In an unusual twist on the activist investing playbook, Paul Singer’s Elliott Management was able to talk its way into receiving a higher price for a bonds than other bondholders in a company that was the subject of takeover battle. Problem is, this may have violated German law.

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Elliott accused of receiving higher price in takeover battle than other investors

The Wall Street Journal is reporting that when drug marketer McKesson Corporation (NYSE:MCK) purchased German competitor Celesio AG (ETR:CLS1) (FRA:CLS1) it paid more to Elliott Management than other bondholders.  The report says that Elliott was paid €31 for convertible bonds while other bondholders were paid just €23.50 in the takeover bid of the public company.

“Under German takeover law, minority shareholders are entitled to receive the minimum price paid to all other shareholders,” the hedge fund Magnetar, who brought a lawsuit on the issue, was quoted as saying.  If successful, the Magnetar lawsuit could result in Celesio bond and stock holders receiving an additional €370 million from McKesson Corporation (NYSE:MCK) because they did not receive equal treatment in the takeover bid.

New activist strategy?

Many activist investing strategies focus on influencing the board of directors to take a certain action that results in the investor receiving a higher price for their shares.  Rather than persuade the board of directors or shareholders in a takeover battle, however, the Elliott approach appears to turn the tables on the acquirer and extracted a higher price for their holdings than the general takeover price.

It all started when earlier this year Elliott Management built a large position in Celesio AG (ETR:CLS1) (FRA:CLS1) stock and two types of convertible bonds in the company. The bonds delivered an interest payment to the bond holder but could also be convertible into stock.

When McKesson Corporation (NYSE:MCK) bid €23.50 per share for the stock, Elliott threatened to block the deal, which was valued at €6 billion. McKesson was then faced with a choice: do battle with one of the most proficient activist hedge fund managers in the world or reach some sort of agreement.  The deal reached, a lawsuit from hedge fund Magnetar alleges, is that McKesson was to pay a higher price to Elliot than it did to general investors.

The Magnetar lawsuit alleges that McKesson Corporation (NYSE:MCK)’s actions in regards to Elliot payments “were specifically aimed at evading the minimum price rule in German takeover law.”

San Francisco-based McKesson Corporation (NYSE:MCK) was up nearly 1.60% in early morning trading.