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January 11, 2006
The Not-So-Divine Right of Shareholders?
The NY Times reports today that the SEC plans to accuse hedge fund Perry Capital of disclosure violations in the 2004 takeover of King Pharmaceuticals. This could be an important warning to some of the more aggressive hedge funds.
In a nutshell, Perry bought shares of King in hopes that King would be acquired, which would likely drive up its stock price. Then it bought shares of Mylan Laboratories in hopes that Mylan would buy King. Perry set up a complicated swap so that it had virtually no exposure to changes in Mylan's stock price, which would likely drop if it bought King. Yet Perry retained the voting rights associated with the Mylan stock, allowing it to vote the shares in favor of the acquisition. In other words, Perry had all the voting rights of a normal Mylan shareholder without any of the economic risk.
Incidentally, Carl Icahn, usually a vocal advocate of shareholder rights, took issue with this particular assertion of rights by Perry (Icahn was a Mylan shareholder). Now the SEC seems to be agreeing with him, at least partly. What does this say about the supposedly divine rights of shareholders in this age of shareholder activism?
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