On August 6, 2009, the Ontario Securities Commission ("OSC") issued the written Reasons for Decision relating to a hearing held on April 15 and 16, 2009 involving a take-over bid (the "Offer") by JLL Patheon Holdings, LLC ("JLL") for restricted voting shares of Patheon Inc. ("Patheon"). At the conclusion of the hearing, the OSC ordered JLL to revise the Offer before it would be allowed to proceed. These revisions flowed from certain arrangements entered into immediately prior to the Offer between JLL and a major Patheon shareholder which raised issues concerning identical consideration and collateral benefits.
Patheon is a company incorporated under the Canada Business Corporations Act ("CBCA") with restricted voting shares listed on the Toronto Stock Exchange ("TSX"). JLL is a Delaware limited liability company affiliated with a U.S. private equity investment firm. At the time of the Offer, JLL and its affiliates owned 1.8% of the restricted voting shares and 100% of two classes of preferred shares, one being a class of convertible shares which were entitled to vote with the restricted voting shares on an as-converted basis. As a result, JLL's holdings represented approximately 30% of the total votes attaching to the restricted voting shares. In addition, JLL had three representatives on the Patheon board of directors.
On December 8, 2008, JLL announced its intention to make the Offer at a price of US$2.00 per share. Following the announcement, Patheon formed a special committee to deal with the Offer. The special committee retained BMO Nesbitt Burns Inc. ("BMO") to prepare a formal valuation and Goldman, Sachs & Co. as its financial advisor. The formal valuation subsequently delivered by BMO concluded that, as at February 16, 2009, the fair market value of the restricted voting shares was in the range of US$4.20 to US$5.00 per share.
The Offer commenced on March 11, 2009 and was for "any and all" restricted voting shares tendered (i.e. there was no minimum tender condition). The Offer price of US$2.00 per share was a 138% premium to the closing price on December 5, 2008.
The Offer disclosed that, on the previous day, JLL had entered into a voting agreement with certain shareholders of Patheon who had acquired restricted voting shares in connection with Patheon's acquisition of MOVA Pharmaceuticals Corporation ("MOVA Group") and, as a result, owned 13.7% of the restricted voting shares. The voting agreement provided, among other things, that:
- JLL would not, to the extent permitted by law, compulsorily acquire MOVA Group's shares pursuant to any subsequent acquisition transaction if they were not tendered under the Offer;
- subject to regulatory approval and to the extent otherwise permitted by law, upon JLL acquiring securities representing at least 50.1% of the aggregate voting rights of Patheon's outstanding securities, JLL and MOVA Group would enter into a stockholders' agreement granting certain minority shareholder protection to MOVA Group including tag-along rights, registration rights, board representation and protection from compulsory acquisition or subsequent acquisition transactions;
- JLL and MOVA Group would vote their Patheon shares in favour of any resolution concerning a subsequent U.S. equity offering and would not acquire any securities of Patheon other than pursuant to an offer to acquire all of the restricted voting shares; and
- MOVA Group would either deposit all, or none, of its restricted voting shares under the Offer.
The Offer was made for all restricted voting shares but not those held by JLL, "its affiliates, associates or any person acting jointly or in concert [with JLL] within the meaning of the [CBCA]". The compulsory acquisition section of the CBCA provides that if, within 120 days of a take-over bid, the bid is accepted by the holders of not less than 90% of the shares of the applicable class, "other than shares held at the date of the take-over bid by or on behalf of the offeror or an affiliate or associate of the offeror," the offeror is entitled to acquire the shares held by the non-tendering shareholders. The term "offeror" is defined in the CBCA to include two or more persons who, directly or indirectly, intend to exercise jointly or in concert voting rights attached to shares for which a take-over bid is made. The voting agreement had the effect of putting JLL in a position to use the compulsory acquisition provisions of the CBCA, whether or not MOVA Group tendered its shares under the Offer.
Between March 19, 2009 and April 15, 2009, when the OSC hearing commenced, various applications were filed and submissions made by JLL and the Patheon special committee with respect to the voting agreement. Ultimately, subject to the resolution of two issues, the OSC determined to accept a proposal by JLL as to how the Offer could proceed. The JLL proposal was (i) to terminate the voting agreement (including the agreement to enter into the stockholders' agreement) as if it had never been entered into, (ii) to extend the Offer by 10 days, (iii) to prepare a notice of change to reflect the foregoing, to make it clear that MOVA Group was not to be considered an offeror under the CBCA or to be acting jointly or in concert with JLL under the Securities Act (Ontario) (the "OSA"), and (iv) that JLL would not be entitled to effect a compulsory acquisition under the CBCA unless it acquired 90% of the outstanding restricted voting shares other than those held by JLL and its associates and affiliates (but specifically not including those held by MOVA Group).
The two stated questions to be resolved at the hearing were:
- Should JLL be restricted in its ability to enter into agreements, arrangements or understandings with MOVA Group for some period following the completion of the Offer and, if so, what form of certifications by JLL and MOVA Group should be required?
- How long should the Offer be extended as a result of the variation required to reflect the JLL proposal?
In addition, the OSC acceded to the request by the Patheon special committee that it consider whether the JLL proposal sufficiently addressed alleged violations of the identical consideration requirement and the prohibition against collateral benefits in take-over bids.
Although the OSC stated the questions to be resolved as set forth above, in fact the Reasons for Decision deal first with the identical consideration and collateral benefits issues, which happen to be the matters of greater importance to issuers and their counsel, and then with the two "questions".
Identical Consideration and Collateral Benefits
Section 97(1) of the OSA provides that "if a formal bid is made, all holders of the same class of securities shall be offered identical consideration" and section 97.1(1) of the OSA provides:
"If a person or company makes or intends to make a formal bid, the person or company or any person or company acting jointly or in concert with that person or company shall not enter into any collateral agreement, commitment or understanding that has the effect, directly or indirectly, of providing a security holder of the offeree issuer with consideration of greater value than that offered to the other security holders of the same class of securities."
The OSC found that clearly MOVA Group was receiving through the voting agreement an opportunity and benefits not available to other shareholders. The opportunity was the ability to remain as a minority shareholder of Patheon subsequent to the Offer. The opportunity made it easier for MOVA Group to decide not to tender to the Offer while, at the same time, neutralizing MOVA Group in terms of JLL's ability to utilize the compulsory acquisition provisions of the CBCA. As a result, MOVA Group was receiving preferential treatment that mitigated any coercion that may be inherent in the Offer. To the extent that the Offer was coercive, public shareholders were suffering that coercion with no mitigation.
Although the public shareholders of Patheon were being offered the same cash consideration as MOVA Group, they were not being offered the same opportunity to remain a shareholder with the benefit of the stockholders' agreement. The OSC believed that such opportunity had significant value to MOVA Group, although the value may be difficult to quantify.
Earlier OSC decisions have held that agreements that confer collateral benefits are subject to the statutory prohibition even though the benefit is structured to be conferred outside the bid. The OSC affirmed this position because, it said, to conclude otherwise would undermine the fundamental principle of equal treatment of shareholders.
In the OSC's view, JLL was offering different consideration to MOVA Group through the opportunity to remain a shareholder with the benefits of the voting agreement and the stockholders' agreement. These agreements had the effect of providing one shareholder consideration of greater value than that offered to other shareholders. In the OSC's view, it was not an answer to say that, if MOVA Group accepted the Offer, it would receive the identical cash consideration as the public shareholders. That response ignored the legal and economic reality of the circumstances and what the OSC considered the proper interpretation of the term "consideration" in the take-over bid provisions of the OSA. In the OSC's view the term "consideration" should be interpreted broadly in accordance with the regulatory objectives of the take-over bid regime of the OSA. A principal objective of that regime is the fair and equal treatment of public shareholders.
Accordingly, the voting agreement may well have breached the identical consideration and collateral benefit provisions of the OSA but the Reasons for Decision state that the OSC did not come to a final conclusion because it did not receive sufficient evidence and submissions on that issue and a final conclusion was not necessary to decide the issue for purposes of its decision.
Fairness to Shareholders
Again, without deciding that the Offer was coercive, the Reasons for Decision state that, generally, shareholders can take some comfort that an offer is fair when a significant shareholder tenders to it, particularly when the tendering shareholder is an insider. Where, as here, a significant shareholder that is an insider is not prepared to accept an offer and is given benefits to remain a shareholder after completion of an offer, a question is raised as to the fairness of the offer to public shareholders. The OSC's concerns about coercion were heightened by the fact that there would be no restriction on the price JLL could pay for MOVA Group's shares following the post-bid integration period under the OSA and because the Offer was made without a minimum tender condition at a cash price substantially below fair market value based on an independent valuation.
The balance of the Reasons for Decision deal primarily with the OSC's two stated questions with respect to the JLL proposal, which come down to how to fix the problem given that the OSC did not accept that it was sufficient to simply tear up the voting agreement and treat it as never having been entered into. After deliberating upon its public interest jurisdiction, the OSC determined the answers to the questions it had posed to be as follows:
- The variations here were of a nature that the Offer should remain open for acceptance for a period longer than the 10 day period contained in the JLL proposal, being the minimum period required by the OSA. The OSC found that a reasonable period would be at least 15 days.
- Each of JLL and MOVA Group should be required to certify that it would not enter into any agreement, arrangement or understanding with any shareholder for a period of 120 days after the expiry of the Offer unless the agreement provided the same consideration to shareholders under the Offer. The 120 day period was chosen because it is the period established by National Instrument 61-101 in which an offer can be integrated with a subsequent acquisition transaction for purposes of obtaining minority shareholder approval.
In Re Sears Canada Inc., the OSC held an indemnity agreement between an offeror and a shareholder and an agreement relating to timing between the offeror and certain financial institutions which gave them certain tax benefits that were not available to other shareholders to be collateral benefits. There were many who may have thought at the time that the OSC was stretching the principles relating to identical consideration and collateral benefits too far. The Patheon decision reiterates that the same type of analysis will be used to deal with other situations in which the consideration itself may be the same for all shareholders but the opportunity, and therefore the value of the offer, is not. The analysis used by the OSC in these circumstances may not expressly provide a "bright line" test but the manner in which the analysis has been performed in these cases is consistent and should leave little room for doubt as to where the line will be drawn in a contested situation and what are, or more likely what are not, acceptable agreements in the context of a take-over bid.
The Reasons for Decision were issued on August 6, 2009. On July 30 and 31, 2009, JLL announced that it had converted its convertible preferred shares into restricted voting shares (at an effective price, according to the Patheon special committee of US$4.77 per share) and, together with restricted voting shares acquired under the Offer, it beneficially owned approximately 55.9% of the total number of restricted voting shares outstanding. On August 10, 2009, JLL extended the Offer to August 26, 2009. On August 21, 2009, the Patheon special committee and Lonza Group AG ("Lonza"), a Basel, Switzerland based pharmaceutical, healthcare and life science company, announced that Lonza had submitted a non-binding proposal to acquire all of the outstanding restricted voting shares at a price of US$3.55 per share and that Patheon had agreed not to negotiate an acquisition transaction with any party until September 30, 2009. On the same day, JLL announced that it would not further extend the Offer and that it intended to "focus on growing the business and creating value". On September 28, 2009, the Patheon special committee announced the extension until October 15, 2009 of the exclusivity and due diligence period and on October 15, 2009, the Patheon special committee announced that the period of exclusivity would continue until terminated by either party by notice to the other.
The final chapter in the saga of Patheon and JLL remains to be written.