The recent outcome of the Augusta/HudBay poison pill hearing provides some insight into how a shareholder rights plan may withstand scrutiny from a Canadian securities regulator for an extended period of time in the right circumstances. Though perhaps the result of somewhat unique facts, including insufficient initial support for the price being offered by the bidder and an active process being conducted by the target company, the British Columbia Securities Commission's decision in Augusta/HudBay is also of interest in the context of the ongoing debates sparked by the proposed National Instrument 62-105 on Security Holder Rights Plans.
On May 2, 2014, the BCSC allowed Augusta Resources to continue its shareholder rights plan until at least July 15, 2014 – which would be 155 days since HudBay Minerals commenced an unsolicited offer for all of Augusta's issued and outstanding shares.
I. THE BCSC DECISION
The BCSC hearing on May 2 considered the following chronology of events:
|DATE||DAYS SINCE BID||EVENT|
|Apr 17, 2013||Hudbay announces its interest in Augusta is approximately 16%|
|Apr 19||Augusta announces the adoption of a rights plan|
|Oct 17||Augusta's rights plan is approved by shareholders at a special meeting|
|Feb 9, 2014||HudBay announces intention to purchase Augusta's outstanding shares|
|Feb 10||Day 0||
HudBay's offer is formally commenced
|Feb 24||Day 14||Augusta establishes a data room|
|Mar 14||Day 32||HudBay
amends its offer
|Mar 28||Day 47||Augusta announces that 9 confidentiality agreements had been executed and site visits to Tucson, AZ property will continue over next 3-4 weeks|
|Mar 28||Day 47||Augusta announces annual and special shareholder meeting to reaffirm Augusta's rights plan on May 9|
|Mar 31||Day 49||HudBay extends its offer to May 5, 2014 (5pm)|
|Apr 8||Day 57||Augusta moves shareholder meeting to May 2|
|Apr 14||Day 63||HudBay applies to BCSC to cease trade Augusta's rights plan|
|Apr 29||Day 78||BCSC hearing adjourned to May 2 to consider voting results|
|May 2||Day 81||73.78% of Augusta's shareholders (94% of votes cast, excluding HudBay), reaffirm Augusta's rights plan|
|May 2||Day 81||BCSC hearing to determine HudBay applicationBCSC decision to continue Augusta's rights plan until at least July 15; no reasons released|
|May 5||Day 84||HudBay's offer set to expire|
|May 5||Day 84||HudBay's offer extended to May 16, 2014 (5pm)|
The BCSC hearing was adjourned to May 2 and heard just hours after 94% of Augusta's shareholders, excluding HudBay, approved the continuation of Augusta's rights plan at an annual and special shareholder meeting.
The BCSC decided that it will cease trade Augusta's rights plan, but only on July 15, 2014 (115 days after the HudBay offer commenced) and only IF HudBay extends its offer to July 16 and agrees to extend its offer for an additional 10 days if it takes up any shares under its offer. Otherwise, Augusta's rights plan will remain in place.
Although no reasons have yet been released, the BCSC's Augusta/HudBay decision is noteworthy for the use of a shareholder confirmation of an existing rights plan and the conditions imposed by the BCSC on its cease trade order after the shareholder confirmation was permitted to occur in advance of the decision. As of May 5 when HudBay's offer was set to expire at the time of the hearing, 85 days would have passed since the offer was announced, which is already considerably longer than the typical period that securities regulators have allowed rights plans to hold off a take-over bid.
II. A POTENTIAL NEW MODEL FOR DEFENDING UNSOLICITED OFFERS?
1. Recent shareholder approval of a rights plan is important
The Augusta/HudBay bid process represents one of the few occasions where shareholders have voted on the continuation of a rights plan in the face of an unsolicited bid.
A target board should consider whether it is appropriate, in the context of its current shareholder support and the date when the unsolicited offer expires, to seek confirmation of its rights plan at a shareholder meeting and to act in accordance with the outcome of that meeting. The BCSC was likely positively influenced by Augusta's undertaking to discontinue its rights plan prior to the expiry of HudBay's offer if shareholders did not approve its continuance. However, the BCSC was likely most influenced by strong shareholder re-confirmation of Augusta's rights plan with the benefit of full information about HudBay's bid.
While it continues to be true that a target board cannot use a rights plan to "just say no", the BCSC decision allows shareholders the opportunity to maintain a rights plan for much longer than typically possible and perhaps indefinitely if anti-coercive features such as an automatic 10 day extension following any take-up under the offer are not provided.
Shareholder approval featured prominently in the proposed National Instrument 62-105 to regulate the use of rights plans. If enacted, the proposed rule would have allowed Augusta to rely on shareholder approval at its prior shareholder meeting (October 2013) to maintain its rights plan in the face of any unsolicited bid. See our publication for more details on the proposed rule.
2. Allowing shareholders to tender after the initial take-up
The fact that the BCSC imposed a condition to cease trade Augusta's rights plan (after July 15) on HudBay — that it amend its offer to provide for an automatic extension of 10 days following any take-up under its offer — may have implications beyond the current Augusta/Hudbay bid process. Augusta had already on April 28 made the strategic offer to terminate its rights plan in the event that HudBay acquired a majority interest under its bid, made that acquisition of control public and then given remaining shareholders a 10 day extension during which they could tender their shares.
It is interesting to observe that Augusta's defensive actions, and ultimately the BCSC's decision, follows some of the key elements set out in a comment letter by an ad hoc group of senior securities lawyers, including Gary Girvan of our firm, proposing an alternative to the current regulator proposals on shareholder rights plan regulation. The success to date of Augusta's defensive strategy and the deference the BCSC has shown to Augusta's rights plan in the circumstances may provide some early testing of the ideas proposed in the comment letter, which may be summarized as the "120-50-10 proposal".
Briefly, the proposal is that:
"120" Extend Minimum Bid Period – The time period during which a formal takeover bid must remain open should be extended to 120 days, subject to the discretion of the target's independent directors to abbreviate that period to no less than 35 days for all existing offers. By extending the minimum bid period, the negotiating dynamic between an unsolicited bidder and a target board will be changed to provide the target board with more time to seek alternatives for unsolicited offers. This proposed change implicitly recognizes that the target board is in the best position to negotiate with an unsolicited bidder and to attempt to generate and consider alternatives to the unsolicited bid. The BCSC decision effectively provides Augusta with the certainty of a 115 day minimum bid period.
"50" Minimum Tender Condition – A formal bid (including a partial bid) should be accepted by holders of more than 50% of the affected class of voting or equity shares. This proposed change is expected to mitigate concerns about the unsolicited bid being coercive.
"10" Extended Offer Period – A formal bid (including a partial bid) should be extended for a minimum 10-day period if the conditions of the offer are satisfied or waived, subject to the discretion of the target's independent directors to waive or modify these requirements. This proposed change is expected to mitigate concerns about the unsolicited bid being coercive. The BCSC imposed a 10-day extended offer period as a pre-condition on HudBay for Augusta's rights plan to be cease traded.
Stay tuned – on May 5, HudBay extended its offer to May 16, 2014. We will in any event review the BCSC's decision when it is released in due course.
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