On May 2, 2014, the British Columbia Securities Commission (BCSC) issued an oral decision declining to immediately cease trade the shareholder rights plan (also known as a “poison pill”) of Augusta Resource Corporation (Augusta) and allowing it to remain in place until July 15, 2014, which will be an unusually long 156 days from the announcement of the hostile take-over bid for Augusta made by HudBay Minerals Inc. (Hudbay). The order was made on the condition that Hudbay’s bid is extended to at least July 16, 2014 and a 10-day extension of the bid is provided to shareholders if shares are taken up under the bid.
This decision may signal a modified approach to the regulation of rights plans in Canada.
In April 2013, Augusta implemented a rights plan in response to Hudbay’s announcement that it had acquired an ownership position in Augusta of approximately 15 per cent.
Consistent with the requirements of the Toronto Stock Exchange, in October 2013, Augusta held a special meeting at which its shareholders approved the rights plan, with approximately 82 per cent of the shares present (excluding those held by Hudbay) voting in favour (72 per cent of the outstanding shares were voted).
On February 9, 2014, Hudbay announced its intention to make an unsupported offer for all of the shares of Augusta it did not already own. It formally launched its bid the next day.
On March 14, 2014, Hudbay extended the expiry date of its bid and waived the offer’s “minimum tender condition”. The result of this waiver was that Hudbay would be permitted to acquire any shares tendered to its bid on expiry, regardless of how many shares were tendered, assuming all bid conditions were then satisfied or waived.
On March 28, 2014, Augusta announced that it would voluntarily seek to have its rights plan reaffirmed by its shareholders in the face of Hudbay’s offer at its annual shareholders meeting scheduled for May 9, 2014.
Hudbay subsequently announced that it was making a “final extension” of its bid to May 5, 2013, 85 days from the date the offer was announced, and applying to the BCSC to have the Augusta rights plan cease traded to permit it to take up shares under its bid without triggering the Augusta rights plan.
On April 8, 2014, Augusta advanced the date of its meeting to May 2, 2014 to ensure that the vote on the rights plan was conducted prior to the expiry of the Hudbay bid.
On April 14, 2014, after the bid had been outstanding for 64 days with no competing offers publicly arising, Hudbay made an application to the BCSC, Augusta’s principal securities regulator, requesting to have the Augusta rights plan cease traded before the scheduled May 5th expiry of its bid.
The hearing on the rights plan was commenced on April 29, 2014, but was adjourned to May 2, 2014.
At the May 2, 2014 shareholder meeting, the Augusta shareholders approved the continuation of the rights plan, with approximately 94 per cent of the shares voted (excluding those held by Hudbay) voting in favour (87 per cent of the outstanding shares were voted).
Later that day, the BCSC completed its hearing on the cease trade application and provided its oral decision, with written reasons to follow.
Prior to the Augusta decision, it is arguable that since 2007 a divergence of views has arisen among Canadian provincial securities regulators in relation to the treatment of rights plans in the context of unsolicited offers.
Historically, Canadian securities regulators have been of the view that unrestricted auctions produce the most desirable outcome for target shareholders. Although the regulators have permitted target boards to use shareholder rights plans to delay unsolicited bids for a reasonable period of time as they seek to maximize value for their shareholders, it typically has been a question of when, not if, a pill must go. Generally, securities regulators have agreed to cease trade rights plans after 50 to 80 days from the announcement of an unsolicited bid.
In the 2007 decision of the Alberta Securities Commission in Pulse Data, as well as the subsequent 2009 decision of the Ontario Securities Commission (OSC) in Neo Material Technologies, the regulators declined an unsolicited bidder’s request to cease trade a rights plan after the usual time period and allowed the rights plans to remain in place indefinitely, subject to any further application by the applicable bidder should circumstances change. In both instances, there was no ongoing auction for the target company, but the target's shareholders had approved the rights plan in the face of the unsolicited bid.
The BCSC in its 2010 Lions Gate decision took an approach more consistent with the pre-2007 regulatory approach and affirmed its view that the only appropriate purpose of a rights plan is to enable the target board to seek an improved offer for shareholders, regardless of whether shareholders have approved the rights plan.
Later that year, the OSC clarified its Neo analysis in its Baffinland decision, indicating that Neo did not establish a new basis for upholding a rights plan, but rather that shareholder approval of a rights plan in the face of a specific bid was an important element of its analysis.
In March 2013, the Canadian Securities Administrators (CSA) and Quebec’s Autorité des marchés financiers (AMF), which is a member of the CSA, separately published for comment certain divergent proposals, either of which, if adopted, would extend the period during which a target board may rely on a rights plan to defend against an unsolicited offer and reduce the frequency with which securities regulators would be called upon to intervene. For more details on the CSA and AMF proposals, please see our March 2013 Blakes Bulletin: Securities Regulators Propose Alternative Approaches to Defensive Tactics.
Although more than a year has passed since their initial publication, revised proposals reflecting comments received from industry participants have not been published by either the CSA or the AMF, in light of the continuing debate regarding whether target boards or target shareholders should have the final say on the acceptability of an unsolicited offer. Nevertheless, while such proposals are pending, securities regulators in various Canadian jurisdictions have continued to employ a traditional “when, not if, a plan should go” analysis and typically cease traded rights plans 50 to 80 days after a hostile bid has been announced.
In its proposal mentioned above, the CSA expressed concern that an insider bid without a minimum tender condition could be seen to increase the pressure on minority shareholders to tender due to, among other things, concerns regarding reduced liquidity after the bid and the increased control in the hands of the bidder. Presumably, the BCSC had the lack of a minimum tender condition in mind when it required that, in order for the Augusta rights plan to be cease traded on July 15th, Hudbay provide a 10-day extension of its bid if any shares are taken up thereunder.
In addition, unlike in Pulse Data and Neo, in which a rights plan was allowed to remain in place with no specified end date, notwithstanding the overwhelming shareholder support in the face of a hostile bid, the BCSC determined to conditionally cease trade the Augusta rights plan on a specified date. However, such specified date was set significantly in the future – 156 days from the announcement of Hudbay’s offer.
It remains to be seen which factors (and the relative weightings thereof) led the BCSC to reach its conclusion. We can presume that Augusta’s shareholders’ approval of the rights plan in the face of Hudbay’s hostile bid was a persuasive factor, particularly given that the BCSC hearing was adjourned until after the shareholder vote occurred. We will have a clearer understanding of the BCSC’s rationale when it releases the written reasons for its decision.