In January 2017, Allergan Inc. agreed with the SEC that it would pay a $15 million fine for failing to disclose, in its Schedule 14D-9 response to the unsolicited tender offer for the company by Valeant Pharmaceuticals International, that Allergan was engaged in negotiations for possible “white-knight” transactions in the months following Valeant’s offer. The director of the SEC’s New York Regional Office set forth in a press release that Allergan had “failed to fully and timely disclose information about potential merger transactions it was negotiating behind the scenes in response to the Valeant bid.”
Allergan’s Schedule 14D-9 filing. In the Schedule 14D-9 filed by Allergan in response to Valeant’s unsolicited, public takeover bid, Allergan: (i) set forth that the Valeant bid was inadequate; (ii) recommended that its shareholders not tender their shares into the offer; and (iii) set forth that it “is not now undertaking or engaged in any negotiations in response to the [Tender] Offer that relate to or could result in a merger or other extraordinary transaction.”
The SEC’s objections to Allergan’s Schedule 14D-9 disclosure. The SEC had the following objections with respect to Allergan’s disclosures in its Schedule 14D-9:
- No disclosure of discussions with “Company A.” The Schedule 14D-9 was filed in June 2014. Thereafter, Allergan engaged in negotiations with Company A in August and September 2014 for a possible acquisition of Company A. The acquisition would have complicated Valeant’s offer by making Allergan a significantly larger company. The negotiations were terminated by Company A after it conducted due diligence on Allergan. The negotiations with Company A were never publicly disclosed.
- No disclosure of discussions with Actavis plc until the merger agreement was signed. On October 4, 2014, the respective CEOs of Allergan and Actavis discussed a potential acquisition of Allergan by Actavis. The Actavis CEO proposed that Actavis would pay $185–$200 per Allergan share. A series of conversations ensued through October, with Allergan insisting that the price had to be higher than $200, and Actavis making increasing price proposals. On November 3, Allergan disclosed that it had been approached by a party about a possible transaction, but provided no other information. On November 5, Allergan and Actavis entered into a confidentiality and standstill agreement, and Allergan permitted Actavis to conduct due diligence. The parties at that time understood that Actavis was proposing $210–$215 per share and that Allergan wanted more than $215. On November 6, Allergan disclosed that it was “in discussions” concerning a possible merger that “may lead to negotiations.” On November 17, Allergan and Actavis announced that they had signed a merger agreement at a price of $219 per share of Allergan. Importantly, as was noted in the SEC Order, after rumors about merger discussions with Actavis came to the SEC staff’s attention, the staff warned Allergan on September 23 that “to the extent that [Allergan] was engaged in merger negotiations, Schedule 14D-9 required those negotiations to be disclosed.” Thereafter, the SEC staff had made repeated requests to Allergan to make timely disclosure of any ongoing discussions.
Companies generally do not have an affirmative obligation to disclose white-knight discussions. Companies engaged in discussions or negotiations with respect to a possible transaction generally do not have a disclosure obligation. However, a disclosure obligation arises under the following circumstances:
- Schedule 14D-9 filing is required. If a tender offer is received by a company, it has an obligation to disclose, in the Schedule 14D-9 that is required to be filed in response to the tender offer, discussions or negotiations conducted in response to the tender offer.
- Inconsistent past statements must be corrected. In the case of a company receiving a bid that is not a tender offer, the company has an obligation to disclose such discussions or negotiations if the company has made inconsistent statements in the past that must be corrected—that is, affirmative statements made in the past that the company is not in discussions about a merger.
- Agreement has been reached on all material deal points. In some cases, an obligation to disclose discussions or negotiations may arise when all of the material deal points for a transaction have been agreed upon between the company and the other party.
Allergan’s disclosure obligation arose because it had received a tender offer. Disclosure issues arose for Allergan only because it was subject to the Schedule 14D-9 rules. The Schedule 14D-9 rules applied only because Allergan had become subject to a tender offer. In the case of a tender offer for a company, Item 7 of Schedule 14D-9 requires that the company disclose “negotiations” that are conducted “in response to [the] tender [offer]” and that relate to an “extraordinary transaction” (including a merger or acquisition). Rule 14D-9(c) requires that the company amend the Schedule if any material change occurs.
Practical considerations with respect to Schedule 14D-9 disclosure of negotiations. Schedule 14D-9 does not require disclosure of discussions with respect to a possible transaction unless they rise to the level of “negotiations.” When discussions become “negotiations” depends on the facts and circumstances, including, for example, whether there has been back-and-forth between the parties on price of a nature that suggests that a deal has been, or is very close to having been, reached. Generally, a company prefers to engage in a process that does not lead to its being required to make early disclosure of possible white-knight discussions. Premature disclosure could result in the company becoming irretrievably “in play” before it has made a final decision about selling the company; could lead to a potential white knight losing interest in a transaction; and/or could require disclosure, as an update, that would not otherwise have been required.
The following potentially distinguishing features of the Allergan situation may have influenced the outcome:
- SEC disclosure warnings. As noted, the SEC set forth in its Order that Allergan had failed to make timely disclosure “despite repeated requests” from the SEC staff that it make “appropriate disclosures.”
- Extensive pricing discussions within a narrow range. Unlike the typical case where price discussions occur in a very short timeframe just prior to execution of the merger agreement, it appears in the Allergan-Actavis discussions that there was extensive back-and-forth on price well in advance of execution of the merger agreement. Moreover, those discussions were within a relatively narrow range, suggesting that real negotiations had taken place.
- Lengthy process, with unusual level of shareholder engagement. The lengthy duration of Allergan’s process, extending over many months, made leaks and rumors about the process more likely. Further, the extensive engagement with shareholders—by both Allergan on the one hand, and Valeant and its shareholder activist co-bidder on the other hand—in connection with proxy contests on various issues relating to Valeant’s bid increased the visibility of the process to the shareholders, the market, and the SEC, perhaps heightening the disclosure issues.