Striking a balance: collective shareholder decisions versus individual rights to tender
Shareholder vote alone should not be determinative
Likelihood of extension of Hudbay Bid
Was Hudbay bid coercive?
On June 27 2014, the British Columbia Securities Commission (BCSC) defended the unusually long shelf life that it accorded to a poison pill in the face of a hostile takeover bid by releasing reasons supporting its May 2014 decision to allow Augusta Resource Corporation to leave its shareholder rights plan in place in the face of the HudBay Minerals Inc hostile bid for a total of 156 days.
The panel was influenced primarily by the results of the Augusta shareholder vote held on May 2 2014, which overwhelmingly supported management's decision to leave the Augusta rights plan in place in the face of the HudBay bid. The panel also concluded that it was reasonably likely that HudBay would extend its bid if the panel fixed a future "date certain" for the termination of the Augusta rights plan.
The panel found that the most logical date for the termination of the rights plan was one tied to Augusta's claim that all material permitting on its key development project (the Rosemont project) would be completed by June 30 2014, and on that basis chose July 15 as the termination date. To address concerns that Augusta shareholders might feel some pressure to tender their shares in light of HudBay's decision to waive its minimum tender condition, the panel accepted HudBay's offer to extend its bid for 10 days if any shares were taken up under the bid and incorporated this term in its order.
This update outlines the key elements of the panel's analysis and offers some takeaways and comments regarding the likely impact on the BCSC's decision.
The panel found that under Canadian law, there remains a process of deciding when, not if, a rights plan must be terminated. A target board in Canada has no right to use a rights plan to refuse a bid, regardless of the level of shareholder support. The panel then turned to the factors set out in the well-known Royal Host decision, which have traditionally been used to help to determine this issue.
The most influential factor at play was clearly the level of shareholder support in favour of the rights plan. Indeed, it is hard to envisage stronger facts in favour of deferring to the views of shareholders than those presented to this panel:
- Augusta management secured overwhelming shareholder support for the continuation of its rights plan, directly in the face of the HudBay offer, on the day of the panel's decision.
- Despite HudBay's objections to the adequacy of Augusta's disclosure to its shareholders, the panel found that the Augusta shareholders were fully informed of the key concept that voting for the continuation of the rights plan potentially meant blocking the HudBay bid.
- Shareholders voted to support the rights plan even though no alternative offers were pending.
- Nearly 80% of all Augusta shares were voted at the meeting, including a majority of the public float – that is, the shares not controlled by HudBay or the Augusta Group. The panel noted that this was a very high percentage, even for a contested meeting.
- The voting percentages in favour of the rights plan were so high that the votes in favour represented an absolute majority of Augusta shares, even if it were assured that every Augusta share that was not voted at the meeting would have been voted against the rights plan.
Faced with these facts the panel stated that, at its heart, the application required the panel to consider how to balance the tension between the rights of shareholders to exercise a collective decision to support a rights plan in the face of a specific bid and the interests of individual shareholders of the target in having an unimpeded opportunity to tender their shares to that bid if they so choose.
The panel placed significant weight on the results of the shareholder meeting. However, the panel's findings on this point were tempered by its concerns with the shareholder voting system in Canada. As is customary in contested transactions, there was a high volume of trading in the public float of Augusta shareholders between the date of announcement of the HudBay bid and the date of the Augusta meeting.
The panel also raised questions regarding the integrity of the voting results due to concerns about 'empty voting' – where market participants are able to exercise voting rights, without having economic interest in the underlying shares. The panel urged that caution must be exercised in these circumstances, and that regulators should not be unduly influenced by the outcome of the shareholder vote.
The concerns expressed by the panel with the Canadian shareholder voting process have been well documented by numerous commentators. In raising this issue the panel was mindful that if it were to find a shareholder vote to be determinative, there could be a real risk that future votes could be manipulated by interested market participants. The panel's comments also signalled concerns regarding the underlying premise of proposed National Instrument 62-105 Security Holder Rights Plans, which, as the panel noted, would make shareholder approval determinative (for further details please see "CSA proposes significant changes to M&A regulation").
The panel found that significant weight should be given to the shareholder vote. However, it was this factor combined with its view that it was reasonably likely that HudBay would extend its bid if the panel were to fix a future date for the termination of the rights plan that ultimately convinced it to accord significant deference to the views of the Augusta shareholders.
The BCSC has historically sided with the rights of individual shareholders, and in this case, it was clear that the panel sought a compromise that would respect both the results of the overwhelming shareholder vote and the rights of individual Augusta shareholders to decide whether to tender to the bid. The panel's finding that HudBay was reasonably likely to extend its bid if a future date for termination was fixed allowed the panel to strike this balance.
While the panel was not prepared to allow the Augusta rights plan to veto the HudBay bid, the timeframe afforded to Augusta management was unprecedented, notably so by BCSC standards.
Augusta argued that significant shareholder value would be unlocked once final permitting was completed on the Rosemont project, and that the shareholder vote was a clear message from shareholders that they supported management's views. At the hearing HudBay argued that the panel should cease trade the rights plan with immediate effect, but alternatively if it was not prepared to do so, that it should issue a cease trade order with a future certain date. Pressed by the panel at the hearing, HudBay conceded that the most logical certain date was one that was tied to Augusta's claim that all material permitting on the Rosemont Project would be completed by June 30 2014.
Having found a logical future date, the panel concluded that it would be appropriate to grant Augusta management an additional 75 days to meet its stated timeline.
The panel's analysis appears to be a considered attempt to strike a reasonable compromise in the circumstances. However, the panel departed markedly from the BCSC's analysis in Lions Gate (2010). In that decision the panel was unequivocal that the only legitimate purpose of a target rights plan was to provide the target board with adequate time to conduct an auction. Once the auction was complete, there was no legitimate reason to keep a rights plan in place, and the views of shareholders in that context would then be irrelevant.
In the case at hand, the panel concluded that there appeared to be no real and substantial possibility of the Augusta board identifying a superior transaction, and noted that this was a clear factor suggesting that the rights plan must end immediately. Further, the panel found that Augusta's decision not to establish a special committee of independent directors to consider the HudBay bid was "an unusual decision in the circumstances" and "made [it] question just how seriously Augusta was pursuing the search for alternative transactions and whether, in reality, the board's first choice was to attempt to complete the permitting and approvals for the Rosemont Project".
Faced with these findings, and a rights plan that had already been in place for 85 days, it is highly likely that the panel in Lions Gate would have cease-traded the Augusta plan with immediate effect. However, the panel in Augusta declined to do so and instead afforded significant deference to the collective views of target shareholders, even where there was no real prospect of a superior transaction.
One of the most interesting elements of the panel's decision was its analysis of Augusta's claim that the HudBay bid was coercive on account of is "opportunistic" timing and HudBay's decision to waive the minimum tender condition, which could result in Augusta shareholders feeling pressure to tender to the bid to avoid being "left behind". First, the panel found that hostile takeover bids are opportunistic in nature, and whether a bid is opportunistic is irrelevant to its analysis, and not a matter for argument at a regulatory hearing. The target's management is free to make its case to shareholders, but from a regulatory perspective, the panel's view was that this was not an issue. How the panel's reasons on this point affect how hostile bids are characterised in the future remains to be seen.
Second, the panel found that the fact that a hostile bidder drops its minimum tender condition in a bid for 100% of a target's securities does not make the bid coercive –a partial bid may have been treated differently – even where there was a significant risk that the bidder would be able to establish a blocking position that could preclude any future bids by competing buyers, as was the case here.
In reaching its conclusion, the panel noted that previous rights plan decisions have determined that a bid is not coercive simply because it contains a right on the part of the bidder to waive the minimum tender conditions.
The panel acknowledged Augusta's argument that the waiver of the minimum tender condition in its bid would allow for the possible creation of a larger blocking position on the part of HudBay and conceded that in these circumstances shareholders could feel some coercion due to the uncertainty and breadth of possible outcomes. At the hearing HudBay offered to include a 10-day extension under its bid, which the panel accepted and incorporated into their order. While the panel was not required to decide specifically on this point, it did state that it would have been appropriate to impose a 10 day extension condition on the process where a bidder has removed a minimum tender condition and there are questions about the resulting shareholder dynamics arising from multiple "blocking positions". This approach is in line with the recent regulatory proposals included in proposed National Instrument 62-105.
The panel's approach does not entirely address the underlying issue of coercion. If HudBay were to acquire sufficient shares to establish a 33% blocking position (noting that HudBay entered the contest with a 15% toehold) shareholders would likely feel pressure to tender to the extended bid.
The panel's view appears to be that HudBay's ability to secure a larger potential blocking position was simply a consequence of the current rules, and a regulator should be expected only to mandate an extension that would allow shareholders to make an informed decision once initial take-up amounts were known. The panel also found that the reality of the Augusta shareholder composition was such that there were already several large share ownership positions in place. In these circumstances, the success of a change of control transaction would require significant shareholder synergy, and the panel concluded that it did not see this situation being made appreciably more difficult by the possibility of an increased HudBay share ownership position.
The panel's assessment that contested bids generally involve unique facts and circumstances is correct and, until a new regulatory code is adopted, regulatory decisions in this area are expected to continue to reflect the specific circumstances of each contest along with the views of the panel members hearing each application.
A number of lessons can be taken from the panel's reasons:
- Shareholder approval in the face of a bid will be given significant weight – the panel found that a shareholder vote in the face of a specific bid should generally be accorded more weight than a vote held before the bid being launched. The best way for a target board of a Canadian company to maximise the amount of time it will be permitted to keep a rights plan in place in the face of a hostile bid is to have the rights plan ratified at a special meeting held after announcement of the bid. This has emerged as the 'playbook' in contested bids in Canada, and the panel's decision is in line with this approach.
- Appoint a special committee – the panel made an adverse inference against Augusta and its commitment to the auction process, as a result of its decision not to appoint a special committee of independent non-management directors to consider the bid.
- Be conscious of specific timeframes – the panel's decision suggests that, faced with significant shareholder support for a rights plan in the face of a hostile bid, regulators may attempt to fix a future date when a rights plan must end in order to strike an appropriate balance between the collective views of shareholders as a group, and the rights of individual shareholders to tender to a bid if they so choose. In this context, the target's management should be mindful of setting out future deadlines that could be used to support a future termination date. Bidders should also expect to be pressed by regulators on how long they are prepared to extend a bid.(1)
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 (firstname.lastname@example.org or email@example.com). The Borden Ladner Gervais website can be accessed at www.blg.com.
(1) The panel's reasons are available here.