Well, the Allergan-Valeant-Pershing Square (PS) situation sure gets a lot of air time, both in general and around here (and here, here, and here). With good reason: it has plowed much new ground in corp gov and activist investing.

In the past couple of years, positive trends in activist investing might prompt us to think we’ve increased our constructive influence over portfolio companies. The sorry, shameful situation at Allergan demonstrates how abundantly bad it can get, and how resourceful, self-interested executives can really screw shareholders.

The latest episode concerns the special shareholder meeting that PS and Valeant have demanded. We explained special meetings before; the process that Allergan imposes defies anything we contemplated in that guide. Investors that seek a special meeting there confront uniquely onerous hurdles, worth exploring.

While complying with the considerable barriers, PS has proposed to relax those same barriers at the special meeting it wishes to convene. Including what to some is a wonky corp gov question on the proposed special meeting agenda may prove to be a brilliant move that wins this battle, and possibly the war, for PS.

An earlier episode

Rewind to 2012. John Chevedden, gadfly individual investor, submits a somewhat routine proposal for the 2012 annual meeting. His non-binding resolution asks the company to allow shareholders to call special meetings, which at the time the company does not allow. The proposal wins 55% of the votes at the meeting.

The next year, Allergan relents, proposes to implement the will of the shareholders, and allow shareholders to call special meetings. At the 2013 annual meeting shareholders approve an amendment to the Certificate of Incorporation (CoI) by which shareholders can call special meetings. Allergan implements the structure in a separate bylaw amendment on which shareholders don’t actually vote, but which Allergan discloses at the time of the CoI vote.

How to call a special meeting at Allergan

You really need a law degree to understand the new bylaw. It’s totally confusing, so our summary here relies mostly on PS’ interpretation. Relevant details:

1. ❖It needs support from 25% of the outstanding shares; the resolution that investors approved indicated 10%.
   

2. ❖All supporters must have at least one share in record name, really, so you need an actual share certificate.
   

3. ❖Your request must come from Cede & Co. (the transfer agent for Depository Trust Company, the custodian for shares in the US), not the shareholder.
   

4. ❖All supporters (not just the meeting proponent, like PS) must disclose unbelievably detailed information to Allergan, including two years’ of share trades and all relationships among the supporter, “affiliates” of the supporter, AGN, AGN employees, and AGN competitors - all supporters also must report any changes to what they first disclose.
   

5. ❖Supporters affirm that they will hold their shares through the date of the annual meeting, and any decrease in a supporter’s shares, say due to normal trading, decreases what counts toward the 25%, even if the supporter buys more shares later.
   

6. ❖The BoD can limit the timing of a special meeting to a narrow window, a three-month period about three months before the anticipated date of next year’s annual meeting.
   

7. ❖The BoD can also limit the agenda, and exclude items considered at the previous annual meeting; this may serve to exclude a proposal to change directors.
   

It sure looks like Allergan asked Latham & Watkins to load the bylaw with the most obstacles to calling a special meeting. PS notes in correspondence with ISS (below) that Latham started with a bad model bylaw, and larded it with even more traps.

Once supporters pull together the shares, share certificates, Cede & Co. request, and disclosures, the BoD has the final say on whether a given supporter’s request complies with all these requirements. PS needs only 25% of the outstanding shares to request a meeting, and PS and Valeant together have almost 10%. PS says they intend to present support from 35-40% of the outstanding shares, anticipating unprecedented scrutiny of individual meeting requests.

PS: Up to the challenge

Allergan could delay the next regular annual meeting until October 2015, and by then Valeant could easily lose interest in the deal. Rather than wait, PS called a special meeting, with three agenda items:

1. ❖restructure the BoD, and replace six incumbent directors with PS nominees
   

2. ❖relax the onerous special meeting provisions
   

3. ❖approve the earlier resolution to negotiate with Valeant.
   

Because of Allergan’s singularly entrenching corp gov, these three items require eight separate meeting proposals, including four different specific bylaw amendments.

So, you want to support the special meeting?

It involves more paperwork than you’ve ever before completed to vote on something at a portfolio company. PS includes detailed instructions and forms in the proxy materials. In short:

1. 1.Register at least one share with the company, but don’t frame the certificate yet
   

2. 2.Complete the special meeting request form, with 22 separate disclosures, including enumerating all those relationships and your two-year trading history
   

3. 3.Complete the white proxy card
   

4. 4.Have your broker(s) complete the DTC instruction letter, which instructs...
   

5. 5.Cede & Co. to complete the separate meeting request letter
   

6. 6.Also, have your broker(s) complete the verification letter, confirming your shareholdings
   

7. 7.Have your broker(s) return 5. and 6. to you
   

8. 8.Send 2., 3., 5., and 6., along with a copy of your new share certificate (or a statement of ownership from Allergan’s transfer agent, Wells Fargo) to PS’s proxy solicitor, to submit to Allergan.
   

Want to change your mind (although it beggars belief why anyone would do that after going through this hassle)? Allergen makes it easy! Just complete a single form from their revocation filing.

What should a shareholder do? Call ISS...

If you’ve read this far, you either own Allergan shares or are just another corp gov junkie. Or, you might have seen the news accounts about this part of the saga, in which ISS and Glass Lewis need to weigh in for their clients on whether Allergan should call a special meeting.

Both PS and Allergan met with ISS and Glass Lewis to present their arguments. Evidently, ISS asked a bunch of hard questions of Allergan about why it has these particularly high hurdles for a calling a special meeting.

After what was likely a tough session with ISS, Allergan sent a memo from its attorneys defending its special meeting bylaw. The memo mostly argues that 20 peer corporations have similar terms.

PS saw the memo, and replied to ISS with

its own arguments. PS also analyzed the 20 peer corporations, which informs the final ISS recommendation (below). They suggest another 15 peers that have much more favorable rules.

After all that, ISS and Glass Lewis both advise clients to support the special meeting request. In particular, ISS delivered a pointed critique of Allergan’s corp gov. Its report to clients shows that it asked Allergan repeatedly about specific provisions, such as why two years’ of trading history or an enumeration of every relationship helps strike a balance between shareholder representation and abuse. At the meeting, Allergan just plain evades the questions. Instead, it provides the legal memo with the twenty peer companies.

ISS then analyzes these peers, too (no doubt relying in part on PS’ advice). It finds that while all 20 have at least one of the six barriers that Allergan includes in its special meeting bylaw, on the whole only four small cap companies come close to what Allergan imposes on shareholders. 12 of the 20 actually have materially less restrictive special meeting rules. And, of course 15 specific peers, and potentially dozens or hundreds of others, have much less restrictive rules.

That’s as far as ISS and Glass Lewis can go, though. Unlike other shareholder matters, in which they process votes for their clients, shareholders need to do this themselves. Perhaps that’s another reason Allergan structured the bylaw in this way, to limit the impact that proxy advisors could have on the outcome.

What’s next?

PS continues to seek investors to consent to the special meeting, and endure the entire painful process. As PS noted in its message to ISS, “If PS and Valeant were the only investors who had to meet these requirements, (we) would already have (called) the special meeting.”

Yet, it appears likely that PS will win the special meeting, and after that the BoD contest. PS cleverly includes the special meeting bylaw in the special meeting request. This matters for two reasons.

First, it engages ISS and Glass Lewis fully in the special meeting process. Without that, shareholders need to decide whether they want a special meeting to 1) restructure the BoD and 2) vote on the precatory proposal asking Allergan to negotiate a deal with Valeant. ISS and Glass Lewis might or might not support  a special meeting for just those two items, preferring to wait for the 2015 annual meeting.

Allergan’s special meeting bylaw, though, really touches a nerve for ISS and Glass Lewis. They (and their clients) absolutely loathe that sort of entrenchment. PS artfully notes that if Allergan can get away with it, others will, too. This positions the special meeting as a campaign for better corp gov everywhere, which the proxy advisors and their clients will likely find attractive.

Second, PS and Valeant now have a concrete way to assess investor support for their proposed deal. Let’s see if 35-40% of the shareholder base jumps through all these hoops. If so, then PS and Valeant have a solid foundation of support for the actual vote at the special meeting. At that point, it becomes much easier for investors to vote their shares.

Typically, support to call a special shareholder meeting does not necessarily translate into support for the proponent’s agenda at that meeting. In this case, though, the barriers to a special meeting almost assure that any investor that calls the special meeting will also support PS’ agenda.

The risk to PS is, at the special meeting, investors support the proposed changes to the special meeting bylaws, but not the changes to the BoD. PS thus needs more than just pension funds with an interest in good corp gov to support the special meeting - it needs hedge funds, arbs, and others that also want the Valeant deal.

So, watch carefully what percent of shares PS submits to Allergan, and, the composition of those shares. If it can muster even 30% of the outstanding shares, with meaningful hedge fund representation, that would translate to a significant base of support at the special shareholder meeting. At 40%, PS will most likely win.

Corrected from original to show that PS and Valeant together own 10% of Allergan shares, not 20% as originally shown.