Blacklisting Icahn: How Some Drug Companies Keep Out Activists

Print 18 November 2015
Miles Weiss / Bloomberg Business

When Concordia Healthcare Corp. agreed to issue a 14 percent stake to a private equity firm, the Canadian drug manufacturer tucked into the deal several layers of protection from shareholder activists.

The agreement in October bars the buyout firm, Cinven, from transferring or reselling its Concordia shares to a list of almost 60 activist firms, including those run by Bill Ackman, Carl Icahn, and Dan Loeb, according to a regulatory filing. To make sure it didn’t miss anyone, Concordia also blocked Cinven from transferring its shares to anyone on the SharkWatch 50, a roster of the largest activists compiled by FactSet Research Systems Inc.

Since last year, amid a torrent of drug industry mergers, at least three other pharmaceutical companies have taken similar precautions against activist firms when using their shares as currency for an acquisition. These bans have gone largely unnoticed by the activist managers, who say shareholders may be harmed when a company limits who can buy its shares.

“I’ve never heard of such a thing,” said Stephen Griggs, chief executive officer of Smoothwater Capital Corp., a Toronto-based activist firm which wasn’t blacklisted by Concordia. “A restriction on who can buy the stock really just smacks of retrenchment by the management team and the board.”

Companies have long put limits on the resale of newly issued shares, in part by requiring recipients to observe mandatory waiting periods or to refrain from sales that would help an investor attain a stake of five percent or more. What’s new is the singling out of a class of investors or actually naming the people or firms that aren’t allowed to buy shares, said Eric Krautheimer, an attorney at Sullivan & Cromwell LLP who helped represent Teva Pharmaceutical Industries Ltd. in a deal that restricted activists.

Marija Mandic, a Concordia spokeswoman, said the ban gives the company some needed sway in future sales of its shares. It expires when Cinven’s stake falls below 1 percent.

“It’s standard market practice to include such a clause when you are selling a sizable stake,” said Mandic. “We would want to have some control over who they would decide to sell to.”

Pershing Square Attacks

Drug companies began using this tactic after Pershing Square Capital Management, the activist firm run by Ackman, teamed up with Valeant Pharmaceuticals International Inc. last year in an unsuccessful bid to acquire Allergan Inc., the maker of the Botox anti-wrinkle treatment. Pershing Square was able to amass a stake of almost 10 percent in Allergan before their takeover plans became public that April.

Six months later, Loeb’s Third Point LLC called for the breakup of biotech giant Amgen Inc., which counted the hedge fund as an investor.

With drugmakers under attack, Mylan Inc., now known as Mylan NV, included a no-activist clause in a July 2014 agreement to buy a generics pharmaceutical business of Abbott Laboratories for 110 million common shares.

This year Teva, an Israeli drugmaker, included a ban on resales to activists when it agreed in July to purchase Allergan’s generic business for almost $41 billion in cash and stock. So did Endo International Plc as part of a deal struck in May to buy Par Pharmaceutical Holdings Inc. from TPG Capital, the private-equity firm co-founded by David Bonderman and Jim Coulter, for $8.1 billion of cash, stock and assumed debt.

Goldman Advises

Spokespeople for Endo and Mylan didn’t respond to requests for comment.

The restrictions on resales to activists date back to at least 2012, when Walgreen Co. bought a 45 percent stake in Alliance Boots GmbH from KKR & Co. for $6.7 billion in cash and stock. As part of the deal, Walgreen included a provision that barred buyout firm KKR from transferring the shares it received to activists if the resale would give them a stake of 5 percent or more.  

Such precautions didn’t insulate Walgreen from outside pressure. Jana Partners, the activist hedge fund run by Barry Rosenstein, won at least two board seats at the pharmacy chain in September 2014, despite holding a stake of little more than one percent. Walgreen last year bought the remaining 55 percent of Alliance Boots to form Walgreens Boots Alliance Inc.  

The restriction is “a reflection of people not wanting to give activists an easy way to get a large chunk of the company,” said Krautheimer of Sullivan & Cromwell. “I don’t think it’s anything unique to the drug industry.”

Goldman Sachs Group Inc., which has defended corporations from activist shareholders, served as adviser to Walgreen on the KKR deal and four of the seven other companies that have disclosed no-activist clauses since then. Elizabeth Arden Inc. , CF Industries Holdings Inc., Rentrak Corp. and Concordia hired Goldman Sachs for deals since 2014 that involved such restrictions.

Michael Duvally, a spokesman at Goldman Sachs, declined to comment.

Activists Unaware

There are no laws preventing companies from using the resale restrictions, said Marc Weingarten, co-chair of the global shareholder activism group at Schulte Roth & Zabel, a New York-based law firm.

Executives at three well-known activist firms, while declining to be identified, said they weren’t aware that companies were placing restrictions on their activities.

The pharmaceutical industry has been the most active sector for mergers this year, with deals valued at almost $554 billion announced or completed to date, up from $403 billion at the same point in 2014, according to data compiled by Bloomberg.

After Toronto-based Concordia reached a deal in September to buy the drug business from Cinven for 2.6 billion pounds ($3.99 billion) in cash and stock, the two sides entered into a “governance” agreement last month that lays out the resale restrictions to activists.

Concordia, Endo, Mylan and Teva all define an activist as a person or firm who has started a proxy contest against them, called a meeting of their shareholders, or made a hostile bid for their stock within the past two years.

Naming Activists

Concordia is the only of the four firms that included its own list of activists that are off limits for purchasing their shares, according to the filings. Its governance agreement also contains a “White List” of investors, primarily public pension and sovereign wealth funds, to which Cinven is allowed to sell its Concordia shares through a block transaction. They include the Canada Pension Plan Investment Board, China Investment Corp., the Kuwait Investment Authority and the Alberta Heritage Savings Trust Fund.

Concordia may be taking extra precautions because it’s based in Canada, where 
U.S. activists have taken advantage of shareholder-friendly securities laws to target a number of local companies, including Agrium Inc., Telus Corp., Lions Gate Entertainment Corp. and Canadian Pacific Railway Ltd. Compared to the U.S., Canada makes it relatively easy to call a shareholder meeting to oust the board and to build up a stake without being detected, said Wes Hall, chief executive officer of Kingsdale Shareholder Services in Toronto.

“There is a lot of vulnerability to activists in this market,” said Hall.

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