On June 27, 2014, the British Columbia Securities Commission published the reasons for its widely discussed decision to cease-trade Augusta Resource’s shareholder rights plan as of July 15, 2014 – an unprecedented 156 days after the commencement of HudBay Minerals’ hostile take-over bid. Prior to the BCSC’s May 2, 2014 ruling, most securities lawyers would have considered it unlikely that a Canadian regulator would permit a rights plan to endure for even 90 days. Our prior comment on the hearing and result can be found here.
In its reasons, the BCSC panel confirmed that it was not following the approach in proposed NI 62-105 or Quebec’s proposed alternative, but rather following established policy and precedent in analyzing, not whether Augusta’s rights plan should be terminated, but when. In setting this background, the panel took the opportunity to reconcile the BCSC’s prior decision in Icahn – Lion’s Gate with the decisions of the ASC in Pulse Data and the OSC in Neo Materials, stating that none of those cases stood for the proposition that shareholders could enshrine a rights plan and “just say no” to a hostile bid as contemplated by the proposed NI 62-105. Rather, in each of these cases, the regulator was essentially answering the “when” question, i.e. whether the time to cease-trade the rights plan had occurred.
The panel then identified the key elements of the HudBay – Augusta situation, and found that three factors – (a) the length of time the HudBay bid was outstanding; (b) the likelihood that Augusta could find a superior proposal if given more time; and (c) whether the HudBay bid was coercive – each suggested that it was an appropriate time to cease-trade the Augusta rights plan. However, a fourth key factor – the approval of the rights plan by the Augusta shareholders in the face of the HudBay bid, combined with the likelihood that HudBay would extend its bid – was the basis on which the panel allowed the rights plan to survive through to July 15.
In discussing the shareholder approval, and the weight to be given to it, the panel identified five factors in this case that allowed the shareholder approval to trump the other factors: (a) the shareholder approval was obtained in the face of HudBay’s bid (as opposed to having been obtained prior to the making of the hostile bid); (b) it was an informed vote in the sense that shareholders understood that a vote in favour of continuation of the rights plan would block their ability to accept the HudBay bid; (c) the context of the vote - that is, shareholders understood from the context that a vote for the rights plan could result in the loss of Hudbay’s bid and without a viable alternative transaction; (d) the high voter turn-out; and (e) the high shareholder approval level – 94% of the voted shares (excluding those voted by HudBay).
The heavy weight to be given to the shareholder approval of the rights plan, taken together with the likelihood that HudBay would extend its bid, enabled the panel to reach the conclusion that allowing the rights plan to remain in place until July 15, 2014 appropriately balanced the will of the majority of Augusta’s shareholders as expressed in the vote approving the rights plan against the individual shareholders’ right to tender shares to HudBay’s bid.
Finally, of interest to target company boards, the panel commented adversely on Augusta’s decision not to implement a special committee, suggesting that Augusta’s failure to do so led the panel to question whether Augusta was serious in its search for alternative transactions. Therefore, it is always best practice to implement a special committee (independent of management), even in situations in which one could argue that a special committee is not strictly necessary.