SANTA ANA, Calif. (CN) - Allergan, which makes Botox and other drugs, sued Valeant Pharmaceuticals and hedge-fund billionaire William Ackman on Friday, claiming they illegally used inside information to mount a $51 billion hostile takeover bid.
Allergan sued Valeant and subsidiaries, Ackman and his hedge fund, Pershing Square Capital Management, in Federal Court.
"This case is about the improper and illicit insider-trading scheme hatched in secret by a billionaire hedge fund investor on the one hand, and a public-company serial acquiror on the other hand," the lawsuit states. "The purpose of the scheme was to generate windfall profits on the backs of uninformed Allergan stockholders and to park a substantial bloc of shares with a stockholder predisposed to support an acquisition proposal. The method the defendants chose was to operate in secret, flouting key provisions of the federal securities laws designed to protect investors from precisely this type of predatory conduct."
Allergan claims that Valeant, a Canadian company, has bought more than 100 companies since 2008, acquiring "a staggering debt load of $17.3 billion" in doing so.
"Valeant's business model depends on constantly making new and larger acquisitions of companies with successful products and strong cash flows and balance sheets, using these acquired assets to offset the debt burdens of the previous acquisitions, and then cutting research and development efforts in order to reap the profits of the acquired companies' revenue streams without incurring expenses for the research and development - before Valeant's entire enterprise eventually collapses for lack of the next acquisition," according to the complaint.
Allegan claims that Ackman, through his hedge fund, "typically tries to make money by acquiring minority stakes in companies, and threatening their boards with proxy contests unless they take steps towards short-term increases in the stock price, often through a sale or other transaction."
The lawsuit continues" "Valeant has now turned its sights on Allergan - a well-established, well-run Orange County company with an impressive cadre of successful products, $1.5 billion in cash on its balance sheet, a very small amount of debt, an A+ investment grade rating, strong cash flows, and steady growth driven by productive research and development and expansion into new markets with its strong sales force. Allergan's admirable financial health and product mix make it an ideal target for Valeant - which would gut Allergan's research and development program to inflate short-term profits and use Allergan's cash and cash flow to service Valeant's mounting debt."
Allergan claims that because of Valeant's "crippling debt," it could not borrow enough money to buy Allergan, so it turned to Ackman, who "found in Valeant an incredible opportunity to buy Allergan stock with advance inside knowledge of a tender offer that was certain to cause the stock price to increase - guaranteeing him a massive return in record time. The federal securities laws, however, prohibit any 'person' from trading in the stock of a potential target company while in possession of nonpublic information about an upcoming tender offer, once the offeror has taken a substantial step toward launching that offer. So, Valeant and Ackman came up with a plan: First, Valeant would take every preliminary step in the tender offer playbook to acquire Allergan, all the while studiously avoiding calling what Valeant was up to a 'tender offer.' Second, Ackman would do 97% of the buying, while strenuously maintaining the fiction that the purchases were by Valeant. Unfortunately for them, the clear requirements of the federal securities laws cannot be so easily defeated by a 'now you see it, now you don't' sleight of hand."
To do this, Allergan claims, Pershing Square formed a shell company called PS Fund 1, "an entity controlled entirely by Pershing Square and in which Valeant later made a relatively miniscule investment. Hidden behind this shell fund, Valeant blatantly tipped Pershing Square regarding Valeant's tender offer, and Pershing Square - through its shell entity PS Fund 1 - embarked on a massive acquisition of Allergan stock on that inside information."
Allergan has been fighting the hostile takeover since it was announced in April.
Allergan claims the defendants violated several sections of the Exchange Act, "by acquiring shares of Allergan while in possession of material nonpublic information relating to Valeant's tender offer."
It seeks rescission of the purchases of shares they acquired unlawfully; wants them to be ordered to make accurate disclosures; to correct their "material misstatements and omissions" in SEC filings; and other relief.
Allergan's lead counsel is Peter Wald, with Latham & Watkins.