ISS urges Allergan to give investors vote, questions credibility

By Reuters

Oct 02, 2014 02:40 AM EDT

Prominent investor shareholder advisory firm ISS called on Allergan Inc to give its shareholders a chance to vote on any large, buyout-blocking acquisitions and said the company's board faced a credibility problem, according to a report seen by Reuters.

The ISS report comes as Allergan's largest shareholder, hedge fund Pershing Square Capital Management, is urging the Botox maker to sell itself to rival Valeant Pharmaceuticals International Inc.

ISS' pronouncements are watched by institutional investors including prominent mutual funds. This report could turn up the heat in the bitter fight over Allergan's future, industry analysts and investors said.

Allergan has repeatedly rebuffed Valeant's buyout proposals. Instead, Allergan is seeking to buy Salix Pharmaceuticals for cash, a deal would not require a shareholder vote, people familiar with the matter have said.

A cash acquisition of Salix, which has a market capitalization of nearly $10 billion, would make Allergan too big and expensive for Valeant or another buyer, effectively defending the company from an unwanted takeover.

"To point out that the board has authority to approve an all-cash acquisition without shareholder approval is to point out the irrelevant: the question is not what the board can do, but what the board should do," ISS said in a report sent to clients on Wednesday.

ISS said it is unusual for large shareholders to express concerns about a board's stewardship so publicly. Industry analysts and investors said the ISS report itself, which does not make any specific recommendation, is also unusual.

"The board's public response to this highly unusual airing of concern from its major shareholders has been only to reiterate generically its 'focus' on 'enhancing stockholder value' with nary a word addressing the more crucial question raised by each of those major shareholders," ISS said.

Investors owning more than 35 percent of Allergan shares have asked the company to call a special meeting, hoping to replace most of its directors with people receptive to Valeant's bid. Allergan set a special meeting for Dec. 18.

"When more than a third of outstanding shares consent to call a special meeting ... there's credible reason to believe that the board should give shareholders a real and binding choice between the buyout offer and the new strategic plan assembled in response," ISS said.

On Friday, No. 2 shareholder T.Rowe Price urged Allergan to hold off on major acquisitions before the Dec. 18 meeting.

T.Rowe also criticized the board, adding its voice to other Allergan shareholders including Pershing Square, Jackson Square Partners and Pentwater Capital Management, who combined own nearly a fifth of outstanding shares. They say hastily striking a large acquisition would thwart takeover offers for Allergan.

These investors make a "credible argument that the board should give shareholders a deciding vote on any large, buyout-blocking acquisitions," ISS said, adding that the board should not take unilateral action that would drive away potential bidders.

Billionaire investor William Ackman's Pershing Square has been working with Valeant for months on a plan to buy Allergan.

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