Canada: Quebec Tribunal Concludes Fibrek Inc. Response To Unsolicited Bid Went Too Far

The hostile bid for Fibrek Inc. (Fibrek) by Resolute Forest Products Inc. (formerly AbitibiBowater Inc.) (Resolute) which unfolded over the course of November, 2011 to May, 2012 and the decision of the Quebec Bureau de Decision et Revision (the Bureau) in relation to a subsequent white knight bid by Mercer International Inc. (Mercer) puts target company boards on alert about circumstances in which steps taken by them in the face of unsolicited take-over bids may be overturned by a securities tribunal exercising its public interest jurisdiction. In this case, the Bureau concluded that, in the absence of a real need of financing, it was improper for the board to issue convertible securities which would dilute significant locked-up shareholders even if doing so resulted in a higher offer for all shareholders. The decision also provides support for the utility by bidders of hard lock-ups and highlights the potential value to a target company of having in place a shareholder rights plan that would prevent the granting of hard lockups.

Additionally, the decision highlights the potentially different outcomes in contested transactions, depending upon whether one is before a securities tribunal or a court of law. Canadian courts have shown great deference to directors' decision-making on the basis of the business judgement rule, as evidenced by, for example, the British Columbia Supreme Court decision in Icahn Partners LP v. Lions Gate Entertainment Corp. 2010 BCSC 1547, where a dilutive transaction in favour of an insider in response to a hostile bidder was found not to be oppressive. However, securities tribunals have in certain circumstances, including this one, been prepared to invoke their public interest jurisdiction to over-ride directors' decisions, suggesting that the chances of successfully challenging a board's decision may be higher before the securities tribunals than the courts. In addition, consistent with what we have observed in decisions relating to shareholder rights plans, the Bureau's decision in this case highlights a continuing feature of the Canadian landscape, where the presence of multiple provincial securities regulators leaves it open for each securities tribunal to determine how readily to exercise its public interest jurisdiction, yielding potentially different results from one province to another. Finally, the Quebec Court of Appeal's decision reversing the lower court in this matter also reinforces the deference Canadian courts continue to show to decisions of securities regulatory tribunals in light of their specialized expertise.


On December 15, 2011, Resolute launched an unsolicited take-over bid to purchase all of the issued and outstanding common shares of Fibrek at a price of $1.00 per share, comprised of $0.55 in cash and 0.0284 of a Resolute common share. In connection with this offer, Fairfax Financial Holdings Ltd. (Fairfax), Oakmont Capital Inc. (Oakmont) and Dala Street LLC (Pabrai), who collectively owned 45.74% of the shares of Fibrek, entered into hard lock-up agreements with Resolute to deposit their shares to the bid. Steelhead Partners, LLC (Steelhead), a holder of 5% of the Fibrek shares, later publicly declared its support for the Resolute offer as well, bringing the total support for the Resolute offer to approximately 50.7% (i.e., legal control), and due to the "hard" lock-up agreements, effectively precluding any competing offer from succeeding, absent the issuance of additional shares by Fibrek. Importantly, each of Fairfax and Steelhead owned shares of Resolute, with Fairfax being Resolute's largest shareholder. This presumably accounts in part for their willingness to enter into hard lock-ups which, although not unknown, are relatively rare. Notably, Fibrek did not at that time have in place any shareholder rights plan which would have prevented the hard lock-ups from being entered into.

On December 18, 2011, Fibrek's board of directors created an independent committee for the purpose of retaining a financial valuator to prepare a valuation of the Fibrek shares and on December 25, 2011, Fibrek's board of directors recommended a rejection of the Resolute offer and also approved a shareholders' rights plan.

On February 9, 2012, the Bureau issued a cease trade order with respect to the rights plan, concluding that Fibrek had had sufficient time to study and develop alternatives in response to the offer (February 9th was 73 days after the announcement of the bid and 56 days after its official launch) and that it was therefore time for the rights plan to go.

On February 10, 2012, Fibrek announced that (i) it had entered into a support agreement with Mercer pursuant to which Mercer agreed to make a substantially higher offer than Resolute to purchase all of the issued and outstanding Fibrek common shares by way of take-over bid, at a price of $1.30 per share payable in cash (subsequently increased to $1.40 per share), Mercer common stock or a combination of cash and Mercer common stock (subject to proration), and (ii) that Mercer agreed to subscribe for 32,320,000 warrants of Fibrek (the Warrants) as part of a private placement, at a price of $1.00 per warrant, for an aggregate subscription price of $32,320,000 (the Private Placement), representing a post-exercise interest of 19.9% in the capital of Fibrek. In the support agreement, Fibrek also agreed to pay a break fee to Mercer for a minimum amount of $8,500,000 (approximately 5% of the Fibrek equity value). Without the Private Placement and the resulting potential dilution to existing Fibrek shareholders, the Mercer offer would have had no prospect of succeeding, given that 50.7% of the Fibrek shareholders were already committed to the Resolute offer, either through hard lock-ups or Steelhead`s statement that it intended to tender to the Resolute offer.

On February 13, 2012, Resolute responded to the announced Mercer white knight offer by applying to the Bureau seeking an order to cease trade the Mercer offer and the Private Placement of Warrants to Mercer and on February 23, 2012, the expiry date of the Resolute offer, the Bureau issued an order cease trading the Private Placement, but allowing the Mercer offer to proceed. In the Bureau's view, the cease trade of the Private Placement was justified on the following principal grounds: (i) the Warrants and the break fee constituted defensive measures; (ii) the issuance of rights to subscribe for shares having a dilutive effect in the context of a take-over bid should only be permitted if the target company has a "real and immediate need" of capital, which was determined not to be the case for Fibrek; (iii) lock-up agreements are mechanisms generally used by offerors prior to take-over bids and generally facilitate the launch of an initial offer; (iv) the main purpose of the issuance of the Warrants was not to respond to a need for immediate funding, but rather to deprive Resolute of its right to benefit from validly negotiated agreements by diluting the shareholders of Fibrek (and in particular Fairfax, Oakmont, Pabrai and Steelhead, whose aggregate holdings would have dropped to 40.6% if the warrants were issued to Mercer and converted into Fibrek shares); and (v) the break fee payable to Mercer was not in the range of break fees usually granted in contested transactions of this kind where there had not been a full market canvass.

Decisions of the Bureau and the Courts

The Bureau concluded that the Warrants and the break fee were intended to interfere with validly negotiated lock-up agreements and were abusive of shareholders and financial markets and, accordingly, the Bureau chose to intervene on the grounds of public interest. The Bureau did not consider or comment on whether the board of directors had complied with its fiduciary duties under corporate law, but rather assessed the matters before it under what it considered to be relevant securities law considerations.

It is worth noting that the Bureau came to its conclusion notwithstanding the submission of staff of the Autorité des marchés financiers to the Bureau that because, in staff's view, the Private Placement was of a hybrid nature (serving as a potential defensive tactic, but also conferring a financial benefit to Fibrek), it therefore did not constitute an abusive defensive tactic. The Bureau also distinguished the case before it from the decision of the Alberta Securities Commission (the ASC) in ARC Equity Management (Fund 4) Ltd, Re, 2009 ABASC 390, in which the ASC declined to exercise its public interest jurisdiction to interfere with the private placement of shares of Profound Energy Inc. (Profound) to Paramount Energy Trust (Paramount) and others in connection with Paramount's acquisition of Profound. While the facts are not the same in the two cases, the Fibrek decision does suggest a greater willingness on the part of the Bureau to find abuse and to intervene than the ASC showed in the ARC decision.

Fibrek and Mercer appealed, and the Quebec Civil Court reversed the Bureau's decision, holding that the Bureau erred in invalidating the Private Placement, which the Court considered to be a "real financing". The Court did not consider the Private Placement as a barrier to other bids, but held that it in fact allowed all shareholders of Fibrek, including its major shareholders, to obtain a better offer and potentially other superior subsequent offers. While the Bureau determined that the Warrants provided an improper dilution of shares which would undermine the effectiveness of the lock-up agreements, the Court disagreed that the significant shareholders should be able to effectively assert a right of non-dilution. While the Bureau concluded that the Fibrek board had improperly exercised broad discretion to interrupt the auction process by unduly favouring the Mercer bid, the Court concluded that the Bureau's decision was in direct opposition to the objectives of National Policy 62-202 – Take-Over Bids – Defensive Tactics, since the Bureau's decision "managed to limit or even completely terminate the auction process and penalize shareholders". In the Court's view, the Bureau erred by focussing only on Fibrek's major shareholders (those who had signed lock-ups) and not all of its shareholders. In this regard, the Bureau and the Court took very different approaches to this case. The Bureau was principally concerned with the use of a defensive tactic that it determined was intended not to further valid financing needs, but to interfere with a bid that was launched with contractual and preclusive support of just less than the majority of the shareholders. In contrast, the Court was opposed to interfering with an informed decision of a board of directors which produced a substantially higher offer for all shareholders and potentially enhanced the auction process.

The lower court's decision was in turn appealed by Resolute to the Quebec Court of Appeal and on March 27, 2012 the Court of Appeal reversed the lower court, reinstating the Bureau's original decision. In general terms, the Court of Appeal held that courts must give the highest deference to the decision of an independent and specialized tribunal such as the Bureau, and that the Court could only properly substitute its view if the Bureau's decision was not clear or intelligible or could not be justified in light of the facts or the law. More specifically, the Court of Appeal held that there was no doubt that the Bureau's decision was intelligible, clear and sufficiently founded in law, and that it was not unreasonable for the Bureau to have concluded that the issuance of the Warrants was an improper defensive tactic intended to dilute those shareholders who supported the Resolute bid and to favour the Mercer bid, as well as an unacceptable interference with legally negotiated lock-up agreements.

The Court of Appeal went on to state that "[o]ne can be in disagreement with the approach chosen by a specialized decision-maker, but one can't say in this case that its decision is not within acceptable possible results justified by the facts and the law". The Court of Appeal explicitly deferred to the Bureau's discretion to give preference to the integrity of the lock-up agreements and the expressed preference of a majority of the Fibrek shareholders over allowing the Fibrek board to take measures to enable the higher Mercer bid. It concluded that it was valid for the Bureau to be concerned that in the face of the Private Placement the Resolute bid would not succeed, not because of a more attractive offer and an auction, but rather due to a dilutive transaction undertaken where, in the Bureau's view on the facts, Fibrek had no real financing need. Accordingly, it was not unreasonable for the Bureau to have concluded that the Private Placement should be invalidated.

On April 30th, following the Supreme Court of Canada's refusal to grant leave to appeal the Quebec Court of Appeal decision, and in light of Resolute's ability to acquire shares under its lock-ups with Fairfax and other Fibrek shareholders , Mercer withdrew its offer. Resolute has since taken up the Fibrek shares deposited under its offer, enabling it to acquire majority control of Fibrek, and has stated that it intends to carry out a second step transaction to acquire the remaining Fibrek shares.


In this interesting and contested transaction - notable for the multiple decision reversals on appeal - Resolute was ultimately allowed to complete its unsolicited bid for Fibrek as a result of the Bureau's decision to invalidate defensive tactics that it concluded interfered with contractual arrangements Resolute had put in place at the outset of its bid, even if these tactics did facilitate a higher bid.

Ward Sellers' practice covers many areas of corporate and securities law. Robert Yalden's areas of specialty include mergers and acquisitions, corporate finance and corporate governance. Emmanuel Pressman's practice focuses on corporate and securities law matters with an emphasis in mergers and acquisitions and corporate finance

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.

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

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

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (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

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’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.


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.


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 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.


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.


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.


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.


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

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

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

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