The future of shareholder rights plans (or "poison pills"), a commonly used tool in the take-over bid world, is up in the air. As outlined in our March 15, 2013 Update, "Canadian Securities Regulators Propose New Regimes for Shareholder Rights Plans", Canadian securities regulators have recently proposed significant changes to the rules governing shareholder rights plans.
In the midst of this, the decision of the British Columbia Securities Commission ("BCSC") to cease trade a shareholder rights plan adopted by Aurizon Mines Ltd. ("Aurizon") appears to confirm that until the new rules are adopted it's business as usual for rights plan oversight in Canada. At the same time, the facts surrounding the Aurizon rights plan raise interesting questions about the continuing role of securities regulators in reviewing defensive tactics other than rights plans.
The rights plan cease traded by the BCSC was actually the second shareholder rights plan adopted by Aurizon in response to the $780 million hostile take-over bid launched in January of this year by Alamos Gold Inc. ("Alamos"). An initial poison pill that had been put in place by Aurizon in January following Alamos' unsolicited bid was ceased traded by the BCSC on February 18, 2013.
On March 4, 2013, in compliance with the BCSC's order, Aurizon announced that it had waived the (initial) rights plan and that it had entered into an agreement for the acquisition of Aurizon (through a statutory arrangement) by Hecla Mining Co. ("Hecla") for consideration valued at approximately $796 million. The agreement with Hecla provided for a $27.2 million "break fee" (approximately 3.4% of the transaction consideration) to be paid if Alamos acquired more than 33⅓% of Aurizon's common shares.
One week later, after Alamos waived the minimum tender condition under its bid, Aurizon adopted a second shareholder rights plan, presumably to reduce the advantage of Alamos' head start (effectively, to delay completion of the Alamos bid to provide time for the Hecla transaction to be considered by Aurizon's shareholders). Alamos extended its offer, and then applied to the BCSC to have the second rights plan cease traded. Alamos also applied to have the Hecla transaction cease traded pending removal of the break fee provisions of the arrangement agreement.
The Decision and the Aftermath
On March 18, 2013, the BCSC cease traded the second rights plan, but left the break fee in place. A day later Alamos announced that it was abandoning its bid for Aurizon, because the break fee made the cost of the transaction too high.
The cease trading of the two Aurizon rights plans is consistent with the longstanding Canadian securities regulator y approach that a rights plan "must go" once it has accomplished its purpose of encouraging competing bids for the target issuer, and further that rights plans cannot be used to equalize timetables for competing transactions.
The BCSC has not yet released reasons for its ruling but, as noted, did not disturb the break fee. One of the core elements of the debate about rights plans specifically, and bid tactics more generally, is whether securities regulators should be involved at all in their regulation, or whether such tactics should be regulated only by the courts as a matter of fiduciary duty law or pursuant to the oppression remedy under corporate legislation.
In the recent proposals, the Canadian Securities Authorities reiterated their view that securities regulators have a role in regulating take-over bids to ensure that such tactics do not unduly restrict the ability of shareholders to respond to a bid, and do not unduly discourage the making of hostile bids. Consequently, though the new rights plan rule will, if adopted, tend to shift fights over poison pills from hearings in front of the securities regulators to shareholder meetings at which rights plans are to be approved, and perhaps to courts to consider corporate law compliance issues, the securities regulators have indicated that they intend to maintain a role. Consequently, their views on defensive measures such as break fees will continue to affect M&A in Canada.
In Aurizon, Alamos did not complain about the size of the break fee. Rather, Alamos argued that the break fee that was paid to Hecla was contrary to the "public interest"; it was not used to secure a better deal for shareholders to consider or to generate a higher bid. It was used only to tip the balance in favour of the Hecla deal. The BCSC's reasons, when released, will hopefully shed some light on its perspective on the break fee question. The BCSC's decision not to overturn the fee indicates that regulators continue to view break fees as appropriate in certain circumstances. However, in light of the changing regulatory landscape, guidance as to what constitutes reasonableness in terms of the use of a break fee mechanism, would be instructive.
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