At what point do “discussions” with a friendly merger party become “negotiations” that are required to be publicly disclosed under the tender offer rules in response to a hostile bid? In a recent settlement of cease and desist proceedings against Allergan in connection with Valeant and Pershing Square’s well-publicized hostile bid for the company in 2014, the SEC found that Allergan violated the disclosure requirements in Section 14(d) and Rule 14d-9 of the Exchange Act when it failed to disclose negotiations that were underway and in preliminary stages with third parties. Specifically, the SEC said Allergan failed to disclose negotiations with a merger party (Company A) that it wanted to acquire to make it more difficult for Valeant/Pershing Square to finance a hostile takeover of Allergan as a much-larger combined company. Allergan also violated the rules when it failed to disclose its preliminary negotiations with Actavis plc, which ended up buying the company in a friendly deal that ultimately ended Valeant’s hostile efforts.
The settlement requires Allergan to cease and desist from committing future violations of Section 14(d) and Rule 14d-9 and to pay $15 million in penalties for the disclosure violations. The Order highlights the risks of failing to make disclosures in this context and provides instructive guidance for determining when discussions with a potential merger party crosses the line.
In response to the Valeant/Pershing Square hostile bid in early 2014, Allergan had filed a Schedule 14D-9 response urging stockholders to reject the bid and also said it was not in negotiations with any bidders. According to the Order, the Schedule should have been amended after “negotiations” began with the third parties because they were material developments that were required to be disclosed under Item 1006(d)(1) of Reg. MA (which is incorporated in Schedule 14D-9). Item 1006(d) requires disclosure of any negotiations underway that relates to, among other things, a tender offer or a transfer of a material amount of assets by the company, including “whether or not [the company] is undertaking or engaged in any negotiations in response to [a] tender offer” that relates to an extraordinary transaction.
As press reports of the negotiations with the third parties swirled, Corp Fin Staff urged Allergan and its counsel to disclose the fact that negotiations were taking place but stated that, per the Instruction to Item 1006(d)(1), disclosure of the identity of the parties and possible terms of the deals were not required to be disclosed if such disclosure would jeopardize continuation of the negotiations. Allergan maintained that no such disclosure needed to be made because it would have jeopardized the deal. After the Staff urged Allergan to disclose any negotiations with Actavis, Allergan disclosed that it had been approached by a third party and provided generic disclosure that the Board continued to consider acquisitions and strategic alternatives among its key alternatives, “that discussions were continuing and may lead to negotiations,” and that it could not provide assurances on the outcome of any discussions regarding transactions that have not been announced.
Specifically, Allergan’s disclosure stated:
In addition, we have been approached by another party regarding a potential merger transaction. Discussions between us and that party have continued and may lead to negotiations. We cannot provide assurance on the outcome of these discussions regarding transactions we have not announced. Our Board has determined that premature disclosure with respect to the possible terms of any transaction might jeopardize continuation of any discussions or negotiations, and accordingly our Board has instructed management not to disclose the possible terms or status of any such transactions or proposals, or the parties thereto, if an agreement in principle relating thereto has not been reached or, upon the advice of counsel, unless and until disclosure may otherwise be required by law. (Emphasis added.)
According to the SEC, that disclosure was not only untimely, it was also inadequate because it “failed to disclose that negotiations were being undertaken or were underway and in the preliminary stages.” More specifically, the SEC found that Allergan’s disclosure was not sufficient, stating that:
- “[Allergan] engaged in negotiations with Company A that were required to be disclosed when Company A made a price counteroffer to Allergan at a higher price. At that time, [Allergan] was undertaking or engaging in merger negotiations, which required [Allergan] to amend its Schedule 14D-9 and disclose the fact of the negotiations to its shareholders,” and
- Allergan “engaged in negotiations” with Actavis that were required to be disclosed by at least October 5, 2014, when Allergan indicated in response to a proposal from Actavis that a proposal with a value of greater than $200 per share would be necessary. By at least that time, [Allergan] was undertaking or engaging in merger negotiations, which required Respondent to amend its Schedule 14D-9 and disclose the fact of the negotiations to its shareholders.
Because it is often difficult to determine when “discussions” become “negotiations” that require disclosure – and violations of the tender offer rules do not require scienter – it is instructive to note the specific facts that were found to cross this line. With respect to Company A, the SEC found that disclosures appeared to be required at the time Company A responded to Allergan’s proposal with a counterproposal that indicated a specific price, but not earlier when Company A agreed to engage in discussions, required a “higher price,” or requested that the bidder “put its best offer on the table.” With respect to the Actavis negotiations, the SEC found that disclosure was required when Allergan countered with a proposal indicating a $200 price floor, but not earlier when Allergan responded that Actavis’ proposal was “insufficient to warrant further discussions.” The Order therefore provides some guidance that once a counterparty responds to a proposal that includes a specific price, range or floor, negotiations will be considered underway and in preliminary stages, and will need to be disclosed.
The Order clarifies that disclosure should be updated where there are material developments to a specific line item. Although the anti-fraud rules apply to Exchange Act disclosure generally, as noted in this recent post on TheCorporateCounsel.net, different reporting regimes may have higher thresholds where specific line items are requested. For example, Allergan also had proxy materials on file in response to Pershing Square’s ongoing proxy contest to replace Allergan’s board. Although the SEC Order cited to the generic disclosures included in Allergan’s proxy disclosure on Schedule 14A, the SEC did not cite to violations or pursue similar proceedings under the proxy rules. This may indicate that disclosure of preliminary merger negotiations with a third party may be triggered at an earlier point in a tender offer (or other transaction where Item 1006(d) applies) than in a proxy contest or statutory merger.