The Allergan Inc./Valeant Pharmaceuticals International Inc./Actavis PLC saga was more unwieldly and complicated than almost anything we've seen in Canada. Maybe that's not surprising, but neither is it just a matter of the U.S.'s affinity for the spectacular. Think of the difference between Canadian and American takeover battles as being like Thanksgiving: Although both countries like to sit down and argue over turkey, we like to do it at different times of year and with very different side dishes.
The most noteworthy part of Valeant's bid for Allergan was Valeant's partnership with Pershing Square Capital, Bill Ackman's activist hedge fund, best known to Canadians for his role in the contested battle for control of Canadian Pacific Railway Ltd. This strategy involved a division of labour: Valeant and Pershing formed a company and reached an agreement where Pershing bought 9.7 per cent of Allergan and ran the bid process. Pershing's upside would be the increase in Allergan's share price as the bid process raised its market value. Ultimately, this caused Allergan's board to negotiate a friendly deal with Actavis. For their trouble, Pershing netted over $2-billion (U.S.) and Valeant got about $400-million, more than its net income for the year. It will be a good Thanksgiving in the Ackman household.
Now, one question you might ask here is: Why did Valeant bring Pershing along for this ride? Think about recent hostile bids in Canada. When HudBay Minerals Inc. went after Augusta Resource Corp., it owned 16 per cent of Augusta's shares and, had another bidder emerged, HudBay would have earned the merger premium itself.
The answer is that the American legal system is deeply unfriendly to hostile bidders. We often hear about America's "just say no" takeover regime, but the Valeant-Allergan affair is a concrete example of how this regime actually functions. Hostile takeovers in the United States are very difficult for two reasons: One, boards can almost indefinitely maintain shareholder rights plans, or poison pills; and two, boards of directors are very hard to remove.
In the United States, because courts will only force boards to redeem poison pills in very specific circumstances, boards use the pill to indefinitely block a bid. This problem is compounded by the fact that American boards are "staggered," meaning that only half the board comes up for election each year. The upshot is that it will take at least a year for an acquirer to replace the board with pro-acquisition directors and redeem the pill.
Sometimes, as in Allergan's case, the company has a bylaw allowing 25 per cent of Allergan shareholders to call a special meeting and force an election. But even this isn't a straightforward process. In the U.S., the voting pill – Canada's hot new securities law trend – is old hat, so it's likely that a would-be acquirer would come up against one, and may have difficulty co-ordinating with other shareholders.
In Canada, acquirers face almost none of these issues: Regulators cease-trade poison pills after a brief period (or, if the new Canadian Securities Administrators proposal goes through, bids will be open for a mandatory period); Five per cent of shareholders can always call a special meeting; and voting pills are of questionable legal viability.
So here's another question. Could Valeant, a company that does a lot of acquisitions but actually, you know, operates companies, be expected to competently navigate its way through this strategic and legal thicket? "Unlikely" is a safe answer. So, why not split up the work and have Pershing, who are experts in this kind of thing, do it? And so they did.
Over the course of the deal, Pershing had to furtively set up an acquisition vehicle, tried to call a fake shareholder meeting to avoid triggering the poison pill, sued to challenge the validity of the poison pill, settled that suit, and forced Allergan into a special meeting in December which gave Pershing time to beat the bushes and find another bidder who came out with a blockbuster price. Oh, and help Valeant defend an insider trading lawsuit.
That is a lot of work and a lot more work than a hostile bidder would have to go through in Canada. But it's also a lesson.
I spoke with Riyaz Lalani of Bayfield Strategy about this deal the other week , and he made an interesting observation – no matter what the legal regime, companies will always try to buy other companies but that urge may have to be channeled through different avenues. The Allergan-Valeant-Actavis saga is a great example of this.
In Canada, Pershing would likely never have been involved, as Valeant would have directly appealed to Canada's regulators, who would have cease traded Allergan's poison pill. Instead, the battle was fought through proxy fights and lawuits. This makes hostile acquisitions in the U.S. much more expensive and difficult to execute, but it may also give shareholders bigger merger premia and better terms (like in Halliburton Co.'s just announced acquisition of Baker Hughes Inc.).
I've argued before that Canada's proposed new rules represent progress over both the current Canadian and American hostile takeover regimes. Given the mandatory auction period and the fact that shareholders have the ultimate choice whether to tender, it seems to me that there still won't be as large a role for activists in Canada as there is in the United States.
Though, as we've seen, there's still plenty for activists to do in Canada. So even without Valeant type partnerships, they'll have no trouble putting turkey on the table for Thanksgiving.
Editor's note: A previously published version of this article incorrectly referred to Pershing Square Capital's battle for control of Canadian National Railway Co. The battle was over Canadian Pacific Railway Ltd.
Adrian Myers