On October 12, 2011, the Ontario Securities Commission (OSC) issued an order1 that in effect will terminate the shareholder rights plan (Rights Plan) of MOSAID Technologies Incorporated on November 1, 2011, and thereby allow the hostile bid by Wi-LAN Inc. for MOSAID to proceed. The cease trade order was issued notwithstanding that shareholders of MOSAID, with full knowledge of the Wi-LAN offer, voted 90.3% in favour of renewing the Rights Plan at a MOSAID shareholders' meeting held in September 2011. As a result, one must ask whether this order is consistent with the decisions of the OSC in Neo Material Technologies Inc., Re2 and the Alberta Securities Commission in Pulse Data Inc., Re;3 or whether it is more in line with the more recent and opposing decision of the British Columbia Securities Commission in Icahn Partners LP et al. and Lions Gate Entertainment Corp.4 In each of Neo Material and Pulse Data, the securities commission refused to cease trade a shareholder rights plan recognizing that shareholder rights plans may be adopted for broader long term purposes when approved by an "overwhelming" majority of informed shareholders in the face of a specific bid; while in Lions Gate the majority held that the only legitimate purpose of a shareholder rights plan is to allow a target board to seek an improved or alternative offer as each shareholder has an absolute right to accept or reject a bid regardless of whether target shareholders have approved a tactical shareholder rights plan.
The Rights Plan was issued on July 8, 2005 and confirmed by MOSAID shareholders in September 2005 and October 2008. Shareholders reconfirmed the Rights Plan at an ordinary course renewal vote at MOSAID's annual and special shareholders' meeting on September 22, 2011.
On August 17, 2011, Wi-LAN announced an unsolicited take-over bid to acquire all of the shares of MOSAID for cash. The offer was formally commenced on August 23, 2011 and was scheduled, following an extension, to expire on October 14, 2011 – two days following the hearing before the OSC.
On August 26, 2011, a management information circular of MOSAID dated August 3, 2011 was mailed to its shareholders in respect of its September 22, 2011 shareholders' meeting. The circular made no reference to the Wi-LAN offer as it was printed prior to the date of the offer. Subsequent to the Wi-LAN offer, MOSAID issued press releases and a directors' circular that referred to the Wi-LAN offer in connection with the renewal of the Rights Plan, and requested that shareholders reconfirm the Rights Plan so that it would remain effective against the Wi-LAN offer.
On September 1, 2011, MOSAID announced the acquisition of Core Wireless Licensing S.a.r.l., which was consummated following extensive negotiations which had commenced in March 2011. MOSAID, on advice from its financial advisors, had initially focused on completing the Core Wireless acquisition and determined to not pursue alternative transactions until the market had an opportunity to react to such acquisition which MOSAID viewed as "transformational." MOSAID had hoped that the acquisition would have a significant impact on the market price of its shares and, after realizing that it would not, began on September 12, 2011 (26 days after Wi-LAN's announcement of its offer) a more formal process to find alternative value enhancement transactions.
In Wi-LAN's application to the OSC, Wi-LAN requested that the Rights Plan be cease traded on October 14, 2011, the day Wi-LAN's offer was scheduled to expire; noting that MOSAID would have had 58 days to find alternatives to the offer.
MOSAID countered that its auction process was ongoing and that the Rights Plan should not be cease traded as it continued to serve a purpose and shareholders had overwhelmingly re-approved the Rights Plan "in the face of and with full knowledge of" the Wi-LAN offer. It was also argued that, in any event, the Rights Plan was needed until November 11, 2011 (60 days from the date MOSAID began to actively explore alternatives with third parties), as MOSAID needed this time period to properly complete its auction process, allow a financially superior alternative to come to fruition and provide its shareholders with sufficient time to consider an alternative. Prior to the OSC hearing, MOSAID had in fact received a formal non-binding indication of interest.
The OSC order provides limited guidance to the reasoning behind its decision. We have also been informed that the OSC will not be issuing formal reasons in this case. In its order, the OSC noted that it considered the following factors to be important:
- the Rights Plan continued to serve a purpose by providing an opportunity for the auction process to continue, which may enhance shareholder value;
- the acquisition of Core Wireless, being a "transformational event," was completed at approximately the same time as the Wi-LAN offer was made;
- MOSAID shareholders approved the renewal of the Rights Plan subsequent to Wi-LAN commencing its offer and subsequent to the announcement of the Core Wireless transaction; and the Rights Plan contained a definition of a "permitted bid" which, among other conditions, requires that a "permitted bid" be open for not less than 60 days;
- two shareholders of MOSAID (including its largest shareholder which owned approximately 12% of the outstanding MOSAID shares) expressed in writing continued support for the Rights Plan; and
- there was no evidence to suggest that the Wi-LAN offer was coercive or unfair to MOSAID's shareholders.
In reviewing these factors, it is difficult to discern the rationale for the OSC's order especially as it relates to the weight to be given to the shareholder approval of the renewal of the Rights Plan. The impact of this order on the continuing tension between the decisions in Neo Material and Pulse Data, on the one hand, and Lions Gate, on the other hand, is not readily apparent.
The author believes, however, that a review of the written submissions of Staff of the OSC5 regarding Wi-LAN's application may shed significant light on the reasoning and rationale behind the OSC order.
With respect to the OSC decision in Neo Material, Staff noted that, unlike the plan in Neo Material, the Rights Plan was not a tactical plan; i.e. it was not adopted specifically in response to the Wi-LAN offer. Staff also noted that in considering the re-approval of the Rights Plan at the September 2011 shareholders' meeting, the "scope of approval" of the Rights Plan must be limited to its purpose, which was to give MOSAID
shareholders sufficient time to properly assess a take-over bid without undue pressure and to give the Board time to consider alternatives designed to allow the Corporation's shareholders to receive full and fair value for their Common Shares.6
In light of the fact that the Rights Plan provided that a "permitted bid" must be open for a period of not less than 60 days and that MOSAID did not indicate to its shareholders prior to the shareholders' meeting that the MOSAID board of directors may require more than 60 days from the commencement of the Wi-LAN offer to conduct an auction, Staff believed that a 60-day period from the date of the Wi-LAN offer was a reasonable time period for the MOSAID board to conduct an auction.7 Staff was therefore of the view that the Rights Plan should be cease traded as of October 22, 2011, being 60 days from the commencement of the Wi-LAN offer. Staff, however, acknowledged that if the OSC accepted that MOSAID acted reasonably in delaying the commencement of its strategic review because it was "trying to finalize a significant transaction at the same time as it was faced with"8 the Wi-LAN offer, this may support keeping the Rights Plan in place until no later than November 1, 2011, being 60 days in their calculation from the announcement of the Core Wireless transaction.
In light of the fact that (i) the OSC ordered that the Rights Plan be cease traded on November 1, 2011, and (ii) the factors which the OSC listed as being important to it in reaching its conclusion correlate with Staff's submissions, it seems reasonable to assume that Staff's submissions significantly influenced the OSC's decision. Accordingly, in light of the complexities and impact of the Core Wireless transaction, it would appear that the OSC believed that it was reasonable for the MOSAID board not to commence an auction process until the Core Wireless transaction had been completed. The fact that shareholders had re-approved the Rights Plan for the purpose of giving the MOSAID board time to consider alternative transactions and that a "permitted bid" under the Rights Plan would need to be open for not less than 60 days, may well have led the OSC to conclude that the Rights Plan should be cease traded approximately 60 days from the date of the announcement of the completion of the Core Wireless transaction, or on November 1, 2011.
Based on the OSC's order and Staff's submissions, it would appear that if a target is seeking to rely upon a shareholder rights plan to deter an unsolicited take-over bid, it is incumbent upon the target to issue a tactical shareholder rights plan (regardless of whether it has a shareholder rights plan already outstanding) and submit that shareholder rights plan to shareholders for approval, on a timely basis, while clearly outlining the purpose of the plan. It is only in circumstances where a tactical shareholder rights plan has been overwhelmingly approved by informed shareholders would it appear that a target may, in Ontario, rely upon the decisions in Neo Material and Pulse Data.
It is also important for targets to review carefully the period of time reasonably required to complete an auction if the target wishes to proceed on the basis of seeking alternative value enhancing transactions. If a target believes that an extraordinary period of time is required, then it is incumbent upon the target to clearly express that view to its shareholders and the public and explain clearly the basis of its rationale. In such circumstances, it is critical that financial and legal advice be obtained before pursuing such a course.