A federal judge in Trenton, New Jersey, ruled that potential insider-trading claims stemming from Valeant Pharmaceuticals' failed takeover of Allergan Inc. are covered under a directors and officers, or D&O, policy.

Calling his ruling "a straightforward application of unambiguous contract terms," U.S. District Judge Michael Shipp adopted a report by Special Master Douglas Wolfson, which recommended granting Valeant's motion on the pleadings.

In his ruling, Shipp rejected the arguments of Allianz Global Risks US Insurance Co., which said the claims at issue do not meet the policy definition of "securities claims."

U.S. District Judge Michael Shipp of the District of New Jersey. Courtesy photo

Shipp wrote that Valeant was a Canadian manufacturer of drugs and medical devices that acquired smaller companies, rather than develop its own products.

Valeant begin an endeavor to buy Allergan in 2012, but could not afford the $37 million cost, so it reached a deal with a hedge fund company called Pershing.

The plan called for Pershing to acquire a portion of Allergan, then use its shareholder status to vote out directors of that company who were hostile to Valeant's overtures. In exchange, Valeant would give Pershing advance notice of its intentions to buy Allergan, so that Pershing could buy Allergan shares cheaply, and later enjoy windfall returns, Shipp wrote.

By April 21, 2014, Pershing obtained 9.7% of Allergan, meaning that it had to disclose its position to the U.S. Securities and Exchange Commission. That day Valeant and Pershing disclosed their plans to buy Allergan with a combination of cash and Valeant stock. However, in November 2014 Allergan announced plans to merge with another drug company, Actavis, at a much higher price than what Valeant offered. Soon after the merger was announced, Valeant was hit with a class action by former Allergan shareholders who had sold their shares without knowing about Valeant's deal with Pershing.

The former shareholders claimed in the suit that, had they known the Valeant offer was forthcoming, they would not have sold their shares at such low prices. The plaintiffs claimed that selectively communicating nonpublic news of a tender offer to third parties and trading on that information violate a statute known as the Williams Act.

The Policies

Valeant had $10 million in coverage with AIG Insurance Co. of Canada and $140 million in excess coverage from various other insurance companies. The policies include coverage for securities claims, and Valeant claimed that the shareholders' claims fall under that category, but the insurance companies disagreed. Valeant sued various insurance companies for breach of contract.

Shipp sent the case to Wolfson, a former state Superior Court judge, now with The Weingarten Law Firm in Piscataway, New Jersey, who ruled in favor of Valeant. Wolfson found that the plaintiffs in the underlying case qualify as "any person or entity" in the policy language, that the claims are related to Valeant securities, and the claims in the suit pertain to an offer to sell Valeant securities.

Douglas Wolfson/courtesy photo

"Both the plaintiffs and defendants have articulated well-reasoned oral and written arguments concerning whether the complaints alleged by the Allergan plaintiffs constitute 'securities claims' as defined under the policies at issue. Based upon these comprehensive submissions of the parties, their cogent oral arguments, and my own analysis of the applicable claims and statutory authorities, I am persuaded that Valeant's undisclosed tender offer stems from the 'purchase or sale or offer or solicitation of an offer to purchase or sell Valeant securities," Wolfson wrote.

"Thus, while the cross-moving defendants have forcefully argued that the Allergan plaintiffs' claims arise from the purported conspiracy with Pershing and its having engaged in insider trading, I am firmly convinced that Valeant's attempted takeover of Allergan is inescapably intertwined with, is related to, and arises from Valeant's undisclosed tender offer to exchange (or sell) its stock for shares of Allergan. Accordingly, my recommended disposition of these cross-motions for judgment on the pleadings is that the Allergan plaintiff's claims indeed constitute 'securities claims' as defined by the policies and thus are covered claims under the policies at issue," Wolfson wrote.

Valeant was represented by McCarter & English and Proskauer Rose. John Failla of Proskauer Rose said he was not authorized to comment. Suzanne Midlige of Coughlin Midlige & Garland in Morristown, who represented Allianz Global Risks, did not return a call.

AIG Insurance of Canada, the original defendant in Valeant's suit, entered into a confidential settlement in the case.

Valeant, headquartered in Laval, Quebec, with U.S. headquarters in Bridgewater, New Jersey, changed its name in 2018 to Bausch Health.