Canada: BCSC Releases Reasons In The Aurizon Rights Plan Decision

Last Updated: September 26 2013
Article by Fred R. Pletcher and Michael Waters

The British Columbia Securities Commission (BCSC) has released reasons supporting its March 18, 2013 decision to grant Alamos Gold Inc.'s request to cease trade a shareholder rights plan implemented by Aurizon Mines Ltd. in the face of Alamos' hostile bid for Aurizon, while rejecting Alamos' request to cease trade the rival white-knight bid for Aurizon from Hecla Mining Corporation. The panel's reasons include commentary on the appropriateness of a $27.2 million dollar break fee that would have been payable to Hecla if Alamos had been able to acquire sufficient shares to block the Hecla offer.

Following the BCSC's decision in March, Alamos withdrew its bid, citing the Hecla break fee as the key reason. The Hecla offer was ultimately successful. A brief summary of the key facts is as follows:

  • On January 14, Alamos offered to acquire all of the outstanding common shares of Aurizon in a bid valued at $4.65 per share on announcement.  On January 22, Aurizon adopted a rights plan, which was cease traded by the BCSC on February 18.  Alamos subsequently extended its bid until March 5.
  • On March 3, Aurizon entered into an arrangement agreement with competing white-knight bidder, Hecla. Hecla's offer, valued at $4.75 per Aurizon share on announcement, was 10 cents more than the Alamos bid.  At the time the Hecla deal was announced, Alamos held 16.1% of Aurizon's outstanding common shares, and stated that it would try to get sufficient support to block Hecla's deal.
  • The Hecla agreement included a $27.2-million break fee which would be triggered if Alamos were to acquire over 331/3% of Aurizon's common shares (i.e., a sufficient position to block a vote approving the Hecla arrangement). This break fee represented 3.42% of the total $796 million value of the Hecla stock and cash offer.
  • On March 11, Aurizon adopted a second rights plan. Aurizon stated that it erected the new defence to ensure all shareholders would have an opportunity to choose the Hecla offer.
  • On March 11, Alamos applied to the BCSC for orders (i) cease trading the second rights plan, and (ii) cease trading the Hecla transaction, pending the removal of the break fee provision of the Hecla deal, which Alamos characterized as "an illegal, defensive tactic". In its March 18 decision, the BCSC granted the first order, but not the second.
  • On March 19, Alamos announced that it would not be extending its bid. Hecla completed its acquisition of Aurizon on June 3.

In cease trading the Aurizon rights plan, the BCSC held that with two bids on the table the auction was essentially over, and all that was left for Aurizon shareholders to do was to decide between the competing offers. Accordingly, the Aurizon rights plan was cease traded. The panel, however, left as an open question what they would have decided if they had found that Alamos could have ended the auction prematurely by acquiring a blocking position. In that circumstance, we expect that the arguments that successfully allowed Falconbridge to keep a rights plan in place temporarily to prevent Xstrata from acquiring sufficient shares to block a competing bid may have come into play, but the panel found no reason to consider those arguments here.

The more interesting aspect of the panel's reasons is its discussion of the break fee that would have been payable to Hecla if Alamos had acquired over 331/3% of Aurizon's common shares. Alamos argued that the break fee in the Hecla transaction was intended solely to thwart the Alamos offer "by ensuring that the only choice Shareholders are able to make is on the Hecla transaction" and that the break fee "can only be interpreted as an unusual defensive measure aimed at eliminating the opportunity of Shareholders to consider the [Alamos] Offer". The panel disagreed. In its reasons, the panel showed some deference to the fiduciary duties of the target directors, stating: "The evidence was that the Aurizon board was not going to be able to obtain an alternative transaction with Hecla without the break fee in the form of that which ultimately prevailed. In the exercise of its fiduciary duties, the board assessed the value of the Hecla transaction as a whole in considering whether the transaction would be in the best interest of Aurizon. The board concluded that it would be. We therefore concluded that the break fee was a necessary element of an alternative transaction the Aurizon board negotiated for its shareholders to consider, rather than an attempt to frustrate the Alamos offer." The panel also noted that the size of the break fee was within the usual range for these sorts of transactions, and found that the 33% trigger was not unreasonable in the circumstances.  We expect the panel's reasons will inform discussions regarding the appropriateness, or inappropriateness, of similarly sized break fees in future transactions.

Alamos dropped its bid shortly after the release of the panel's original decision not to cease trade the Hecla offer, stating in its press release that, "the Aurizon board, by adopting this unique type of break fee, has foreclosed the opportunity for Aurizon shareholders to tender to Alamos' superior offer." The panel concluded with the following piece of commentary: "As it happened, Alamos decided to abandon its offer. Its stated reason was that the break fee made the deal too expensive – somewhat surprising, considering that Alamos entered no evidence nor made any submissions indicating that the break fee was at a level that,  left in place, would cause Alamos to abandon the offer." In previous rights plan decisions, the BCSC has focussed on the rights of shareholders to choose between competing bids. The panel's commentary suggests that it may have given weight to the fact that Alamos intended to abandon its offer if the Hecla offer was not cease traded, if that was in fact the case. However, the panel heard no submissions on that point, and accordingly saw no reason to interfere.

The BCSC's reasons are available on its website.

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