Shareholder activism has been dubbed “the new M&A” in recognition of activists’ propensity to drive companies to pursue value-creating transactions. Last month, Bill Ackman’s Pershing Square Capital Management took this trend to a new level when it teamed up with Quebec-based Valeant Pharmaceuticals International to orchestrate a hostile takeover bid for Botox manufacturer Allergan Inc. – a deal valued at over US$45 billion. A joint vehicle formed between Pershing Square and Valeant was able to accumulate a strong toehold in Allergan in advance of Valeant’s bid by amassing nearly 10% of Allergan’s outstanding shares without detection. While US securities law requires investors to disclose holdings exceeding 5%, the joint vehicle used the generous 10-day disclosure window to continue its accumulation.
Pershing Square is no stranger to activism: in 2012, the New York-based hedge fund shook up the board of CP Rail in a move that installed seven new directors in a matter of months. However, Pershing Square’s latest activist maneuver could signal the beginning of an unusual trend – one that sees deep-pocketed shareholders joining forces with strategic purchasers to coordinate takeovers of under-performing companies. Though the approach is novel, its benefits are clear: strategic purchasers can capitalize on hedge funds’ proven willingness to invest millions without extensive diligence, and hedge funds stand to gain hefty returns even if another purchaser steps in to pay a higher price.
Pershing Square’s approach has certainly captured the attention of Canadian media and the M&A world, but the reality is that it could not be easily replicated in Canada. Though Canadian law would not have required disclosure of the 9.7% stake in Allergan (the Canadian disclosure threshold is set at 10%, compared to 5% in the US), strict insider trading regulations are in place that would have made Pershing Square’s strategy more difficult to pursue in Canada. Under Canadian securities law, any investor who learns of a contemplated takeover bid from a potential bidder is prohibited from trading on that non-public information. In order to acquire shares in advance of a bid in the Canadian context, an activist investor may actually have to become a joint bidder to comply with applicable securities law. Industry observers anticipate that Pershing Square’s strategy may spawn similar reform south of the border.