On December 3, 2010, the Ontario Securities Commission (OSC) released the reasons for its November 2010 decision to cease trade the shareholder rights plan (rights plan or poison pill) of Baffinland Iron Mines Corporation (Baffinland). This was the first OSC decision in matters of poison pills since the May 2010 decision of the British Columbia Securities Commission (BCSC) to cease trade the poison pill implemented by Lions Gate Entertainment Corp. (Lions Gate) in the face of a hostile bid.
In its majority reasons, the BCSC stressed that poison pills are only a temporary defence to hostile bids and that the only legitimate purpose for a poison pill is to facilitate negotiations with the bidder for an enhanced bid or to solicit competing bids or alternative value-enhancing transactions. Ultimately, shareholders must get the opportunity to decide whether to tender into a bid. The Lions Gate decision contrasted with an earlier decision by the OSC in Neo Material Technologies Inc. (Neo) in which the OSC described another purpose of poison pills as being to assist a target board in fulfilling its fiduciary duty (as prescribed by the Supreme Court of Canada in Re BCE Inc. (BCE)) to protect the long-term best interests of the corporation (as opposed to maximizing short-term shareholder value). Accordingly, under Neo, a poison pill could continue to be deployed as long as it continues to serve this purpose.
The OSC's decision in Baffinland explicitly states that Neo does not stand for the proposition that:
- the OSC will defer to the business judgment of a board of directors in considering whether to cease trade a rights plan; or
- a board of directors in the exercise of its fiduciary duties may "just say no" to a take-over bid.
Baffinland clarifies that:
- in Neo, the OSC deferred to the wishes of shareholders, as contemplated by National Policy 62-202 Defensive Tactics (NP 62-202);
- whether or not a board of directors is complying with its fiduciary duties is a relevant, although secondary, consideration that may justify the OSC in deciding to cease trade a rights plan regardless of shareholder approval; and
- that compliance with fiduciary duties does not determine the outcome of a poison pill hearing.
Baffinland reaffirms that:
- a rights plan will be cease traded where it is unlikely to achieve any further benefits for shareholders; and
- there is no one test or consideration that constitutes the “holy grail” when deciding whether a rights plan should remain in place or be cease traded.
On September 22, 2010, Nunavut Iron Ore Acquisition Inc. (Nunavut) made an unsolicited all-cash offer for all of the shares of Baffinland at a price of $0.80 per share (the Nunavut Offer). On November 8, 2010, ArcelorMittal S.A. (ArcelorMittal) announced that it had entered into a support agreement with Baffinland (the Support Agreement) pursuant to which ArcelorMittal agreed to make an all-cash offer for all of the shares of Baffinland at a price of $1.10 per share (the ArcelorMittal Offer). ArcelorMittal also entered into lock-up agreements with shareholders holding approximately 26% of the outstanding common shares of Baffinland.
The Baffinland poison pill was originally put in place in 2006 and amended in January 2009. It was approved by Baffinland's shareholders in March 2009.
REASONS'S FOR THE OSC'S DECISION
Citing principles derived from previous poison pills decisions, the OSC indicated that there is no one test or consideration that constitutes the "holy grail" when deciding whether a rights plan should remain in place or be cease traded. The OSC reminded us that the outcome of a poison pill hearing is inherently fact-specific. The OSC also reiterated that it is generally time for a poison pill "to go" when it has served its purpose by either facilitating an auction, encouraging competing bids or otherwise maximizing shareholder value and that a rights plan will be cease traded where it is unlikely to achieve any further benefits for shareholders.
In the case at hand, the OSC indicated that one of the factors that it would consider in applying its public interest discretion is whether the rights plan will likely result in the shareholders of Baffinland being deprived of the ability to respond to the Nunavut Offer.
The Auction Was Coming To An End
The OSC began its analysis by noting that, at the time of the hearing, the Nunavut Offer had been outstanding for 57 days (which is more than the minimum statutory period of 35 days) and had resulted in a higher priced competing offer being made by ArcelorMittal.
The OSC also noted that, having entered into the Support Agreement with ArcelorMittal and having agreed not to solicit competing offers, Baffinland needed no further time to do so. Although the auction was not yet over, the OSC concluded that, as a practical matter, it was unlikely that a third bidder would make an offer. Nunavut, on the other hand, could increase its offer.
The OSC concluded that it was unlikely that the rights plan would achieve more for Baffinland's shareholders in terms of inducing a further offer from a new bidder and that there was no real and substantial possibility that Baffinland would be able to increase shareholder choice by keeping the rights plan in place.
Nunavut’s Timing Advantage
By requiring Baffinland to maintain in place its rights plan, the Support Agreement sought to eliminate Nunavut’s timing advantage vis-à-vis ArcelorMittal, that is, it deterred Baffinland shareholders from tendering to the Nunavut Offer until the expiry of the ArcelorMittal Offer.
In past decisions, in the OSC held that it would not permit a rights plan to be used for the sole purpose of eliminating the timing advantage available to a first bidder. In Baffinland, the OSC affirmed this principle by reiterating that:
...Nunavut is entitled as the first bidder to the timing advantage its offer has under our take-over bid regime. In our view, cease trading the Rights Plan now will allow the current offers to proceed in a fair and even-handed manner...
The OSC rejected the suggestion that it should defer to the decision of the board of directors of Baffinland in having agreed to leave the rights plan in place until the expiry of the ArcelorMittal Offer. The primary objective of the Baffinland board was to induce ArcelorMittal to make a higher priced competing offer and they achieved that objective by negotiating and entering into the Support Agreement. The Support Agreement provided a number of strategic advantages to ArcelorMittal, including control over when the poison pill was to be terminated. The OSC stated that the terms of the Support Agreement cannot restrict its ability to act in the public interest.
Furthermore, leaving the rights plan in place would have had the effect of forcing Nunavut to extend its offer in order to compete with the ArcelorMittal Offer, exposing Nunavut to potential costs and market risks.
OSC Clarifies And Distinguishes Neo Decision
Baffinland submitted that in assessing whether to cease trade the rights plan, the OSC should defer to the reasonable business judgment of Baffinland’s directors, as contemplated in Neo. The OSC did not agree with Baffinland’s characterization of Neo.
The OSC distinguished Neo by emphasizing that in Neo it concluded that:
...it would defer to the wishes of shareholders (our emphasis) who had overwhelmingly voted to keep the relevant rights plan in place in the face of the specific bid that was before shareholders at the time of the vote. The vote was held only two weeks before the hearing...
The OSC cited NP 62-202, which states that “prior shareholder approval of corporate action would, in appropriate cases, allay” concerns with respect to a defensive tactic.
Having concluded in Neo that it should defer to the wishes of shareholders as expressed by the recent shareholder vote, the OSC then considered whether there were any circumstances that would lead it to a different conclusion, such as whether the board of directors of Neo was acting in accordance with its fiduciary duties in having decided not to solicit competing bids.
The OSC held that:
...Neo does not stand for the proposition that the Commission will defer to the business judgment of a board of directors in considering whether to cease trade a rights plan, or that a board of directors in the exercise of its fiduciary duties may “just say no” to a take-over bid.
To the contrary, in Neo, the OSC deferred to the wishes of shareholders as contemplated by NP 62-202. The OSC emphasized that:
...Neo suggests only that whether or not the board of directors of a target issuer is acting in the best interests of that issuer and its shareholders, and is complying with its fiduciary duties, is a relevant, although secondary consideration for the Commission in deciding whether to cease trade a rights plan.
While the OSC’s decision in Baffinland partially closes the gap between the views of the BCSC and those of the OSC with respect to circumstances in which they would cease trade a rights plan, it does not resolve their differing approaches in determining whether the continued deployment of a rights plan is justified in the face of a specific bid where informed (and not coerced) shareholder approval has been obtained or is forthcoming. In Lions Gate, the BCSC indicated that in circumstances where a target company board is not actively seeking alternatives to a bid, shareholder approval of a rights plan is not relevant. In Neo, the OSC stated it was an important element of its analysis.
Baffinland does not address the interplay between the fiduciary duties of directors of Canadian corporations to act in the best interest of the corporation (described by the Supreme Court of Canada in BCE as a broad and contextual concept that is not confined to short-term profit of share value and which looks to the long-term interests of the corporation where the corporation is a going concern) and the heretofore understood underpinning policy objective of NP 62-202, that is, maximizing short-term shareholder value.