Allergan Agrees to $15 Million Fine for Failure to Disclose Merger Negotiations During Hostile Bid
The SEC announced a settlement with Allergan, Inc., pursuant to which Allergan would pay a $15 million fine and acknowledge its failure to update its Schedule 14D-9 to disclose the merger negotiations it had begun with Actavis plc and another company while fending off a hostile bid from Valeant Pharmaceuticals International Inc.
On January 17, 2017, the SEC announced that Allergan, Inc. had agreed to pay a $15 million fine and admit wrongdoing for failing to update its disclosures in its Schedule 14D-9 while fending off a hostile takeover bid from Valeant Pharmaceuticals International Inc. The SEC's order provides valuable insight into the SEC's view of when negotiations in the context of an ongoing tender offer are far along enough to obligate a filing under the tender offer rules.
The settlement arises from the hostile takeover attempt launched in April 2014 by Valeant Pharmaceuticals International Inc. for Allergan. The takeover bid generated a raft of litigation, including a claim in a California federal court that the co-bidder vehicle structure utilized by Valeant and hedge fund Pershing Square had failed to evade liability for insider trading (see Legal Update, Allergan v. Valeant: California District Court Questions Whether Co-bidder Vehicle Avoids Insider Trading Liability ( www.practicallaw.com/0-587-3266) ). At issue for the SEC was Allergan's failure to update its disclosures in its Schedule 14D-9 after its discussions with third parties matured into outright negotiations.
Tender Offer Rules
A public company that is the subject of a tender offer has an obligation to express a position on the tender offer in a Schedule 14D-9. The Schedule lists nine categories of required disclosure, in each case incorporating enumerated items contained in Regulation M-A. Item 7 of Schedule 14D-9 requires the company to furnish the information required by Item 1006(d) of Regulation M–A. Item 1006(d) of Regulation M-A, in turn, requires the company to state whether it is "undertaking or engaged in any negotiations in response to the tender offer" that relate to several possible transactions, including an "extraordinary transaction" such as a merger or acquisition transaction. After the company files its Schedule 14D-9, Rule 14d-9(c) obligates it to promptly disclose any material changes to the information in the Schedule by filing an amendment.
The instructions to Item 1006(d) add that if an agreement in principle has not been reached at the time of filing, no disclosure is required of the possible terms of or the parties to the transaction if, in the opinion of the board of directors of the subject company, disclosure would jeopardize the negotiations. In that case, it is sufficient for the company to indicate that negotiations are being undertaken or are underway and are in their preliminary stages.
Allergan Discusses Competing Transactions
On June 23, 2014, Allergan filed its Schedule 14D-9 in response to Valeant's tender offer. The Schedule stated that Valeant's offer was inadequate and, for purposes of Item 7, that the company was not undertaking or engaged in negotiations that could result in an extraordinary transaction. In the ensuing months, however, Allergan did enter into discussions with two parties concerning a potential transaction, yet did not amend its Schedule 14D-9 until shortly before agreeing on a competing transaction, long after the discussions had become focused enough to qualify as "negotiations" for purposes of Regulation M-A.
Specifically, the order describes that beginning in July 2014, Allergan and "Company A" began discussions of a possible transaction in which Allergan would acquire Company A, thereby making Allergan prohibitively expensive as an acquisition target for Valeant. (Based on both the SEC's description of Company A and on contemporaneous media reports, it is apparent that Company A is Salix Pharmaceuticals Ltd.) On August 20, 2014, Allergan proposed to purchase Salix for $200 per share in cash and confirmed the offer in writing. On August 25, 2014, Salix presented a counterproposal of $210 per share. The following day, Allergan offered Salix $205 per share in return for three weeks of exclusivity, subject to satisfactory completion of due diligence. Due to issues identified in due diligence, Allergan never acquired Salix. Allergan never amended its Schedule 14D-9 to disclose its negotiations with Salix.
At the end of July 2014, Actavis plc sent a non-binding proposal to acquire Allergan at a price of $175 per share. Allergan initially rejected the proposal and did not intend to engage in further discussions over it. In October, Actavis revised its proposal to $185 to $200 per share. Allergan responded that any proposal would have to begin at $200 per share for Allergan to move forward with discussions. Actavis went on to offer a price range of $195 to $205 per share; discussions over price continued over the ensuing weeks until, on November 5, 2014, the parties got close enough on terms to agree to a confidentiality and standstill agreement. On November 16, 2014, the parties signed a merger agreement.
SEC Staff Urges Allergan to Update Its Schedule 14D-9
Before signing the merger agreement, Allergan made only two updates to its public disclosures:
On November 3, 2014, Allergan filed an amendment to its preliminary proxy statement (which it had on file in response to Pershing Square's ongoing proxy contest to replace the directors of Allergan). This amendment added that Allergan had been "approached by another party regarding a potential transaction."
On November 6, 2014, Allergan filed an amendment to its Schedule 14D-9, disclosing that its discussions with an unnamed bidder "have continued and may lead to negotiations."
These updates came only after repeated urging by the SEC's Division of Corporation Finance staff. As far back as September 23, 2014, following press reports that Allergan was involved in discussions with potential merger partners, SEC staff informed Allergan's legal counsel that, to the extent any merger negotiations were being conducted, a disclosure under Item 7 of Schedule 14D-9 was required. Discussions between counsel and SEC staff continued in October, with Allergan's counsel insisting that disclosure was not required because the announcement could jeopardize negotiations. After Allergan filed its amended preliminary proxy statement, the staff reiterated that if Allergan was engaged in negotiations of an extraordinary transaction, this fact was material and required to be disclosed (with permission to leave out the identity of the counterparty and the possible terms of the deal). Though Allergan eventually filed an amendment to its Schedule 14D-9, that amendment only stated that Allergan's discussions "may lead to negotiations," not that negotiations were already underway.
The SEC ordered that, based on these facts, Allergan had violated Section 14(d) of the Securities Exchange Act of 1934 ( www.practicallaw.com/5-382-3808) , as amended, and Rule 14d-9 thereunder. Allergan agreed to a cease-and-desist order and to pay a $15 million penalty.
As a general matter, the point at which "discussions" become "negotiations" for purposes of Schedule 14D-9 can only be determined on a case-by-case basis in light of all the relevant facts. But the SEC's order in this case is particularly helpful because it pinpoints the exact events where, in the view of the SEC, this evolution occurred. The order states with regard to the discussions with Salix and Actavis, respectively, that:
"In view of the receipt of the counterproposal on price on August 25, [Allergan] was required to amend its Schedule 14D-9 to disclose that negotiations were 'being undertaken or [were] underway and [were] in the preliminary stages.'"
"In view of [Allergan]'s indication of a specific price level to Actavis on October 6, [Allergan] was required to amend its Schedule 14D-9 to disclose that negotiations had begun, even though they were in the preliminary stages."
In both sets of deliberations, the SEC considered the discussions to have become "negotiations" once Allergan proposed a specific price to its counterparty. These events occurred well before Allergan eventually amended its Schedule 14D-9. It is equally notable that Allergan's initial responses to the respective counterparties were not deemed the triggers for a disclosure obligation.
In totality, all of the following factors contributed to the finding of a violation of securities law on the part of Allergan:
The tender offer rules were operative. As a general matter, a public company is free to conduct negotiations for a potential transaction without having to disclose the fact that it is holding those negotiations. The obligation to file a Form 8-K is triggered only on entry into a material definitive agreement. Outside that context, a company negotiating a transaction has a disclosure obligation only if it has previously made forward-looking disclosures on that particular matter that would be misleading if left unrevised. In the case of Allergan, its disclosure obligation arose because it was already subject to Schedule 14D-9 and Item 1006(d) of Regulation M-A.
Discussions were held on specific price. Even under the Schedule 14D-9 rules, a subject company does not have to disclose any and all discussions it has during the pendency of the tender offer with potential white knight bidders or acquisition targets. Disclosure is only required once these discussions qualify as "negotiations," the term used by Regulation M-A. While the existence of "negotiations" can only be determined on a case-by-case basis in light of all the facts of the situation, the SEC takes the view that if the subject company proposes a specific price to the third party, that proposal likely changes the discussion into a negotiation.
The eventual disclosure was neither timely nor accurate. Allergan essentially violated the disclosure rules in two ways, by being too late to amend its disclosures and, when it did, by stating only that its discussions "may lead to negotiations," not that negotiations were already underway. In the SEC's view, negotiations were in fact already being held and should have been disclosed, even if Allergan were permitted to leave out the identity of the counterparty and the terms of the deal.
No finding of scienter necessary. As the SECs' order points out, no finding of scienter ( www.practicallaw.com/w-000-3646) is necessary to establish a violation of Section 14(d) or Rule 14d-9. The SEC therefore only had to demonstrate that Allergan had failed to satisfy the disclosure rules, without having to establish knowledge on the part of Allergan that its failure to amend its Schedule 14D-9 was wrongful and that it had decided not to amend the Schedule in spite of that knowledge.
Discussions with the SEC. The repeated warnings from the SEC to Allergan that it needed to amend its Schedule 14D-9, while not strictly necessary to establish a violation, helped illustrate that months before Allergan amended its Schedule 14D-9, it was already being warned that its disclosure obligation might have been triggered.