The British Columbia Securities Commission (BCSC) has issued an order allowing Augusta Resource Corporation (Augusta) to leave its shareholder rights plan in place until July 15, 2014 in the face of the HudBay Minerals Inc. (HudBay) hostile bid.
On May 2, 2014, the BCSC issued an oral decision declining to immediately cease trade the shareholder rights plan (also known as a "poison pill") of Augusta in the face of a hostile bid by HudBay. Instead, under the terms of the BCSC order, if HudBay extends its take-over bid to July 16, 2014 and provides a ten day extension of the take-over bid if it takes up any shares, then the BCSC will issue an order cease trading Augusta's shareholder rights plan, effective 5:00 p.m., Vancouver time, on July 15, 2014, unless Augusta confirms in advance that it has terminated its shareholder rights plan. Effectively, this allows the Augusta pill to remain in place for 156 days from the date of the announcement of the HudBay bid, marking a sea change in the BCSC's approach to the treatment of shareholder rights plans.
Augusta adopted its shareholder rights plan in the spring of 2013. As of the date of the BCSC's decision the Augusta shareholder rights plan had been in place for 82 days since the date HudBay first announced its intention to launch its bid for Augusta. Canadian regulators have typically granted target boards between 55 and 65 days to find a white knight offer before cease trading a target's rights plan. The prevailing view of Canadian regulators has historically been that at some point a target company's shareholder rights plan has "to go" in order to allow target shareholders the opportunity to exercise their right to decide whether or not they wish to tender to a hostile bid.
Against this background, the BCSC's decision to allow Augusta to leave its shareholder rights plan in place for a total of 156 days is certainly uncharacteristic. However, there are a number of unique factors at play in the Augusta-HudBay contest.
Reasons supporting the BCSC's decision have not been released and are not due until July 31, 2014. We will not have the opportunity to consider the BCSC's rationale supporting its decision until reasons are released, and we will issue a more detailed bulletin at that time, however, we expect the following factors will have influenced the BCSC's decision.
Overwhelming Shareholder Support
The Augusta board received an unprecedented level of support in favour of the company's rights plan. Augusta held a meeting on May 2, 2014, to consider, among other things, a resolution confirming the continuance of its shareholder rights plan in the face of the HudBay offer. The result was that 94% of shareholders (excluding HudBay) had voted in favour of the shareholder rights plan.
In the past, Canadian regulators have wrestled with the tension between the rights of shareholders to make collective decisions in the face of a hostile bid, and the rights of individual shareholders to tender their shares to an offer if they wish to do so. More so than any other Canadian regulator, the BCSC has historically sided in favour of the rights of individual shareholders. In particular, in the 2010 Lions Gate decision the BCSC took the position that the only appropriate purpose of a rights plan is to enable the target board to seek an improved offer for shareholders, regardless of whether shareholders have approved the rights plan. However, the enthusiastic level of shareholder support Augusta was able to obtain would have been difficult for any regulator to ignore.
As a result, the BCSC's approach to shareholder support for a rights plan now appears to be more in line with the 2007 decision of the Alberta Securities Commission in Pulse Data, as well as the 2009 decision of the Ontario Securities Commission (OSC) in Neo Material Technologies, where those regulators declined to cease trade a rights plan after the target's shareholders had approved the plan in the face of an unsolicited bid.
The BCSC's decision is also in line with recent regulatory proposals by the Canadian Securities Administrators (CSA) that, if adopted, would provide shareholders with the ability to collectively ratify a target company's rights plan in the face of a hostile bid.
Concern Regarding HudBay's Decision To Drop Its Minimum Tender Condition
In past decisions, particularly the OSC's 2006 Falconbridgeruling, Canadian regulators have been willing to uphold a target board's rights plan where there was a concern that the bidder would seek to obtain a blocking position, which in turn could limit a target board's ability to seek superior proposals in the future.
In addition, in the CSA proposal discussed above, securities regulators expressed concern that insider bids without a minimum tender condition could be seen to unduly pressure minority shareholders to tender due to concerns regarding reduced liquidity and increased control by the bidder post-bid.
Both of these concerns may have worked against HudBay. HudBay held approximately 16% of the outstanding Augusta shares at the outset of its bid. On March 14, 2014, after shareholders holding over 33% of Augusta's shares announced that they would not tender to the HudBay offer, HudBay formally amended its takeover bid to drop its minimum tender condition giving them the potential ability to obtain a blocking position. It will be interesting to see to what extent the BCSC was influenced by Augusta's claims that this move was an inappropriate coercive tactic.
Permitting Matters And The Status Of Third Party Discussions
Historically Canadian regulators have deferred to the rights of hostile bidders after a target board has had sufficient time to attempt to solicit competing white knight offers. It will also be interesting to see to what extent the BCSC was influenced by Augusta's claims that it was actively engaged in discussions with several third parties in connection with potential alternative transactions, and its claim that it was in the final stages of obtaining key regulatory approvals.
Regardless of the BCSC's rationale, the order was clearly a victory for Augusta and will be welcomed in those circles where concerns have long been expressed that takeover bid regulation in Canada has unduly favoured hostile bidders and contributed to the "hollowing out" of corporate Canada.
We look forward to reviewing the panel's reasons when they are released. The BCSC's order was published on May 5, 2014, and is available here1.
Footnote
1 http://www.bcsc.bc.ca/eservices/Inc/ViewDoc.asp?DocNum=J7E7Z6L1C7M7W7LCJ6C4V7T9H7B3&s=False
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