Loose End: The Insider Trading Lawsuit
Hi everyone:
One of the loose ends, now that Valeant's takeover efforts have been defeated is the status of the insider trading lawsuit.
Counter to general expectations, despite Valeant publicly dropping their bid and Ackman openly supporting the Actavis deal, Allergan has
not dropped the suit. At least not yet.
(It was reported, on the same day the Actavis deal was announced, that Ackman was still planning to hold the special shareholder meeting on December 18 as a leverage over Allergan's board to drop the suit. It took him all of one day to figure out that going into a meeting where he was going to lose 90.3-to-9.7% was no leverage at all. He dropped the meeting the next day).
To some extent the suit is almost irrelevant anyway. The judge has already ruled that Allergan is not a victim, only Karah Parschauer. (As a reminder, Parschauer, a co-plaintiff with Allergan, sold some shares during the time Ackman was buying. Ackman knew that a Valeant hostile takeover bid is coming and she didn't -- making him an alleged Insider Trader and her a victim). While the number of shares Parschauer sold is not public, I imagines the number can't be that high (she is a VP-level employee selling some vested stock options -- can't be a huge number -- probably less than 1000 shares). So, the most that she can win would be what she lost due to the Insider Trading (maybe $50/shares; even under some very stretched arguments, not more than $100/share). So, the most Parschauer can possibly win, tops, would be maybe $100K (plus legal fees -- maybe another $10M tops
). Even with the recovered legal fees, this amount is hardly worth the attention of a management team that is busy delivering a $120B baby.
So, if the most Allergan will ever recover is legal fees, why not drop the suit already? Once the merger completes, I can't imagine Actavis having any reason to continue a suit it inherited from Allergan with no material upside whatsoever. Therefore, I expect that the suit will be dropped sooner or later in any event, it's just a question of when (it's not even a question of terms -- no one really cares if Ackman agrees to pay Karah $100K in losses and Allergan $10M in legal fees, the most either could win in a completed trial). But, for now, having a leverage over Ackman and Valeant can't hurt. If the Actavis deal fails, and Valeant returns, the suit may regain relevance -- both low probability events, and even then it will just be another Soft Power, but might as well not ditch it just yet. I suppose that once the Board reaches the conclusion that the likelihood Valeant returning and Ackman causing further mischief is approaching nil (can't be far from that already), the suit will be dropped.
That leads to the question of just how much leverage does the suit provide against Ackman and Valeant? My answer is
some leverage. Obviously, the old questions of blocking shares from voting are totally moot. However, in the background are the class action lawsuits -- some of which are already publicly seeking victims -- with the potential to suck out some or all of Ackman's (and Valeant's) profits. These suits will proceed, no matter what, until they either win, settles, or (I doubt it) lose. However, the longer Allergan is keeping the current suit going, with a much higher caliber of legal talent, access, discovery rights, domain expertise, and budget than any of the class action mills are likely to muster, at least initially; the more paved the road becomes for these class action firms in it's wake. In my view, the Class Action mills already have enough of a path paved -- once a Federal judge said "
Serious Questions" and "
Jury" in the same sentence, where before the legal territory was "
uncharted," -- that additional paving won't change much. But, it's still leverage.
And what of the counter-suit? The one where Valeant claims that Allergan's own hands are unclean because they "manipulated" Valeant's shareprice by meeting with large Valeant shareholders and telling them them Valeant's business model is unsustainable leading some of them to ditch Valeant and push it's price down. Well, in prior posts, I described it as laughable (as if those institutional shareholders, with entire research teams, are so impressionable as to be so easily "manipulated"). Well, in his 30 pages opinion, Judge Carter didn't bother dedicating even one sentence to the counter-suit.
And, finally, is the matter of bruised egos and vindication. While DP and the Board shouldn't be using shareholders' (Allergan's) resources to pursue a lawsuit that is past the point of generating any benefit to the shareholders; the shareholders are now in a particularly thankful mood. Not only did DP and the Board sell the company at a price that was above their wildest dreams, a price that has only further escalated subsequent to the deal, to say nothing of twice having the discipline to avoid bad deals (Shire and Salix), but they have done so in the face of intense scorn, doubts, and fury from those same shareholders. And, most abusive of all, was William, Serious Doubts Insider Trader, Ackman. Not forgotten how he referred to DP as an unfit leader with a disabling conflict of interest, to the board as entrenched, to the R&D as wasteful, and in general how he was trashing the company from the moment he arrived. Not that there is a slightest word of apologies from him now -- rather, he is making the rounds of Wall Street and the media as the wonder-kid who should get the credit for putting Allergan "in play." Well, I suppose DP and the Board don't feel particularly hurried to drop this suit. Not just yet.
Wishing everyone a happy holiday weekend.
Dan.
