Overview: Inmet's Hostile Bid for Petaquilla
On November 28, 2012, the BC Securities Commission gave its reasons for orders that it made following a hearing held on October 30, 2012 in connection with Inmet Mining Corporation's offer for Petaquilla Minerals Ltd.
Inmet announced its intention to bid for the common shares of Petaquilla on September 5, 2012. Inmet increased its offer by 25% on October 24, 2012, resulting in an offer that was a premium of 71% over the September 5, 2012 closing price of Petaquilla's shares. The offer would expire on November 5, 2012. Under a shareholders rights plan adopted by Petaquilla in October 2010, it was not a "permitted offer" as it was a condition of Inmet's offer that the rights plan be waived, invalidated or cease-traded and that securities not be issued pursuant to a contemplated offering by Petaquilla of senior secured notes (which may have included potentially dilutive share purchase warrants). Inmet sought orders to have any securities issued pursuant to the shareholders rights plan and the notes offering cease-traded. Arguing that Inmet's offering circular was misleading, Petaquilla in turn applied for an order cease-trading any securities issued by Inmet in connection with its offer. Following the hearing the Commission granted the applications of Inmet and dismissed the application of Petaquilla.
Reasons for Cease-trading Petaquilla's Shareholder Rights Plan
The Commission considered National Policy 62-202 Take-Over Bids – Defensive Tactics and referred to the decision in Icahn Partners 2010 BCSECCOM 214 (decision), 2010 BCSECCOM 233 (reasons) and the decision of the Ontario Securities Commission in Baffinland Iron Mines Corp. 2010 LNONOSC 904.
Under National Policy 62-202, the Canadian securities regulatory authorities have taken the view that "unrestricted auctions produce the most desirable results in take-over bids and they are reluctant to intervene in contested bids" and that "they will take appropriate action if they become aware of defensive tactics that will likely result in shareholders being deprived of the ability to respond to a takeover bid or to a competing bid." In Icahn Partners and Baffinland, orders were made to cease-trade the shareholder rights plans that had been put in place to fend off hostile bids.
The Commission looked at whether or not it was time for the Petaquilla rights plan to go. This involved an analysis of two factors: (i) the period the offer had been outstanding and (ii) whether there was "a real and substantial possibility of an alternative that would increase shareholder choice and maximize shareholder value."
The Commission considered how long Petaquilla had to find superior alternatives to the offer. It found that the offer's expiry date was 60 days from Inmet's initial announcement and 38 days after the takeover bid circular was filed by Inmet. It found that Inmet's announcement of September 5 contained the material terms and conditions of the offer and that Petaquilla's behaviour was "consistent with that of a target in play" - it held a board meeting on September 10 and appointed a financial advisor on September 17. In total, Petaquilla had about 60 days to respond to the offer.
The Commission noted that a shareholders rights plan should be allowed to continue where there is a real and substantial possibility that more time would yield an alternative transaction for shareholders to consider; Petaquilla failed to meet this test.
Petaquilla's advisors had contacted 37 potential bidders, only two of which showed any real interest. In the Commission's opinion, the "evidence fell short of demonstrating a real and substantial possibility that leaving the Petaquilla rights plan in place any longer would result in an alternative transaction for its shareholders to consider that would result in greater shareholder value." Petaquilla only showed that the discussions could lead to a superior alternative transaction but no strong evidence was given as to why more time was needed or that there was a greater likelihood of an agreement if more time was available. The Commission said better evidence needed to be given and concluded that it was therefore time for the rights plan to go. The Commission found that to allow the rights plan to continue when Inmet had advised that it would not be extending its offer posed the risk that Petaquilla shareholders would be denied the opportunity to tender their shares to Inmet if they found it desirable to do so.
The Commission also found that the contemplated Petaquilla note offering, while not created as a purely defensive measure, could effectively deny shareholders the opportunity to tender their shares to Inmet. Evidence was given that Petaquilla would not suffer adversely if, during the period between the hearing and the offer's expiry, the notes were cease-traded.
The Commission advised that it would cease-trade the securities issued or to be issued under the Petaquilla rights plan if Petaquilla did not waive the rights plan in relation to Inmet's offer. It also cease-traded the notes offering.
Postscript - OSC May Change the Rules on Unsolicited Bids
The Ontario Securities Commission has recently announced that it will be publishing a draft instrument, 62-105 Security Holder Rights Plans in January 2013. We look forward to reviewing this draft instrument when it is published as there has been much speculation as to what position the OSC and the other Canadian securities regulatory authorities may wish to take in light of at times conflicting regulatory decisions in recent years on the appropriateness of certain defensive strategies deployed in the face of unsolicited bids.
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