Canada: Baffinland Decision Clarifies OSC’s Position on Poison Pills

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Mergers & Acquisitions, January 2011

On December 3, 2010, the Ontario Securities Commission (OSC) released the reasons for its November 19, 2010 decision to cease-trade the shareholder rights plan (poison pill) of Baffinland Iron Mines Corporation. In the decision, the OSC had an opportunity to clarify its position on the use of rights plans to block unsolicited take-over bids and the reasoning in its 2009 decision in Neo Material Technologies, recently criticized by the British Columbia Securities Commission (BCSC) in its Lions Gate decision. In confirming the OSC's view that shareholder approval of a rights plan in the face of an unsolicited offer is a significant factor in determining whether to uphold a plan in the absence of an auction, the decision arguably highlights a difference in views between the Ontario and British Columbia securities regulators.

RECENT DIVERGENCE IN VIEWS OF CANADIAN SECURITIES REGULATORS

It is a long-standing proposition of Canadian law that boards of Canadian public companies cannot implement permanent structural defences to ward off unsolicited acquisition proposals. Canadian securities regulators have historically expressed the view that while a target board may use a shareholder rights plan to delay an unsolicited bid for a reasonable period of time as it seeks out competing offers, it has always been a question of when, not if, a pill must go. This position is reflected in National Policy 62-202 - Take-Over Bids - Defensive Tactics (NP 62-202) and a lengthy history of regulatory decisions.

The 2007 decision of the Alberta Securities Commission (ASC) in Pulse Data, relied and expanded upon by the OSC in its decision in Neo, appeared to reflect an evolution in this reasoning. Each suggested that where shareholders, who are fully informed of the relevant facts, approve a rights plan in the face of an unsolicited bid, and the target board is able to demonstrate the exercise of reasonable business judgment in determining that the unsolicited bid is not in the best interests of the corporation, securities regulators will be reluctant to cease-trade the rights plan even in the absence of an ongoing auction for the target company.

In Neo, the OSC incorporated the view of the Supreme Court of Canada (the SCC) in Re BCE Inc. that a board in the exercise of its fiduciary duty is not confined to a consideration of short-term profit or share value, but rather must make decisions in the best longterm interests of the corporation, which may include weighing the interests of all stakeholders.

For more details on the Neo and Pulse Data decisions, please see our previous Blakes Bulletins on Mergers & Acquisitions: Neo and Canadian Hydro Decisions Provide New Perspective on Poison Pills in Canada, October 2009, and Alberta Securities Commission Declines to Cease-Trade Poison Pill Following Timely Shareholder Approval, December 2007.

However, in its 2010 decision in Lions Gate, the BCSC in majority reasons expressed reservations about the reasoning of the ASC and OSC in Pulse Data and Neo, respectively.

While the Lions Gate rights plan had not received shareholder approval at the time of the hearing before the BCSC, a shareholders' meeting to consider the rights plan was imminent. Noting that the Neo and Pulse Data decisions were apparent departures from NP 62-202 and past regulatory decisions, the BCSC ordered that the Lions Gate rights plan be cease-traded. The BCSC affirmed its view that the only appropriate purpose of a shareholder rights plan is to enable the target board to seek an improved offer for shareholders. In the absence of any attempts by the Lions Gate board to take steps to increase shareholder value through an improvement of the bid or identification of alternative transactions, there was no basis for allowing the rights plan to continue and the possibility that shareholders might approve the plan was considered by the BCSC to be, in those circumstances, irrelevant.

The BCSC did not comment on the view expressed by the OSC in Neo that the pursuit of value-enhancing alternative transactions is not the only legitimate purpose of a shareholder rights plan and that a rights plan may be adopted for the broader purpose of protecting the long-term interests of shareholders. Moreover, the BCSC did not address the impact of the SCC decision in BCE, which highlighted a board's duty to consider the best long-term interests of the corporation. The BCSC was critical of the weight attributed by the ASC and OSC to shareholder approval of the rights plans, noting that while a majority of disinterested shareholders may have approved of the plans, the remaining shareholders had been deprived of an opportunity to tender to the bids. For more details on the Lions Gate decision, please see our August 2010 Blakes Bulletin on Mergers & Acquisitions: BCSC Releases Reasons for Decision to Cease-Trade Lions Gate Shareholder Rights Plan.

In Baffinland, the OSC took the opportunity to clarify its reasoning in Neo and, indirectly, respond to the criticism of the BCSC.

BACKGROUND TO BAFFINLAND DECISION

Baffinland is a TSX-listed junior mining company engaged in the exploration of one mineral property, the Mary River Property, located on Baffin Island in Nunavut.

Baffinland adopted its shareholder rights plan in January 2006 and amended it in January 2009.

Consistent with TSX rules, the amended rights plan was approved by Baffinland shareholders in March 2009. On September 22, 2010, Nunavut Iron Ore Acquisition Inc., a company indirectly controlled by The Energy & Minerals Group, a private investment firm, launched an unsolicited all-cash take-over bid for Baffinland at a price of C$0.80 per share. On November 8, 2010, Baffinland entered into a support agreement with white knight ArcelorMittal S.A., the world's largest steel producer, pursuant to which ArcelorMittal agreed to make an allcash offer to acquire Baffinland at a price of C$1.10 per share and C$0.10 per warrant. Under the terms of the support agreement, Baffinland agreed not to waive its rights plan until the expiry of ArcelorMittal's bid.

Nunavut made an application to the OSC to cease‑trade the Baffinland rights plan and, at a hearing on November 18, argued that it was prevented from taking up any Baffinland shares under its offer until the rights plan was terminated. Moreover, Nunavut contended that the rights plan was the only impediment to increasing the price of its offer, which was set to expire on November 22. Baffinland and ArcelorMittal sought to have the rights plan upheld. On November 19, the OSC issued an order cease-trading the Baffinland rights plan.

OSC'S DECISION

In determining whether or not to cease-trade the Baffinland rights plan, the OSC indicated it would exercise its public interest discretion to do so if the continued validity of the rights plan would likely result in Baffinland shareholders being deprived of the ability to respond to the Nunavut offer. The OSC affirmed its long-held view that a rights plan will be cease-traded where it is unlikely to achieve any further benefits for shareholders. In the view of the OSC, a rights plan has "got to go" once the plan has served its purpose by facilitating an auction, encouraging competing bids or otherwise maximizing shareholder value. As it has done in previous decisions (and perhaps as a means of accommodating the Neo precedent), the OSC cautioned that there is "no one test or consideration that constitutes the 'holy grail' when deciding whether a rights plan should remain in place or be cease traded."

The OSC noted that Baffinland's support agreement with ArcelorMittal prohibited Baffinland from soliciting further offers, so there was no basis for keeping its rights plan in place in order to facilitate an auction. The auction process was evidently coming to an end, and it was unlikely that the rights plan would achieve more for shareholders in terms of inducing a further offer from a new bidder. The OSC also recognized that upholding the rights plan in these circumstances would unfairly negate Nunavut's timing advantage of being the first bidder, as it would force Nunavut to extend its offer and wait until the expiry of the ArcelorMittal bid before it could take up shares. This view by the OSC was consistent with previous decisions in which it indicated that pills cannot be used to eliminate timing advantages between competing bids.

NO DEFERENCE TO BUSINESS JUDGMENT OF BAFFINLAND BOARD

The OSC then turned to Baffinland's contention that it should undertake its analysis "through the lens of deference to the reasonable business judgment of the target company's directors," as contemplated in Neo. The OSC disagreed, noting that in Neo it had concluded that it would defer to the wishes of shareholders who had overwhelmingly voted to keep the rights plan in place in the face of the specific bid that was before shareholders at the time of the vote. The OSC pointed to the language in NP 62-202 that provides that "prior shareholder approval of corporate action would, in appropriate cases, allay" concerns with respect to a defensive tactic. The OSC explained that in Neo, after reaching its conclusion on shareholder approval, it then considered whether there were any other circumstances that should lead the OSC to otherwise intervene, including whether or not the board of Neo had breached its fiduciary duty by electing not to solicit competing bids.

The OSC clarified that Neo does not stand for the proposition that it "will defer to the business judgment of a board of directors in considering whether to cease-trade a rights plan or that a board of directors in the exercise of its fiduciary duties may 'just say no' to a take-over bid." The OSC stated that this would be inconsistent with NP 62-202 and prior regulatory decisions. Rather, the OSC in Neo deferred to the wishes of shareholders as contemplated by NP 62-202. Whether the target board is acting in the best interests of the corporation is only a secondary consideration and "does not determine the outcome of a poison pill hearing."

Conclusions

Baffinland clarifies that Neo did not establish a new basis for upholding a poison pill. Rather, the OSC stated that shareholder approval of a rights plan in the face of a specific bid is an important element of its analysis and one that was always contemplated by NP 62-202.

This does not resolve the differing approaches of the Ontario and British Columbia securities commissions where shareholder approval of a rights plan in the face of a specific bid has been obtained or is imminent and an auction is not ongoing. The inconsistencies between the Lions Gate and Neo decisions arguably suggest that the outcome of a cease-trade hearing on a rights plan in these circumstances may vary depending on the jurisdiction in which the application is brought. The Baffinland decision also does not address the inconsistency between the SCC's views on a target board's duty to act in the "best interests of the corporation," being its long-term interests having regard to all stakeholders, and the value-maximization principles espoused by NP 62-202.

RECENT DEVELOPMENTS

On December 15, Nunavut increased its offer to C$1.35 in cash per share for up to a 50.1% interest in Baffinland and extended its offer to December 30. On December 18, ArcelorMittal increased its offer to C$1.25 in cash per share for all of the shares of Baffinland and extended its offer to December 29. In connection therewith, ArcelorMittal and Baffinland amended the support agreement to require Baffinland to adopt a new shareholder rights plan no later than December 20 in substantially the same form as the rights plan cease-traded by the OSC and to increase the break fee payable to ArcelorMittal from C$11-million to C$15.5-million. The board of Baffinland recommended that shareholders accept the amended ArcelorMittal offer.

Following implementation of the second rights plan, Nunavut again applied to the OSC for a cease-trade order, which order was agreed to by all parties and granted on December 22.

Each of Nunavut and ArcelorMittal has since further increased and extended its offer.

Highlights

  • OSC takes the opportunity to confirm that its Neo decision did not create new law
  • Absent informed shareholder approval of a poison pill in the face of a bid, a target board of directors cannot use a pill to "just say no" to an unwelcome bid
  • Informed shareholder approval in the face of a bid is a relevant consideration in determining whether to uphold a rights plan in Ontario in the absence of an auction, creating potential inconsistency with position taken by the British Columbia Securities Commission in the Lions Gate decision

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.

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