The Ontario Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan (Commissions) recently published reasons for their order on December 22, 2017 in response to litigation relating to the hostile take-over bid by Aurora Cannabis Inc. (Aurora) for CanniMed Therapeutics Inc. (CanniMed). Their reasons are the first by a Canadian securities regulator regarding a shareholder rights plan under the new take-over bid regime adopted in May 2016 (New Bid Regime).
The New Bid Regime modernized the rules governing Canadian take-over bids and rebalanced the dynamics among Canadian targets, target boards, target shareholders and prospective bidders. The three key elements of the New Bid Regime are: (1) the extension of the minimum time period that a take-over bid must remain open from 35 days to 105 days; (2) the addition of a condition that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered and not withdrawn before the bidder can take up any securities under the take-over bid (the Minimum Tender Requirement); and (3) the requirement to extend the bid period by at least 10 days once the Minimum Tender Requirement has been met and all other terms and conditions of the bid have been complied with or waived.
The reasons provide interesting guidance on a number of important considerations, including:
- the application of the exceptions to the 105-day minimum bid period;
- the use of the exemption in the take-over bid rules that allows a bidder to acquire up to 5% of the target’s securities once a take-over bid has been launched;
- a joint actor analysis in the context of hard lock-up agreements;
- disclosure requirements; and
- the use of tactical shareholder rights plans.
In June 2017, CanniMed, a publicly traded company in the cannabis industry, initiated informal and confidential discussions with Newstrike Resources Ltd. (Newstrike), a licensed producer of medical cannabis, to explore possible collaborations. CanniMed’s strategy was not supported by one of its largest shareholders who approached a director of Aurora (one of CanniMed’s competitors) with a proposal that it and other shareholders would support a “white knight” offer from Aurora for the shares of CanniMed.
On November 13, Aurora submitted an unsolicited offer to acquire CanniMed to the CanniMed board and advised that if the board did not respond by November 17, Aurora would formally commence a hostile take-over bid (Aurora Offer). The same day, a draft arrangement agreement between Newstrike and CanniMed was presented to the CanniMed board. That agreement contemplated that Newstrike would become a wholly-owned subsidiary of CanniMed.
The CanniMed board formed a special committee comprised of independent directors (Special Committee) to consider the Aurora proposal. On November 17, the date of Aurora’s deadline, the Special Committee recommended to the CanniMed board that it should not engage in discussions with Aurora. This recommendation was accepted by the CanniMed board. The same day, CanniMed issued a press release announcing that it had entered into an arrangement agreement with Newstrike. In response to the Aurora proposal, the CanniMed press release stated that the terms of any offer from Aurora were unknown while the Newstrike arrangement was fully negotiated, with reasonable closing conditions.
On November 24, Aurora formally commenced the Aurora Offer. Aurora also advised the CanniMed board that it had entered into so-called “hard” lock up agreements in support of the Aurora Offer with three CanniMed shareholders (Locked-Up Shareholders) holding approximately 38% of the CanniMed shares.
On November 28, CanniMed adopted a tactical shareholder rights plans without shareholder approval (CanniMed Rights Plan). The CanniMed board rejected the Aurora Offer on December 8, outlining its reasons as to why the bid was inadequate in its directors’ circular dated the same date.
Aurora and CanniMed each filed applications with the Commissions in respect of some of the matters discussed in this blog post.
Guidance for Future Public M&A Deals
1. Application of Exceptions to the 105-Day Minimum Bid Period
Aurora sought exemptive relief from the 105-day minimum bid period requirement on the basis that the Newstrike transaction was “tantamount” to an “alternative transaction”.
Under the New Bid Regime, all non-exempt take-over bids must remain open for a minimum time period of 105 days, which provides target boards with a longer period of time to consider and respond to a hostile take-over bid compared to under the old regime. The minimum bid period may be shortened to 35 days: (i) if the target board issues a news release shortening the bid period (usually in the context of a negotiated consensual transaction); and (ii) if the target board issues a news release announcing that it intends to pursue an “alternative transaction” (Alternative Transaction Exception). An “alternative transaction” is essentially a transaction other than the take-over bid in question, where holders of equity securities of the same target could have their equity securities terminated without their consent or a sale, lease or exchange of all or substantially all of the property of the target.
Aurora conceded that the Newstrike transaction did not fall within the technical definition of “alternative transaction” because holders of CanniMed would not have their equity securities terminated. Aurora argued that because the Newstrike transaction was touted by the CanniMed board as a strategic and highly accretive transaction that was preferable to the Aurora Offer, the CanniMed board did not require a 105-day bid period to pursue other transactions.
The Commissions held that the Newstrike transaction was not an alternative transaction, noting that:
- The Newstrike transaction was not a tactical defensive tactic. It was negotiated by CanniMed several months before the Aurora proposal was made.
- The Aurora Offer was conditional on the termination of the Newstrike transaction, which was the primary reason why Aurora believed the Newstrike transaction should be considered an alternative transaction. However, Aurora could always waive this condition.
- Shortening the minimum bid period was unnecessary to facilitate the CanniMed shareholders’ decision between the Aurora Offer and the Newstrike arrangement. Aurora was free to engage in a proxy solicitation to seek the rejection by CanniMed’s shareholders of the Newstrike transaction and to advocate that CanniMed shareholders should wait until the Aurora Offer was completed.
- Preserving the minimum bid period allowed for “the possibility of superior offers” which the Commissions found were not “precluded by the Newstrike transaction, even if CanniMed is not currently conducting an auction for the sale of the company.” In contrast, abbreviating the minimum bid period would increase the timing advantage enjoyed by Aurora.
- Given the changes implemented by the New Bid Regime, the Commissions are reluctant to make “piecemeal changes to the timing requirements that affect planning by bidders and target companies and that would make bid pricing and secondary market price determinations less predictable”.
2. Use of the 5% Exemption
CanniMed applied for an order prohibiting Aurora from making use of the 5% exemption to purchase additional CanniMed shares prior to expiry of the Aurora Offer.
Once a take-over bid has been commenced, a bidder is generally prohibited from purchasing the target’s securities outside of the take-over bid. This prohibition is intended to ensure the equal treatment of all securityholders, so that one securityholder does not receive different consideration than is available to all other securityholders. Canadian securities laws contain a limited exemption that allows a bidder to purchase up to 5% of the target company’s securities after a bid has been launched, provided certain requirements are adhered to. This limited exemption exists to provide liquidity in the target’s securities.
The Commissions denied CanniMed’s request, noting that:
- The 5% exemption is an established feature of the Canadian take-over bid regime.
- Aurora, which did not own any shares of CanniMed, did not wield the ability to block a competing offer, and in any event, the New Bid Regime now includes the Minimum Tender Requirement, which effectively ensures that disinterested securityholder approval is obtained for any take-over bid.
- Prohibiting the use of the 5% exemption may be in the public interest if the policies underlying the take-over bid regime are undermined by allowing its use. Given Aurora’s shareholdings in CanniMed and the Commissions’ determination (below) that Aurora was not acting jointly or in concert with the Locked-Up Shareholders, there was no risk under the New Bid Regime that CanniMed shareholders would be denied the ability to participate in a control premium.
3. Joint Actor Analysis in the Context of Lock-Up Arrangements
CanniMed’s Special Committee argued that Aurora and the Locked-Up Shareholders were “joint actors” under section 1.1 of Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions and were “acting jointly or in concert” for the purposes of National lnstrument 62-104 – Take-Over Bids and Issuer Bids.
In public M&A transactions, whether or not a person is acting jointly or in concert with a bidder has important consequences. If Aurora and the Locked-Up Shareholders (holding approximately 38% of CanniMed shares) were acting jointly or in concert then, among other things, (a) the Locked-Up Shareholders’ shares would be excluded from determining whether Aurora had satisfied the Minimum Tender Requirement, (b) the Aurora Offer would be an “insider bid” requiring additional information to be disclosed in Aurora’s take-over bid circular and a formal valuation would have to be prepared unless an exemption was available, and (c) the time periods applicable to the Aurora Offer may have had to be restarted from the date its take-over bid circular was revised.
The Commissions declined to deem Aurora and the Locked-Up Shareholders as joint actors, noting that:
- Canadian securities laws expressly provide that the existence of a lock-up agreement is in itself insufficient evidence that a person is a joint actor, and that this is true for both hard and soft lock-up agreements.1 Moreover, lock-up agreements have previously been recognized by regulators as legitimate (and common) business arrangements that can provide bidders with greater deal certainty, particularly under the New Bid Regime where a bid is at higher risk to be countered during the extended minimum bid period of 105 days.
- The Commissions determined that while specific terms and conditions of lock-up agreements could raise public interest issues, none of the lock-up agreements in this case flagged the Commissions’ concerns. The Special Committee had argued that the Locked-Up Shareholders entered into the lock-up agreements on the basis of a soft, informal letter rather than concrete terms, an unusual move given the binding nature of the hard lock-up agreements.
- The Commissions found that Aurora had received “extremely valuable” material non-public information, but the level of co-operation was insufficient to find that Aurora was “under the tent” with the Locked-Up Shareholders such that they should be considered joint actors about the nature and timing of CanniMed board meetings relating to the Newstrike transaction. However, the receipt of the material non-public information was “cleansed by disclosure” of the Newstrike transaction and Aurora Offer. Significantly, Aurora was still the only buyer, did not make toehold purchases based upon the information, and the Locked-up Shareholders were acting in self-interest by seeking the most attractive exit possible. By way of guidance, the Commissions noted:
“If such a transfer was clear and extensive, it could suggest a level of cooperation that would mean that the shareholders are ‘under the tent’ with the bidder and are participating in the planning of the bid beyond appropriately seeking to maximize the price and liquidity for their shares.”
4. Disclosure Requirements
Given its finding that Aurora had received and benefitted from material non-public information, the Commissions ordered Aurora to provide enhanced disclosure in an amended news release and an amended take-over bid circular. The Commissions held that such information would reasonably be expected to affect the decision of CanniMed shareholders to accept or reject the Aurora Offer, noting that:
“In deciding whether to accept Aurora’s bid, CanniMed shareholders are entitled to consider whether the receipt of material non-public information by Aurora, which gave it a tactical advantage in launching its bid, will have an impact on their decision whether to tender or not. It may affect their confidence in the board or management of the companies involved.
Shareholders can reasonably be expected to consider the facts related to the transmission of material non-public information as a potential ethical consideration in deciding whether to tender to a bid. These considerations can have long-term financial effects and are reasonable consideration in and of themselves for a potentially broad segment of shareholders. To the extent that this information might support litigation on corporate law grounds against Aurora or others, the possibility of such litigation and the possible resulting disruption is also a reasonable matter for CanniMed shareholders to consider. If, on the other hand, Aurora discloses the circumstances surrounding such disclosure and an innocent explanation is provided under the strength of the certification required for its take-over bid circular, this can also be appropriately considered by the CanniMed shareholders.”
5. Use of Tactical Shareholder Rights Plans
In its application, Aurora submitted that the CanniMed Rights Plan was designed to thwart the Aurora Offer, and was inconsistent with the New Bid Regime. Some features of the CanniMed Rights Plan created more onerous requirements for potential bidders. For example, the CanniMed Rights Plan replicated the 105-day minimum bid period without including the Alternative Transaction Exception, and changed the requirement to extend the bid period by at least 10 days once the Minimum Tender Requirement has been met and all other terms and conditions of the bid have been complied with or waived to at least 10 business days. The CanniMed Rights Plan also deemed all securities owned by the Locked-Up Shareholders to be beneficially owned by Aurora, and prevented Aurora from using the 5% exemption to make normal-course purchases of CanniMed shares after the Aurora Offer had been launched.
The Commissions cease-traded the CanniMed Rights Plan, noting that:
- Generally speaking, regulators will bar defensive maneuvers that impair the ability of a target’s securityholders to appropriately respond to a take-over bid, though regulators have previously recognized that defensive tactics can play a role in soliciting a better outcome for target securityholders. The Commissions and other securities regulators have a broad public interest mandate to protect investors from inappropriate practices by companies involved in take-over bids and to foster fair and efficient capital markets.
- The CanniMed Rights Plan was intended to block the Aurora Offer. The CanniMed Rights Plan was not intended to give the CanniMed board more time to conduct an auction or to allow time for a higher bid to emerge in pursuit of the shareholders’ best interests. Instead, as currently structured, the CanniMed Rights Plan could prevent CanniMed shareholders from taking advantage of the Aurora Offer.
- The Canadian securities administrators deliberately rebalanced the bid dynamics in its adoption of the New Bid Regime. Attempts to circumvent or create additional piecemeal changes to the mechanics would create instability and unpredictability moving forward for both market participants and investors.
Happily Ever After?
Subsequent to the proceedings with the Commission, CanniMed and Aurora were able to engage in a friendly transaction, which is expected to be completed during the spring of 2018.