After a slow 2013 in terms of M&A activity in the Canadian mining sector, 2014 has begun with the launch of three hostile takeover bids making headlines across Canada.
On January 14, 2014, Goldcorp Inc. formally launched its bid to acquire Osisko Mining Corporation. Then, on February 10, 2014, HudBay Minerals Inc. made a bid to acquire Augusta Resource Corporation. On February 19, 2014, a subsidiary of Waterton Precious Metals Fund II Cayman, LP, made a bid to acquire Chaparral Gold Corp.
The return of M&A activity has been touted positively by some as it may signal a rebound in commodity prices and the return of financial health to the mining industry. For certain junior and mid-tier companies, however, the recent hostile activity is seen as predatory and opportunistic at a time when share prices may not accurately reflect the true or potential value of a company's assets.
Each of the boards of Osisko, Augusta and Chaparralhave formally rejected their respective bid, citing each as inadequate, although each offer represents a premium to the target company's share price immediately prior to the announcement of the bid. The reality is that the shares of the three targets have traded significantly higher in the past.
In the current climate, junior and mid-tier mining companies should be prepared to respond to a hostile takeover bid at any time. As part of such preparedness, companies should carefully consider the adoption of a shareholder rights plan to help ward off coercive and unfavourable bids.
The purpose of a shareholder rights plan is to give shareholders adequate time to consider a takeover bid and to give the board of directors adequate time to respond and seek value enhancing alternatives. A shareholder rights plan sets out certain ground rules for takeover bids made for the company. For example, a plan may require that bids be made to all shareholders of the company, remain open for 60 days and may only be completed if at least 50 per cent of shareholders tender to and do not withdraw from the bid. In the event that a takeover bid does not meet the requirements of the plan, rights issued under the plan will entitle shareholders, other than takeover bid offeror, to purchase additional shares of the target company at a substantial discount, essentially frustrating the bid.
Traditionally, shareholder rights plans have been cease traded before such dilution actually occurs, effectively buying the company time to facilitate a competitive bidding process. More recently, however, the securities commissions have, in certain situations, given more deference to boards and shareholders, and have permitted shareholder rights plans to remain in effect indefinitely as long as they continue to serve a proper purpose. On March 14, 2013, the Canadian Securities Administrators published for comment proposed National Instrument 62-105 Security Holder Rights Plans, which would allow a rights plan adopted by a board to remain in place provided majority shareholder approval of the rights plan is obtained 90 days following the making of the bid or the date of the plan (whichever is earlier).
A shareholder rights plan that is not adopted in direct response to a bid can be implemented with immediate effect but requires shareholder ratification within six months to remain in place. Alternatively, a tactical shareholder rights plan can be implemented in direct response to a bid. Companies should be aware that institutional investors will generally vote against a plan unless certain guidelines are met. Companies should consult legal counsel to properly understand the operation and legal consequences of a plan, and to properly tailor the timing, implementation and terms of a plan to their specific circumstances.
This article originally appeared in the Spring 2014 issue of Canadian Mining Magazine.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
