Last April, the Supreme Court of Canada (SCC) dismissed an
application by Fibrek Inc. (Fibrek) for leave to appeal a decision
of the Quebec Court of Appeal in connection with two take-over bids
for Fibrek, one hostile and one friendly. Had leave been granted,
it is possible that there might have been a resolution of the
conflicting Canadian judicial and regulatory positions around the
defensive actions a board of directors of a public company is
entitled to take in the face of a hostile take-over bid. It is also
possible that a decision on the merits of the case by the highest
court would simply have entrenched the status quo.
The Hostile Bid
In December 2011, AbitibiBowater Inc. (AbitibiBowater) launched an unsolicited take-over bid for all the outstanding common shares of Fibrek, a Quebec-based company listed on the Toronto Stock Exchange. The Fibrek shareholders were given a choice of three forms of bid consideration: AbitibiBowater common shares, a combination of AbitibiBowater common shares and cash, or $1.00 per share in cash, subject to proration based on aggregate maximum cash and share amounts.
The bid was supported by irrevocable lock-up agreements with three Fibrek shareholders who together owned 45.7% of the outstanding Fibrek common shares and one of whom was a large shareholder of AbitibiBowater. Another large shareholder of AbitibiBowater advised AbitibiBowater that it would tender its Fibrek shares (most of which were acquired after the announcement of the bid) to the bid, bringing the declared Fibrek shareholder support of the bid to 50.7%.
Shortly after the bid was commenced, Fibrek adopted a shareholder rights plan which was eventually cease traded by the Bureau de décision et de révision (the Bureau), the tribunal responsible for making securities regulatory rulings on contested take-over bid matters in Quebec.
The Friendly Bid
Fibrek's board of directors and financial adviser sought an alternative transaction to the AbitibiBowater bid and elicited a proposal from Mercer International Inc. ("Mercer"). Mercer was willing to make a competing take-over bid but, to address the obvious obstacle posed by the lock-up agreements with AbitibiBowater and to "level the playing field", Mercer would require Fibrek to agree to issue special warrants to Mercer. The special warrants would be issued at a price of $1.00 per share, the same as the amount of the all-cash consideration option in the AbitibiBowater bid. Subject to certain conditions, the special warrants would be convertible on a one-for-one basis into Fibrek common shares. The number of common shares issuable on conversion would represent 19.9% of the number of outstanding common shares on a post-conversion basis, which would be just below the threshold that would normally trigger an automatic requirement for shareholder approval under Toronto Stock Exchange rules. (The locked-up shareholders to the AbitibiBowater bid had agreed, among other things, to vote their shares against any issuance of Fibrek shares or convertible securities except in accordance with the lock-up agreements.) The share issuance to Mercer on conversion of the special warrants would reduce the aggregate percentage holdings of the locked-up shareholders, and the additional shareholder that had advised of its intention to tender to the AbitibiBowater bid, to 40.6% of the outstanding Fibrek common shares from 50.7%.
Similar to the AbitibiBowater bid, the Mercer bid provided the Fibrek shareholders with a choice of three forms of bid consideration: Mercer common shares, a combination of Mercer common shares and cash, or $1.30 (later raised to $1.40) per share in cash (as compared to $1.00 in the AbitibiBowater bid), subject to proration based on aggregate maximum cash and share amounts.
AbitibiBowater's Application to the Bureau
AbitibiBowater applied to the Bureau for an order cease trading the Mercer bid and the proposed private placement of special warrants, based on the Bureau's public interest jurisdiction. Following a hearing, the Bureau cease traded the private placement but not the bid.
As is normally the case when a securities regulator issues an order preventing a board of directors of a target company from carrying out a defensive strategy, the Bureau devoted part of its reasons to explaining that it was not the Bureau's role in this type of proceeding to decide on whether the target's directors properly exercised their fiduciary duties. The Bureau's decision regarding the private placement was based on its view that the private placement would undermine the take-over bid regime and the rights of shareholders by unduly interfering with the legitimate expectations of AbitibiBowater and the locked-up shareholders who had negotiated valid agreements that helped to cause the AbitibiBowater take-over bid to be made in the first place.
Of particular note was the Bureau's assertion, citing an earlier decision by the Bureau when it cease traded a shareholder rights plan, that use of the primary securities market and the issuance of securities are designed to raise capital to finance the issuer's projects. The Bureau went on to examine in detail the evidence relating to Fibrek's financing requirements. The evidence not having indicated a pressing need for financing, the Bureau concluded this line of analysis by stating that the issuance of warrants which has a dilutive effect in connection with a take-over bid should only be allowed where proof is made that the target company has a real and immediate need for capital. For commentators who had already expressed concern that securities regulators, through the use of their cease trade powers, were unduly infringing on corporate law, these pronouncements of seemingly general application by the Bureau as to the limits on the exercise of corporate directors' statutory responsibility over the issuance of securities might have been expected to add a certain amount of fuel to the fire.
The Appeal to the Court of Quebec
On appeal by Fibrek and Mercer, the Court of Quebec allowed the appeal and quashed the Bureau's decision, applying the standard of review of reasonableness. The court held that the Bureau contravened completely the guiding principles of National Policy 62-202 – Take-over Bids – Defensive Tactics (NP 62-202) of the Canadian Securities Administrators by nullifying the bidding process, favouring one bidder (AbitibiBowater) and denying the shareholders the ability to decide. According to the court, the jurisprudence established that where there has not been a contravention of the law, securities regulatory authorities should intervene only in cases that involve abuse of shareholders in particular and the capital markets in general. Issuing the special warrants in order to make it possible for Fibrek's shareholders, including those who had signed the lock-up agreements, to obtain a better offer, namely the Mercer offer, could not reasonably be regarded as an abusive transaction that justified the use of the cease trade power.
In regard to the purpose of a private placement, the court did not agree with the Bureau that a need for financing was a necessary condition to the validity of a private placement or that a private placement in the circumstance in which Fibrek found itself should only be allowed to the extent that it was established that the company had a real and immediate need for capital. It was sufficient to the court that the transaction was a real financing and not a sham.
The court also expressed the view that the responsibility for determining what was best for the shareholders of a take-over target belongs, first and foremost, with the target's board of directors pursuant to the business judgment rule.
The Appeal to the Quebec Court of Appeal
On appeal by AbitibiBowater, the Quebec Court of Appeal allowed the appeal, restoring the cease trade order that had been issued by the Bureau against the private placement. The court decided that the Bureau's decision met the necessary standard of reasonableness. The Court of Appeal's reasoning was consistent with the generally held judicial view that a court should show deference to the decisions of a securities regulatory tribunal, which has a wide statutory discretion to intervene in the public interest using its relative expertise in the regulation of the capital markets.
Supreme Court of Canada Denies Application for Leave to Appeal
Fibrek applied to the SCC for leave to appeal the decision of the Quebec Court of Appeal, submitting in its application that the case provided "a rare opportunity for this Honourable Court to resolve fundamental issues which arise in the context of take-over bids." These issues revolve around the difference between the courts and the securities regulators in the level of deference given to boards of directors when their actions are challenged. The business judgment rule, which has been enshrined by the courts and gives deference to decisions of boards of directors that are within a range of reasonableness, has been overridden, in the hostile take-over bid context, by the securities regulators in their application of NP 62-202, which gives priority to shareholder choice.
The SCC dismissed Fibrek's leave application and, as is normal practice, did not issue reasons.
In 2010, the British Columbia Court of Appeal (BCCA), in Re Icahn Partners LP and Lions Gate Entertainment Corp., upheld a decision of the British Columbia Securities Commission (BCSC) to issue a cease trade order against the shareholder rights plan of a take-over target (Lions Gate) at the request of the bidder (the Icahn Group). The BCSC had stated in its reasons that it had concluded there was no evidence that Lions Gate's board of directors had failed to discharge its fiduciary duties, but the BCSC characterized that as "neutral factor" in a securities regulator's consideration as to whether a decision by a board to utilize a shareholder rights plan to impede or prevent a take-over bid should be overruled by the regulator. The BCCA's written reasons for dismissing Lions Gate's appeal included the following passage:
In the present case, the Commission concluded that it was in the public interest to issue the cease-trade order so that the shareholders of Lions Gate would not be deprived of the opportunity to respond to the take-over bid by the Icahn Group. In my opinion, that conclusion was consistent with National Policy 62-202 and was within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.
One year later, the same court issued reasons relating to a different alleged take-over defensive tactic involving the same parties. On this occasion, the BCSC had dismissed the Icahn Group's application requesting the BCSC to intervene in the case of an issuance of shares of Lions Gate to a friendly party. The BCSC had decided that the court was the most efficient forum to resolve the issues. The Icahn Group's court challenge of the share issuance took the form of an oppression action. Absent any consideration of NP 62-202, the British Columbia Supreme Court applied the business judgment rule and dismissed the application. The BCCA upheld this decision. In its reasons, the BCCA made the following statement:
In Canada, it has been clear since Teck [Teck v. Millar, 1972, BCCA] that where directors have carried out reasonable enquiries to inform themselves as to where their company's best interests lie and are bona fide of the belief, based on reasonable grounds, that a proposed takeover will run contrary to those interests, they are entitled to use their powers to take defensive measures.
These two decisions by the same court perhaps best illustrate the inconsistency that Fibrek's application for leave to appeal to the SCC invited that court to address. The rejection of the leave application may indicate to some that the SCC was content with the status quo.
The SCC, in reinforcing the business judgment rule in the 2008
case of BCE Inc. v. 1976 Debentureholders, characterized
the concept of directors' fiduciary duties as not being
confined to short-term profit or share value, but rather looking to
the long-term interests of the corporation. In the same judgment,
the SCC stated that there was no principle that, in the exercise of
the directors' fiduciary duties to the corporation, the
interests of shareholders should prevail over another set of
corporate stakeholder interests. However, the SCC had also
previously confirmed the judicial deference to be accorded to
regulators based on their broad public interest mandate and specialized expertise, such as in the 2001 case of Committee for the Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission). For those who may have suggested that this deference on the part of the courts has taken precedence over the business judgment rule and the principles of fiduciary duties set out in BCE, the events of Fibrek may have provided additional confirmation that this is the case.
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