On April 22, 2014, William A. Ackman (“Ackman”), CEO of Pershing Square Capital Investment (“Pershing Square”) and Valeant Pharmaceuticals International, Inc. (“Valeant”) (NYSE: VRX) jointly announced an unsolicited bid to acquire all the outstanding shares of Allergan, Inc. (“Allergan”) (NYSE: AGN) in a transaction valued at approximately $45.6 billion, or $48.30 in cash and 0.83 shares of Valeant common stock. 

Following Ackman’s and Valeant’s announcement, serious questions began emerging whether such a duo was even permitted to make such a bid under current federal securities laws.  After a review of the federal securities laws and U.S. Supreme Court precedent, the answer is unfortunately, yes.  Debate has once again emerged regarding whether the Securities Exchange Commission’s (“SEC”) current rules governing insider trading are strong enough to protect investors, or whether the SEC needs to revamp its insider trading rules to strengthen transparency and access to information to stockholders.

Under the current rules, Pershing Square was able to utilize confidential information to acquire Allergan common shares for its own personal benefit, information that was not available to the market as a whole.  Specifically, Pershing Square acquired 10% or 11.5 million shares of Allergan before other stockholders learned what Ackman knew all along, that Valeant was interested in acquiring Allergan. 

The criticism regarding this move is the disparity and treatment of information that exists between investors such as Ackman—the insider—and all other investors.  Allergan stockholders who sold their shares before Ackman’s announcement of his 10% stake in the Company or the hostile bid by Ackman and Valeant were at an informational disadvantage.  Surely these stockholders deserved to know this information before making those trades.  Not to mention that Ackman acquired 11 million shares relatively cheaply through the market. 

Even more frustrating, however, while Valeant is not permitted—under current federal securities laws—to buy shares of Allergan because of legal restrictions; there is no restriction that prohibits Allergan from sharing this information with certain “insiders,” including Ackman, despite the inherent unfairness. 

While no rule will guarantee complete transparency or equal access to information, one modification that may level the playing field is Congress’ implementing the “Possession Theory” for insider trading.  The Possession Theory would prohibit the use of all confidential information for trading purposes, unless the information is first disclosed to the market.  Regardless of the inherent unfairness, only Congress has the power to change the laws on insider trading.  At the very least, the Ackman/Valeant bid has reopened the long overdue debate whether insider-trading rules should be revised and modified to protect stockholder interests. 

By: David M. Sborz