On May 28, Orange Capital announced that it was launching a tender offer at a premium to market to purchase up to 10% of the outstanding units of Partners REIT. While it did not constitute a takeover bid, the tender offer was structured similar to a takeover bid, asking for willing shareholders to tender their securities to be potentially purchased by Orange Capital in accordance with the terms of the offer. Notably, the tender offer required that depositing unitholders be holders of record as of the record date in respect of the 2014 annual general meeting and appoint Orange Capital as their nominee and proxy for all deposited units in respect of the AGM.

In the event that more than the maximum number of units were delivered in accordance with the tender, the units purchased from each depositing unitholder were to be determined on a pro rata basis according to the number of units delivered by each unitholder. Orange Capital pledged to vote all proxies solicited in favour of a new slate of independent trustees to be nominated by Orange at the AGM.

Lead up to Tender Offer

On May 1, Orange Capital issued a press release identifying a number of concerns in regards to recent transactions and announcements by Partners. Specifically, Orange Capital stated that Partners’ purchase of retail centres from Holyrood Holdings, first announced in December 2013, was a related party transaction that prejudiced the interests of minority unitholders. Orange Capital also made a financing proposal whereby it offered to purchase $15 million of convertible securities, subject to the appointment of three new trustees, including one Orange Capital nominee.

Pursuant to an investigation of Orange Capital’s concerns, Partners’ board announced on May 4 that it had received material new information suggesting that the REIT’s CEO and the owner of Holyrood should be considered as acting together, and that it had thus asked Holyrood to unwind the transaction. Partners’ CEO also resigned, and the REIT ultimately announced the rescission of the transaction on June 6.

Meanwhile, on May 6, Partners announced that it had initiated a strategic review process to consider strategic alternatives to maximize value for unitholders.

The Tender Offer

Orange Capital’s tender offer was made to purchase up to 10% of the outstanding units of Partners (prior to the closing of the purchase of Holyrood deal), represented a 7.1% premium to the closing price of the units on the previous trading day and a 15% premium over the volume-weighted average trading price over the previous 30 trading days. As stated above, in order for units to be eligible for take up and payment, depositing unitholders were required to be holders of record as of the record date and appoint Orange Capital as nominee and proxy for Partners’ upcoming AGM.

Notably, pursuant to the offer, a tendering unitholder would be required to appoint Orange Capital as the unitholder’s nominee and proxy for all deposited units, regardless of the number of deposited units actually taken up and paid for under the tender. According to Orange Capital, all proxies would be voted in favour of a new slate of independent trustees to be nominated by Orange at the upcoming AGM. Orange Capital cited issues with Partners’ performance and governance, notably in respect of the Holyrood transaction, as reasons for initiating the tender offer.

The Fallout

On June 6, Partners announced that it had filed a complaint with the Ontario Securities Commission regarding Orange Capital’s “highly coercive offer”. In outlining its complaint to the OSC, Partners emphasized a number of concerns, stating that, among other things:

  1. Orange Capital did not make “any real offer”, as the offer could be withdrawn, varied or extended by Orange Capital for any reason at any time. Partners thus characterized the offer as a “free option” for Orange Capital to acquire the units that were deposited;
  2. the tender offer would transfer control of the REIT to Orange Capital (characterized as a small minority unitholder) for no compensation, as the offer allowed Orange Capital to acquire all of the voting rights of unitholders who tendered under the offer, even if it only purchased 10% (or less) of Partners’ units. The REIT characterized Orange Capital’s ability to secure proxy control without taking up or paying for all of the units tendered as a “bait and switch” tactic;
  3. even if Orange Capital elected to purchase units, unitholders would likely face “massive pro-ration”, as unitholders would only be able to sell 10% of their tendered units, but Orange Capital would be able to vote 100% of the tendered units; and
  4. Orange Capital was not filing a proxy circular and had not provided information regarding a proposed slate of nominees.

Pursuant to the REIT’s complaint to the OSC, Orange Capital and the regulator engaged in discussions that ultimately led to a further explanatory release being issued by Orange Capital. Among other things, Orange Capital clarified that:

  1. in the event that greater than 10% of the number of outstanding units of Partners were tendered and the conditions of the offer were otherwise met, Orange Capital would not be able to take up less than the full 10% of the units;
  2. if the tender offer was withdrawn by Orange Capital, all units would be immediately returned to unitholders and all associated proxies would be deemed to be revoked;
  3. deposited units could be withdrawn by unitholders from the tender offer at any time prior to take-up by Orange Capital. In such a case, all associated proxies would be deemed to be revoked; and
  4. any proxies solicited by Orange Capital, other than those in respect of units taken up and paid for, could be revoked at any time by unitholders.

Orange Capital also extended its offer to ensure that its proxy circular would be disseminated and received by unitholders in advance of the expiry of its offer and further released a list of board nominees in advance of the unitholder meeting scheduled for July 15.

As we will discuss in our second post on the subject, Partners REIT subsequently applied to the Ontario Superior Court of Justice for a declaration that Orange Capital had breached the REIT’s advance notice policy. While Orange Capital was successful in court, it later withdrew its nominees from consideration for election to the board, while leaving the tender offer open.

At the expiry of Orange Capital’s tender offer, however, the 10% minimum tender condition had not been satisfied. As such, Orange Capital announced that it would not be taking up any of the REIT’s units and that all tendered units would be returned to tendering unitholders.

Conclusion

Orange Capital employed a relatively unorthodox means of attempting to acquire control of a company, and it is unclear whether others will follow in attempting to gain control of an issuer by offering a premium for shares or units rather than simply soliciting proxies. Prior to its offer, Orange Capital held only a nominal number of Partners’ units and, thus, had no preexisting economic interest in the REIT.

Regardless of whether Orange Capital would have succeeded in this case, acceptance by the OSC of its methods pursuant to the above mentioned clarifications demonstrates the importance of full disclosure.

This article is the first of a two part series on the recent Orange Capital Tender offer for Partners REIT units