Leave it to Bill Ackman to innovate further in activist investing.

 

The Allergan-Valeant-Pershing Square (PS) situation already started differently. A creative, driven pharma teams up with an aggressive activist investor to acquire a complacent competitor. No one saw that coming.

 

Valeant and PS have now lobbed another grenade. This week, PS proposed to Allergan shareholders that they attend a “meeting” of sorts (in person or by proxy) solely to vote on whether Allergan should negotiate with Valeant on a deal. This is not your usual vote, or meeting.

The Vote

PS calls it a "precatory" "shareholder referendum", in which shareholders vote on a resolution urging Allergan to negotiate with Valeant. Approval of the resolution would not obligate Allergan to do anything. In the same way that PS intends to solicit proxies in favor of the resolution, they invite Allergan to solicit proxies that (presumably) oppose it. And, it's not clear what constitutes "approval" of the resolution, either - we guess winning a majority of the votes cast at the meeting.

 

The resolution is similar to some other new ones we've seen lately, specifically the ones that Carl Icahn floated at eBay, and that Starboard proposed at Darden. What's different is the meeting.

 

The Meeting

PS will convene a "meeting of the shareholders". This is emphatically not a special shareholder meeting allowed under Allergan bylaws. It rather looks like a nice little get-together specifically to express investor views on the proposed Valeant deal. But, why?

 

It seems that if PS and Valeant want to rally Allergan shareholders to their case, then they don't have much choice. At the annual meeting earlier this month, Allergan shareholders signaled solid support - they:

1. ❖elected all directors but one with around 90% of the votes (the lead independent director received two-thirds)
   

2. ❖approved exec comp with almost 95% of the votes
   

3. ❖approved a company proposal to allow action by written consent, but only by a narrow margin.
   

We speculate that the written consent proposal, which at other companies wins handily, probably lost votes because Allergan proposed a very narrow form.

 

How about a special meeting? Starboard did this, for its resolution at Darden. At Allergan, it takes 25% of the outstanding shares to call one. PS and Valeant would need to solicit proxies, which could add months to the process. We wonder if shareholders would agree to convene a special meeting so soon after the annual meeting, just to consider a non-binding resolution.

 

And, Allergan does not now allow shareholder action by written consent. Yes, shareholders approved a bylaw amendment to allow consent solicitations. But, procedural matters in implementing the new bylaw, and the restrictive nature of the particular version of written consent that shareholders approved, mean that Valeant and PS could not realistically solicit written consent in any sort of timely manner.

 

The Implications

We wonder where this will go. Will Allergan shareholders take this vote seriously? As a non-binding proposal, shareholders may just ignore it, they way they ignore many other similar proposals.

Alternatively, how will this vote differ from some sort of an opinion poll of investors? In other polls we’ve seen, investors (and many other survey subjects) often favor proposals that they would otherwise oppose if the vote really counted.

Valeant and PS need to send a signal that Allergan shareholders want this deal. In the absence of any other recent vote that went strongly against management, and seeing as they have no other upcoming opportunity to solicit real votes on an enforceable decision, this might be their best option. And as options go, it’s pretty interesting.