On June 27, 2014, the British Columbia Securities Commission (BCSC) released the reasons for its May 2, 2014 decision declining to immediately cease trade the shareholder rights plan (also known as a "poison pill") of Augusta Resource Corporation (Augusta) in the face of a hostile take-over bid for Augusta made by HudBay Minerals Inc. (Hudbay). In its decision, the BCSC allowed the rights plan to remain in place until July 15, 2014, an unusually long 156 days from the announcement of the bid.
Notwithstanding marketplace speculation that Augusta marked a potential change in approach by the BCSC due to the extended period of time that the plan was allowed to remain in place, the BCSC's reasons reaffirm the traditional approach of Canadian securities regulators to the regulation of shareholders rights plans (that it is "when, not if" the plan should go), but do provide new guidance on how a shareholder vote affirming a rights plan in the face of a hostile bid can impact the timing of a cease-trade order.
Augusta is a mining company whose only material property is the Rosemont copper project (Rosemont Project) located in Arizona. In April 2013, Augusta implemented a rights plan in response to Hudbay's announcement that it had acquired an ownership position in Augusta of approximately 15%. The rights plan was subsequently approved by Augusta shareholders at a special meeting in October 2013.
On February 9, 2014, well after shareholder approval of the plan, Hudbay announced a take-over bid for all of the Augusta common shares. After being extended, the bid was scheduled to expire on May 5, 2014.
In the face of this bid, Augusta held a shareholder meeting on May 2, 2014 at which the shareholder rights plan was reaffirmed, with approximately 94% of the shares voted (excluding those held by Hudbay) voting in favour (78% of the outstanding shares, including those held by Hudbay, were voted).
Later that day, the BCSC issued a decision that it would cease trade the Augusta rights plan on July 15, 2014, provided that the Hudbay bid was still outstanding and Hudbay agreed to extend its offer for 10 days after any initial take-up of shares. Augusta had provided evidence that it believed that all necessary material permits and approvals for the Rosemont Project would be obtained by the end of June. At the time of the BCSC's decision on May 2, 2014, Hudbay's bid had already been outstanding for 82 days.
For more details on the May 2, 2014 decision and the background to the transaction, please see our May 2014 Blakes Bulletin: Augusta's Rights Plan – A Hard Pill for Hudbay to Swallow.
In its written reasons, the BCSC explained that it followed the principles set out in its 2010 Icahn decision that (1) it is in the public interest that each shareholder be allowed to decide whether or not to accept a bid; (2) regulators will be reluctant to interfere with defensive measures taken by board in discharging their fiduciary duties; (3) shareholder rights plans are not contrary to the public interest when used to buy time for the target company to respond appropriately to the bid (i.e., rights plans are a temporary defence and the issue is "when, not if" a rights plan should go); and (4) take-over bids are fact-specific, so the relevance of the factors to be considered when determining whether to cease trade a rights plan will vary.
In doing so, the BCSC affirmed its stated view in Icahn, and agreed with the reasoning of the Ontario Securities Commission (OSC) in its 2010 Baffinland Iron Mines decision, that the 2007 decision of the Alberta Securities Commission in Pulse Data and the subsequent 2009 decision of the OSC in Neo Material Technologies, where the regulators declined an unsolicited bidder's request to cease trade a rights plan after the usual time-period and allowed the rights plans to remain in place indefinitely following shareholder approval in the face of bids, did not create a "just say no" defence in Canada if shareholders have approved a rights plan in the face of a bid.
Although the BCSC indicated that it was "mindful" of the issues raised in the separate March 2013 proposals by the Canadian Securities Administrators (CSA) and Quebec's Autorité des marchés financiers (AMF) regarding defensive tactics by target companies, which have not yet been approved, it specifically elected not to follow the proposed changes in policy with respect to the treatment of shareholder rights plans reflected in either proposal. For more details on the CSA and AMF proposals, please see our March 2013 Blakes Bulletin: Securities Regulators Propose Alternative Approaches to Defensive Tactics.
With a view to the non-exhaustive list of factors to consider when reviewing an application to cease trade a rights plan set out in the BCSC's 1999 decision in Royal Host, the BCSC identified the five most relevant factors it considered in making its decision in Augusta:
1. The length of time that the Augusta board had already had to run a process aimed at identifying a superior transaction.
According to the BCSC, the significant time the bid had already been outstanding (85 days by the planned expiry of the bid on May 5, 2014) was already at the outer limit for historical decisions cease-trading rights plans. The BCSC indicated that this was a clear factor suggesting that it was time for the rights plan "to go".
2. The likelihood of the Augusta board being able to find a superior transaction.
The BCSC questioned how seriously Augusta was pursuing an auction. The evidence suggested to the BCSC that Augusta was more focused on obtaining the outstanding permits and approvals for the Rosemont Project, rather than seeking another serious bidder.
3. Hudbay's waiver of the minimum tender condition in its bid and whether the bid was coercive to Augusta shareholders.
The BCSC found that the waiver of the minimum tender condition was not coercive to Augusta shareholders because, among other things: (1) there is no prohibition in securities laws against making a partial bid; (2) there were other large shareholders of the company, so significant shareholder synergy would be required to effect a change of control transaction of Augusta, which would not be significantly more difficult if Hudbay increased its ownership percentage; and (3) a requirement for a minimum tender condition in a bid notwithstanding a significant minority shareholder "blocking position" (as was the case in Augusta, where a group holding approximately 33% of the Augusta shares, including the Augusta directors and officers, had committed not to tender to the bid) could produce a restricted auction and could result in bids not being made at all or in shareholders being deprived of the ability to respond to a bid.
The BCSC was, however, concerned that shareholders might feel some coercion due to the uncertainty of the ultimate outcome of the bid without a minimum tender condition. It asked for submissions on whether it would be appropriate to require a 10-day extension after the first take-up of shares under the Hudbay bid. Arguments were not heard on this point though, as Hudbay voluntarily agreed to provide such an extension. Nevertheless, the BCSC stated its position that in circumstances where the minimum tender condition is waived and the outcome is uncertain due to shareholder dynamics resulting from multiple "blocking positions", such a 10-day extension would be appropriate.
4. The vote by Augusta shareholders to approve the continuation of the rights plan in the face of the Hudbay bid.
As discussed further below, the BCSC was of the view that, while not determinative, shareholder approval of the rights plan in the face of the bid was persuasive evidence that should be considered.
5. The likelihood that if the rights plan was cease traded immediately or at a specified date in the future, Hudbay would extend its bid.
Evidence from Hudbay and its financial advisor led the BCSC to believe that there was a reasonable possibility that Hudbay's bid would be extended if the BCSC granted an order that the rights plan would be cease traded at some future date.
In the absence of the shareholder vote approving the rights plan in the face of the bid, it appears that the above factors would have resulted in the BCSC cease trading the Augusta rights plan immediately.
The BCSC identified five factors to consider in determining how much weight to afford shareholder approval of a rights plan:
1. Is the approval obtained in the face of a specific bid versus prior approval unrelated to a specific bid?
The BCSC emphasized that approval of a plan in the face of a bid is much more persuasive than one prior to a bid, as the former is an economic decision while the latter is largely theoretical. In Augusta's case, the plan had been approved both before and after the launch of Hudbay's bid, with a generally consistent level of shareholder approval. The BCSC found that this consistency lent further weight to the vote.
2. Is the approval an informed one (i.e., was all relevant information available to shareholders)?
The BSCC applied the common law test of "does a shareholder have sufficient information to make an informed decision on the matter at hand" and suggested that it is not necessary to parse every word of disclosure to confirm all nuances and subtleties have been described, provided the key concept (i.e., the continuation of the rights plan means blocking the bid) is conveyed.
3. What is the context of the vote in relation to the bid?
In the view of the BCSC, the vote by Augusta shareholders to approve the rights plan took place at a time where the Hudbay bid had been in the market for long enough without a competing bid emerging that Augusta shareholders had to have significant concern that another offer would not materialize, yet the shareholders approved maintaining the rights plan anyway.
4. What level of shareholder turnout is reflected in the approval?
According to the BCSC, the weight to be accorded to a shareholder vote should vary depending on the proportion of the total shares voted. Almost 80% of the Augusta shares (and a majority of the public float) were voted at the May 2, 2014 Augusta meeting to approve the rights plan, which the BCSC noted was high for a Canadian public company, even for a contested vote.
5. What level of approval has been obtained (taking into consideration and excluding "interested" voters (i.e., insiders, bidders, related parties, etc.))?
The BCSC, while not wanting to parse voting results too finely, recognized that there are clear differences in levels of shareholder approval. The BCSC found it significant that the continuance of the Augusta rights plan was approved by a sufficiently large number of shareholders that it represented an absolute majority of the shares, even if it was assumed that every share that did not vote was voted against the proposal.
Applying the above factors, the BCSC determined that the shareholder approval of the rights plan should be given significant weight and supported the notion that the rights plan should not be immediately cease traded.
While, after analyzing the factors from Royal Host, many factors suggested that it was "time for the plan to go", the BCSC decided that the shareholder approval of the rights plan in the face of the bid (combined with the likelihood that Hudbay would extend its bid) outweighed such factors and elected to set a future date for the rights plan to be cease traded. The BCSC concluded that this approach allowed it to strike a balance between deferring to the majority of Augusta shareholders who had voted for the plan to continue and respecting an individual shareholder's right to decide whether or not to tender to a bid.
The selection of the July 15, 2014 date was based on Augusta's expectation that material permits and approvals for the Rosemont Project would be obtained by the end of June. Although Hudbay argued that it did not expect the permits and approvals to be obtained by such date, it conceded that, if the rights plan was to be cease traded at some date in the future (as opposed to immediately), a date based on such expected permitting and approval timeline would be logical.
Until such time as one of the 2013 proposals by the CSA and the AMF changing the Canadian regulatory approach to shareholder rights plan, in whatever form, are implemented, Augusta has reaffirmed that Canadian regulators will continue to analyze applications to cease trade shareholder rights plans from the perspective of "when, not if" a plan should go. In any such analysis, informed approval of a rights plan by target shareholders in the face of a hostile bid will be an important factor that will support a plan remaining in place, but will not allow a target board to "just say no" indefinitely. Instead, such shareholder approval will be one of a number of factors taken into account in determining the date at which a plan will be cease traded.
The outer limits of the cease-trade date remain to be determined, but it would appear that in the appropriate circumstances, such a date could be extended beyond what was determined in Augusta. For example, in the Augusta reasons, the BCSC questioned how seriously Augusta was pursuing the search for alternative transactions but nevertheless allowed its rights plan to remain in place for an unusually long 156 days due to the impending permitting and approval decisions. It is possible that the BCSC would have selected an even later date if it had a different view of Augusta's efforts to undertake an alternative transaction.
On June 23, 2014, with the cease-trade date approaching and with no other offers made, Hudbay and Augusta entered into a support agreement providing for the friendly acquisition of Augusta and the waiver of Augusta's rights plan.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.