Canada: OSC Spider Decision Muddies the Waters for Rights Plans

On July 12, 2010 On July 2, 2010, the Ontario Securities Commission released a decision concerning a challenge to the shareholder rights plan (or "poison pill") of Spider Resources Inc. Full reasons have not yet been released, and when they are they may shed light on the implications of the decision. For now, parties involved in or considering engagement in public M&A transactions are left with uncertainty, as the Spider decision is difficult to reconcile with earlier "poison pill" cases.

Generally speaking, Canadian securities regulators' decisions in "poison pill" cases have reflected the view that shareholder rights plans may be used to ensure that:

  • all shareholders are treated fairly in connection with any take-over bid, and
  • directors of a target board are provided with sufficient time to evaluate unsolicited take-over bids and explore and develop alternatives to maximize shareholder value.

In simple terms, with notable exceptions, Canadian securities regulators have generally permitted shareholder rights plans to stand only for so long as the issuer is developing, and/or there is a reasonable prospect that it may develop, an alternative for shareholders. The Spider decision may reflect a view of the OSC that shareholder rights plans will be permitted to stand for other purposes.

Background

The Rights Plan. Spider's rights plan had been adopted by Spider in May 2009 and approved by Spider's shareholders in June 2009.

The Initial Cliffs Proposal and Bid. In May 2010 Cliffs Resources launched a bid, unsupported by the Spider board, to acquire all of the outstanding common shares of Spider for $0.13 cash per share. Cliffs' offer was open until 5:00 pm (Eastern Time) on July 6, 2010 and contained a number of conditions, including a condition that the Spider rights plan be waived or invalidated.

The KWG Deal. In response to Cliffs' initial proposal, Spider entered into a combination agreement with KWG Resources Inc. That agreement gave certain customary deal protection rights to KWG, including a commitment by Spider not to solicit alternative transactions and a right for KWG to match any (unsolicited) superior alternative proposals received by Spider. Spider announced that it would hold the shareholder meeting to approve the combination on July 8, 2010, two days after Cliffs' offer was to expire.

Cliffs Increases, KWG Matches. On June 14, Cliffs proposed to increase its offer from $0.13 to $0.165 cash per share, subject to certain conditions. The special committee of the Spider board and the board determined that Cliffs' $0.165 proposal constituted a "superior proposal" under the agreement with KWG, which triggered KWG's five-day matching right. On June 23, KWG agreed to match Cliffs' proposal for $0.165 per Spider share. As a result, the Spider board informed Cliffs that its revised offer of $0.165 per share was no longer "superior".

Cliffs Raises Again. On June 25, Cliffs proposed to further increase its offer to $0.19 cash per share. That proposal was determined by the Spider special committee and Spider board to be a "superior proposal", and KWG had a further matching right that would expire on July 6, 2010 at 12:01 a.m. (Eastern Time).

The Decision

At the time of the hearing, Cliffs' offer was scheduled to expire prior to the shareholder meeting to consider the KWG merger. Unless the Cliffs offer were extended the continued existence of the Spider rights plan would result in a failure of a condition to the "superior" Cliffs offer, and therefore possibly deny shareholders the opportunity to accept it.

At the hearing, Cliffs submitted that the Spider rights plan had accomplished its purpose in allowing for an auction and should be set aside to allow Spider share holders to "choose the way forward". In support of this argument Cliffs pointed out, among other things, that by the expiry date of its offer:

  • Spider had agreed not to seek out some other transaction, foreclosing or dramatically reducing the possibility of other bidders emerging, and
  • an auction process had occurred, as a result of which Cliffs' offer premium had increased from 62.5% to 106% (and ultimately to 138%).

The OSC decided not to cease trade the Spider rights plan. The panel indicated that Cliffs' application was premature "considering all the circumstances, and in particular, the ongoing auction between Cliffs and KWG for Spider".

Historically Canadian securities regulators have generally not permitted rights plans to survive in the midst of an auction. In Re Falconbridge Limited, Falconbridge was allowed to keep a shareholder rights plan in place during an auction for a limited period of time primarily as a result of the OSC's concern that failing to do so might result in Falconbridge shareholders being faced with a potentially coercive partial bid. Spider's shareholders did not face a similar risk.

In this context, it is unclear why Spider shareholders should be denied the choice of being able to accept Cliffs' offer and suggests that a concern other than coercion may have driven the decision.

The Outcome of Spider

On July 2 –after the OSC hearing – KWG informed Spider that KWG would not exercise its matching right, and the Spider board confirmed that Cliffs' proposal was "superior". As a result, Spider terminated its agreement with KWG (paying a break fee), cancelled the meeting of Spider shareholders to consider and vote on the combination with KWG and entered into a support agreement with Cliffs.

On July 6, the special committee and the board announced that all of the conditions to Cliffs' offer had been satisfied or waived. Cliffs then took up the approximately 316 million common shares of Spider that were validly tendered, resulting in Cliffs owning approximately 52.1% of the Spider shares then outstanding on a fully-diluted basis. Cliffs extended the offer to 11:59 p.m. (Eastern Time) on July 16, 2010.

Implications of the Decision

The Spider decision may suggest an increasing reluctance on the part of the OSC to intervene to cease trade a rights plan. Such a view might appear to be consistent with the decision of the OSC in Neo and the Alberta Securities Commission in Pulse Data. However, the decision would appear to be inconsistent with the views expressed by the British Columbia Securities Commission in April in its decision in Lions Gate – although the reasons of the BCSC also are yet to be issued – and inconsistent too with prior decisions. In the absence of guidance that may be provided by the reasons, and in light of other recent "pill" decisions, the OSC has made it increasingly difficult to advise acquirors or targets as to the likely outcome of a "pill" hearing.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.