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SEC Brings Enforcement Action for Disclosure Failures During Merger Talks

by   |   January 20, 2017

The SEC announced that Allergan Inc. had agreed to admit securities law violations and pay a $15 million penalty for disclosure failures in the wake of a hostile takeover bid.

The SEC’s order finds that Allergan failed to disclose in a timely manner its negotiations with potentially friendlier merger partners in the months following a tender offer from Valeant Pharmaceuticals International and co-bidders in June 2014.  Allergan publicly stated in a disclosure filing that the Valeant bid was inadequate and it was not engaging in negotiations that could result in a merger.  It was required to amend the filing if a material change occurred.  According to the SEC’s order, Allergan never publicly disclosed material negotiations it entered with a different company that would have made it more difficult for Valeant to acquire a larger combined entity.  And after those negotiations failed, the investing public wasn’t informed that Allergan entered into merger talks with Actavis, the company that ultimately acquired Allergan, until the announcement that a merger agreement had been executed.

A public company that is the subject of a tender offer has an obligation to express a position on the tender offer in a Schedule 14D-9. See Exchange Act Rules 14d-9 and 14e-2. Item 7 of Schedule 14D-9 (incorporating Item 1006(d) of Regulation M-A) requires the subject of a tender offer to provide certain disclosure, as elaborated further herein, if it enters into “negotiations” “in response to the tender offer” that relate to an “extraordinary transaction,” including a merger or acquisition transaction. After a Schedule 14D-9 is filed, Rule 14d-9(c) obligates the filer to amend the Schedule 14D-9 if any material change occurs.

According to the SEC, Allergan failed to disclose its negotiations with Actavis in a timely manner despite repeated requests from staff of the Commission’s Division of Corporation Finance, referred to as Corp. Fin. Following news reports of rumors that Allergan was in talks with potential friendly merger partners, Corp. Fin. staff urged Respondent to make appropriate disclosures. Specifically, on September 23, 2014, Corp. Fin. staff informed Allergan’s counsel that, to the extent that Allergan was engaged in merger negotiations, Schedule 14D-9 required those negotiations to be disclosed. Corp. Fin. staff reiterated this message in subsequent communications with Allergan’s counsel.