Historically, it has been challenging for target boards in Canada to defend against hostile bids. In 2012 that challenge appeared to grow somewhat, but new rules expected to be proposed by the Ontario Securities Commission (OSC) in 2013 might ultimately provide target boards with new powers to defend against these bids.
In 2012 regulators continued their historical practice of ultimately cease trading shareholder rights plans adopted by target boards.
In Canada, the primary tactic used by target boards to defend their companies against hostile bids is the implementation of a shareholder rights plan, also known as a 'poison pill'. Canadian regulators have historically held that target shareholders have the right to decide whether to accept or reject a hostile bid, and that the only rationale for leaving a shareholder rights plan in place in the face of a hostile bid is to provide the target board with adequate time to solicit competing offers.
Following decisions in Pulse Data (2007) and Neo Materials (2009), it appeared to many commentators that this approach might be evolving. In both decisions the regulators allowed shareholder rights plans to stay in effect indefinitely; taken together, the decisions suggest that in certain circumstances, the regulators might be willing to defer to the business judgement of directors of a target board and allow them to 'just say no' to a hostile bid, particularly where implementation of the rights plan used by the board had been approved by an overwhelming majority of shareholders.
However, since 2009 it has become increasingly clear that Canadian regulators view these decisions as anomalous cases which will generally be distinguishable on their facts. This trend continued in 2012, where regulators in Quebec (Fibrek) and British Columbia (Petaquilla Minerals) relied on the traditional analysis developed in the line of cases before Pulse Data and Neo Materials in support of their decisions to cease trade rights plans implemented in the face of hostile bids, thereby allowing decisions on whether to accept those offers to be made by target shareholders rather than target boards.
Neither of these decisions was surprising and both were in line with the regulatory trend observed in 2010 and 2011. The more interesting development stems from the decision in both cases to cease trade proposed securities issuances by the target board.
In 2012 securities regulators became even more aggressive in preventing target boards from using (or even potentially using) defensive techniques beyond shareholder rights plans.
A secondary tactic available to target boards to defend their companies against a hostile bid is the strategic issuance of securities of the target – for example, to:
- a third party to place a large block of shares in friendly hands;
- a rival 'white knight' bidder to support a competing offer; or
- one or more third parties to rebuff a hostile bidder by diluting the company's existing share capital.
The traditional view has been that the issuance of target securities through a private placement will generally be acceptable as long as there is a valid business purpose for the financing, and the primary purpose of the financing is not simply to use the financing as a defensive tactic. However, in both the Fibrek and Petaquilla Minerals decisions the regulators appear to have adopted a more restrictive approach.
Fibrek warrant offering
The board of Fibrek Inc faced a hostile bid from Resolute Forest Products Inc (formerly AbitibiBowater Inc) at C$1 a share. The target board set out to find a competing bid at a higher price, but was severely constrained in its ability to do so as Resolute was able to secure hard lock-up agreements from approximately 50.7% of the outstanding Fibrek shareholders, ensuring that there was no means for a competing bidder to secure legal control of the company in the absence of additional share issuances. Fibrek's position was complicated by the fact that one of the locked-up shareholders and Fibrek's largest shareholder, Fairfax Financial Holdings Ltd, was also a substantial shareholder of Resolute and stood to benefit from a Resolute acquisition of Fibrek at a favourable price to Resolute.
Despite its unenviable position, the Fibrek board was ultimately able to negotiate a competing offer from Mercer International Inc at a substantial premium to the Resolute offer (ultimately at C$1.40 a share, a 40% premium on Resolute's original offer). As part of the offer, Mercer also agreed to subscribe for 32.32 million special warrants of Fibrek, with each warrant exercisable for a Fibrek share at a price of C$1 a share. The warrant offering ensured that Mercer could potentially obtain over 50% of the outstanding shares and legal control of the company, making the Mercer offer a viable alternative for the non-locked-up Fibrek shareholders.
In February 2012 Resolute requested an order from the Quebec Bureau de Décision et de Révision cease trading the proposed warrant offering, arguing that:
- Fibrek had no pressing need for the financing;
- the warrant offering was abusive to the auction process; and
- the primary purpose of the warrant offering, combined with an unusually high break fee, was to use these measures as a defensive tactic to thwart the Resolute offer.
Somewhat surprisingly, the bureau agreed and intervened to cease trade the warrant offering, effectively denying shareholders any realistic opportunity of tendering to the good-faith competing offer negotiated by their board of directors at a substantial premium.
The bureau's decision was the subject of a protracted dispute, first at the Quebec Civil Court, where the decision was overturned, and ultimately at the Quebec Court of Appeal, where the decision was reinstated (primarily for procedural reasons). What is interesting from the perspective of the regulation of defensive tactics is that a Canadian securities regulator intervened to cease trade the proposed issuance of securities by a target board of directors where there was no other practical way for the target board to secure a superior offer for its shareholders. This decision represents a more aggressive approach than seen in past decisions.
Petaquilla Minerals note offering
In July 2012 Petaquilla Minerals Ltd announced a proposed offering of US$210 million in senior secured notes to help finance capital expenditures related to its properties in Spain and Panama and to pay off two of the company's futures contracts. In September 2012 Inmet Mining Corporation announced its intention to make a hostile bid for all outstanding securities of Petaquilla. Inmet viewed the proposed note offering as a threat to Petaquilla's financial stability and, since the note offering had the potential to include the issuance of convertible securities, believed that the note offering subjected Inmet to a significant dilution risk. Accordingly, when Inmet formally launched its takeover bid, it made non-completion of the note offering a condition of its offer.
Inmet asked the British Columbia Securities Commission to intervene to cease trade both the Petaquilla rights plan and the note offering. As discussed above, the panel's decision to cease trade the rights plan was uncontroversial. The decision to cease trade the note offering was more interesting. The panel accepted that the note offering was in the ordinary course of business, and that there was no evidence that the primary purpose behind the note offering was to use the note offering as a defensive tactic. However, the panel went on to find that, irrespective of the company's primary motive for the financing, the note offering had the potential to deny Petaquilla shareholders the right to tender into the offer, as Inmet had made non-completion of the note offering a condition of its offer. Based on this finding the panel was willing to grant an order cease trading the note offering.
In both Fibrek and Petaquilla the actions taken by the target boards were seen by regulators as constituting (or potentially constituting) inappropriate interference by those target boards in the takeover process. The actions taken by the regulators in both cases appear to reflect the prevailing view of many Canadian securities regulators that the role of directors, while important, should be strictly limited in terms of both time and available tactics, and that ultimately decisions regarding whether to accept a hostile bid should be left to shareholders, not directors.
In 2013 new rules on the use of shareholder rights plans may be coming which give target boards more power.
The OSC has announced that in early 2013 it intends to publish a new proposal for dealing with shareholder rights plans. While the draft rule has yet to be released, the OSC has indicated that it favours an approach that would provide target boards with more latitude to adopt and use shareholder rights plans to defend against hostile bids, while adhering to the general concept that ultimate power to accept or reject hostile bids should rest with target shareholders. Based on the OSC's preliminary comments, under the proposed rule:
- target boards would be required to seek shareholder approval for a shareholder rights plan within 90 days of implementation;
- if rejected during the 90-day window, the plan would be terminated;
- if approved during the 90-day window, the board would be permitted to leave the plan in place until the next annual meeting, where the plan would once again need to be put to a vote, allowing target boards to leave a rights plan in place in the face of a hostile bid; and
- if the board does not put the plan to shareholders for approval during the 90-day window, the plan would be terminated after 90 days.
It is not yet clear how much support these new proposals will receive from other Canadian securities regulators, some of which appear to believe that the existing system works quite well. However, if the effort is ultimately successful and is implemented broadly across Canada, this would be a significant development for M&A practice in Canada, and would likely make the process of completing a hostile bid in Canada more expensive and subject to significantly more uncertainty from the point of view of a hostile bidder.
For further information on this topic please contact Warren B Learmonth or Michael Waters at Borden Ladner Gervais LLP by telephone (+1 604 687 5744), fax (+1 604 687 1415) or email ([email protected] or [email protected]).
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