Pershing Square (PSHZF) announced Friday it settled a lawsuit claiming it and Valeant (VRX) had profited from insider trading in shares of Allergan (AGN):

Pershing Square Holdings, Ltd. (PSHZF) (LN:PSH) (NA:PSH) today announced that it has reached an agreement in principle, subject to court approval, to settle lawsuits concerning the attempted acquisition of Allergan plc. (“Allergan”) by Pershing Square Capital Management, L.P. (“Pershing Square”) and Valeant Pharmaceuticals International, Inc. (“Valeant”) in 2014, which were filed in the Central District of California (Anthony Basile et al v. Valeant Pharmaceuticals International, Inc. et al. and Timber Hill LLC v. Pershing Square Capital Management, L.P. et al) …

“We continue to believe the case had absolutely no merit,” said Pershing Square CEO Bill Ackman. “We decided, however, that it was in the best interest of our investors to settle the case now instead of continuing to spend substantial time and resources pursuing the litigation.”

The agreement ends a saga that began after hedge fund manager Bill Ackman’s Pershing Share netted a paper gain of over $2 billion. VRX fell nearly 2% on the news while PSHZF rose nearly 2%.

The Situation

I assumed VRX could potentially succumb to its high debt load, and litigation related to AGN insider trading and its relationship with specialty pharma Philidor. A few large AGN shareholders claimed that Ackman traded on insider information pursuant to Valeant’s hostile takeover attempt of Allergan. AGN investors claim that had they known about the pending offer they might have held onto their investments and earned more after AGN shares spiked on the bid. U.S. District Judge David Carter denied a request by Ackman and Valeant to discard the claims, setting up a potential jury trial in January.

The settlement calls for a payment of $290 million to the claimants. Pershing Square will pay $193.75 million and Valeant will pay $96.25 million. I understand that Pershing Square had reserved $75 million for the case. Though Pershing Square could experience a cash outflow, the hit to income would equate to the payout less the $75 million reserve. Valeant’s cash outflow would be $96 million, but its hit to income would be net of any legal reserves pursuant to the settlement.