In a story that would likely make Marty Lipton’s lips whet, it seems that drug companies have a new tactic to shoo away activists.
According to a November 16th article from Bloomberg Business, pharmaceutical firms have begun banning the resale of stakes sold as part of M&A activity to activist fund managers. This extension of the concept of a stock “lock up” is now being applied to activist firms to make it more difficult for them to acquire shares and establish a stake big enough to qualify for proxy access.
For example, Concordia Healthcare Corp. recently issued a 14% stake to a private equity firm, and the Canadian drug maker made sure that the shares it sold would not be made available to shareholder activists.
The PE firm, Cinven, may not transfer or resell its new Concordia shares to a list of almost 60 activist firms (such as activist fund firms run by Bill Ackman and Carl Icahn) based on information gleaned a regulatory filing. Then to make double sure, Concordia also specified that Cinven can sell its shares to anyone on the SharkWatch 50, a list of major activists maintained by FactSet Research.
Bloomberg’s Miles Weiss notes that over the last year or so, at least three other pharma companies have included similar bans against share sales to activist firms when using company shares to make an acquisition.
Statement from Concordia
Marija Mandic, a Concordia spokesperson, explained the ban gives the firm some necessary input into future sales of its shares. The restrictions expire when Cinven’s stake drops under 1%.
“It’s standard market practice to include such a clause when you are selling a sizable stake,” Mandic claimed. “We would want to have some control over who they would decide to sell to.”
More on pharma companies barring stock sales to activists
Analysts point out that companies have been putting limits of various sorts on the sale of newly issued shares for a long time, sometimes by making buyers observe mandatory waiting periods or that prohibit sales that would help an investor attain a stake of 5% or greater. According to Eric Krautheimer, an attorney at Sullivan & Cromwell LLP who represented Teva Pharmaceutical Industries in another deal that restricted activists, it’s the singling out of a class of investors or specificlly naming the people or firms that can’t buy shares.
“I’ve never heard of such a thing,” commented Stephen Griggs, the CEO of Smoothwater Capital Corp., a Toronto activist fund that was not blacklisted by Concordia. “A restriction on who can buy the stock really just smacks of retrenchment by the management team and the board.”
Also of note, drug manufacturer Mylan included a no sales to activists clause in a July 2014 agreement to buy the generics pharmaceutical business of Abbott Laboratories in exchange for 110 million common shares.
Israeli pharma firm Teva also insisted on a ban on sales to activists when it agreed to buy Allergan’s generic business for almost $41 billion in cash and stock this summer. Endo International did the same thing as part of a deal completed this May to acquire Par Pharmaceutical Holdings from TPG Capital, a PE firm co-founded by David Bonderman and Jim Coulter, in an $8.1 billion of cash, stock and debt deal.
Activist hedge funds having summer and fall
As reported last month by ValueWalk, activist funds have been getting hammered for the last several months, with an average decline of of -10.92% from June through September. The -5.06% average loss this September was largest monthly loss since September 2011.
Of note, activist funds went on to return -4.26% for all of 2011, then went on a tear, up by 14% in 2012 and 20% in 2013.