Yesterday I discussed the history of Valeant Pharmaceuticals, and mentioned its unsuccessful effort to acquire Allergan.
Valeant never did acquire Allergan, but its effort made some fascinating law.
Some of the key questions arose from the fact that Valeant was acting in concert with a hedge fund manager, Pershing Square. So closely in concert, indeed, as to raise the question whether what was going on amounted to insider trading as SEC rules understand it? Pershing Square acquired a 9.7% stake in Allergan during the period of this collaboration, and it is was willing to vote those shares in favor of ousting the company directors that were resisting the takeover attempt.
Allergan responded with a lawsuit, asking that Pershing Square be enjoined from voting its shares giving the "likelihood" that this would be deemed to be insider trading.
Was there such a “likelihood” and would that have supported a preliminary injunction?
The U.S. District Court for the Central District of California court applied what is known as the Winter test for preliminary injunctions; named after a 2008 Supreme Court decision, Winter v. NRDC. The test involves four elements: a court will grant such an injunction if there is (1) a likelihood of success on the merits; (2) a likelihood of irreparable harm to the movant; (3) a balance of equities in favor of the movant; and (4) the interest of the public.
After working through each of those elements, the court granted the injunction “in part,” and in a way that allows each party to claim victory.
The take-away from all of that for merger arbs was (as I wrote for AllAboutAlpha at the time) that a co-purchasing tactic "in the lead-up to a tender offer may well be suspect in the eyes of many federal judges, and ought to be initiated if at all, only with that caution in the front of one's mind."
The photo above, by the way, is of William Ackman, the chief executive of Pershing Square Capital Management.