SEC Chair Mary Jo White
Photograph by Andrew Harrer — Bloomberg/Getty Images
By Stephen Gandel
March 19, 2015

The Securities and Exchange Commission hasn’t lost its patience with activist investors. But it is getting close.

In a speech this week to a conference of lawyers and bankers on mergers and acquisition sponsored by Tulane University, SEC Chair Mary Jo White, warned that hedge funds and others who push for new board members and other changes at companies need to watch what they say.

“It is not my intent to threaten the vibrancy of anyone’s practice,” White said, adding that she’s worked as a private sector lawyer, too. “But I do think it is time to step away from gamesmanship and inflammatory rhetoric that can harm companies and shareholders alike.”

White specifically addressed hedge fund activist Bill Ackman, although not by name, and his ultimately failed co-bid with drug company Valeant to take over rival Allergan. It was the first time White had addressed the deal or ones like it.

Ackman’s hedge fund bought shares of Allergan in a so-called toe-hold deal, before Valeant publicly announced its buyout offer, which Ackman knew was coming. Last year, a judge said there were serious questions as to whether Pershing and Valeant had broken insider trading rules but that it was up to the SEC to decide on these matters.

Ackman and Valeant eventually gave up on buying Allergan, which was bought earlier this year by another pharmaceutical rival Activis. Ackman has also found himself in hot water surrounding a market manipulation investigation involving lobbyists and consultants he hired related to high-profile bet against Herbalife. White didn’t address Herbalife.

But the SEC chair did seem to discourage others from crafting shareholder referenda similar to what Ackman and Valeant attempted with Allergan. The two players had called for shareholders to vote in an informal referendum on the deal, rather than a formal tender offer. White worried that referenda could go under the radar and get around SEC rules. She said the SEC would look closely at similar proposals in the future.

The problem is that it’s really hard to make tender offers in toe-hold deals and not get accused of insider trading, which is why Ackman and Valeant avoided it. Insider trading rules are looser with informal shareholder referendums. White did not address the inconsistencies in the insider trading rules or the tender offer catch-22. Nevertheless, activists, you’ve been warned about toe-holds.

In general, White said there was an active debate about whether activists are good for the market and the economy, and that the SEC wasn’t going to take a side on the matter. But White said that activist investment funds now have $120 billion under management, up 30% from 2014. That’s a good sign that at least investors think activism is a good thing.

Editor’s note: A previous version of this story suggested that Bill Ackman’s Pershing Square Capital took a less than 5% stake in Allergan to avoid issuing a filing with the SEC. In fact, Ackman’s firm took a 9.7% stake in the firm and, as required, filed a disclosure with the SEC. Also, at present, Ackman has not been subject to allegations that he manipulated shares of Herbalife. Rather, consultants and lobbyists Ackman hired have been involved in such investigations.

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