin PS Fund 1 From Voting Its Shares
With respect to plaintiffs’ disclosure claims under Section 14(a) and Rule 14a-9, the court found that “[a] reasonable shareholder would consider facts regarding [d]efendants’ potential Rule 14e-3 liability important in deciding whether to vote for proposals advocated by [d]efendants, which [were] part of [d]efendants’ plan for Valeant to acquire Allergan.” The court determined that “the potential threat of an uninformed vote … presents an irreparable harm,” and therefore granted plaintiffs’ motion for a preliminary injunction to enjoin defendants from voting any proxies solicited by them pending corrective disclosures.
However, the court denied plaintiffs’ motion to enjoin PS Fund 1 from voting its shares at the special shareholder meeting. The court emphasized that “no jury has made a final determination as to whether substantial steps were taken toward a tender offer by the time PS Fund 1 began trading on confidential information.” Moreover, the court noted that “[t]his case also involves the novel legal issue of whether an entity that is a ‘co-bidder’ for disclosure purposes is necessarily a ‘co-offering person’ exempt from Rule 14e-3’s ‘disclose or abstain’ rule.” Finally, the court explained that there were “too many ‘ifs’ between PS Fund’s ability to vote and the ultimately threatened harm to characterize the harm as certain or imminent.”
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