Canada: The 156 Day Pill – When, Not If It Should Go

One of Canada's leading securities regulators, the British Columbia Securities Commission (BCSC), defended the unusually long shelf life it accorded to a poison pill in the face of a hostile take-over bid with the release of reasons supporting its decision in early May to allow Augusta Resource Corporation (Augusta) to leave its shareholder rights plan in place in the face of the HudBay Minerals Inc. (HudBay) hostile bid for a total of 156 days. The BCSC's reasons were issued on June 27, 2014.

The panel was influenced primarily by the results of the Augusta shareholder vote held on May 2, 2014, which overwhelming supported management's decision to leave the Augusta rights plan in place in face of the HudBay bid. The panel also concluded that it was reasonably likely that HudBay would extend its bid if the panel fixed a future "date certain" for the termination of the Augusta rights plan.

The panel found that the most logical date for the termination of the rights plan was one which was tied to Augusta's claim that all material permitting on its key development project, the Rosemont project, would be completed by June 30, 2014, and chose July 15 as the termination date on that basis. To address concerns that Augusta shareholders might feel some pressure to tender their shares in light of HudBay's decision to waive its minimum tender condition the panel accepted HudBay's offer to extend its bid for ten days if any shares were taken up under the bid, and incorporated this term in its order.

A few of the key elements of the panel's analysis are discussed below. We then conclude with a few takeaways and conclusions regarding the likely impact on the BCSC's decision.

STRIKING A BALANCE: COLLECTIVE SHAREHOLDER DECISIONS VS. INDIVIDUAL RIGHTS TO TENDER

The panel found that the law in Canada, at least at present, is that there remains a process of deciding when, not if, a rights plan must be terminated. A target board in Canada does not have the right to use a rights plan to "just say no" to a bid, regardless of the level of shareholder support. The panel then turned to the factors set out in the well-known Royal Host decision, which have traditionally been used to help determine this issue.

The most influential factor at play was clearly the level of shareholder support in favour of the rights plan. Indeed, it is hard to envision stronger facts in favour of deferring to the views of shareholders than those presented to this panel.

  • Augusta management secured overwhelming shareholder support for the continuation of its rights plan, directly in the face of the HudBay offer, on the day of the panel's decision.
  • Despite HudBay's objections to the adequacy of Augusta's disclosure to its shareholders, the panel found that the Augusta shareholders were fully informed on the key concept that voting for the continuation of the rights plan potentially meant blocking the HudBay bid.
  • Shareholders voted to support the rights plan even though no alternative offers appeared to be pending.
  • Nearly 80% of all Augusta shares were voted at the meeting, including a majority of the "public float" – i.e. the shares not controlled by HudBay or the "Augusta Group". The panel noted that this was a very high percentage, even for a contested meeting.
  • The voting percentages in favour of the rights plan were so high that the votes in favour represented an absolute majority of Augusta shares, even if you assumed that every Augusta share that was not voted at the meeting would have been voted against the rights plan.

Faced with this set of facts the panel stated that, at its heart, the application required the panel to consider how to balance the tension that exists between the rights of shareholders to exercise a collective decision to support a rights plan in the face of a specific bid, against the interests of individual shareholders of the target in having an unimpeded opportunity to tender their shares to that bid if they so choose.

SHAREHOLDER VOTE ALONE SHOULD NOT BE DETERMINATIVE

The panel placed very significant weight on the results of the shareholder meeting, however, the panel's findings on this point were tempered by its concerns with the shareholder voting system in Canada. As is customary in contested transactions, there was a very high volume of trading in the public float of Augusta shareholders between the date of announcement of the HudBay bid and the date of the Augusta meeting.

The panel also raised questions regarding the integrity of the voting results due to concerns about "empty voting", where market participants are able to exercise voting rights, without having any economic interest in the underlying shares. The panel urged that caution must be exercised in these circumstances, and that regulators should not be unduly influenced by the outcome of the shareholder vote.

The concerns expressed by the panel with the Canadian shareholder voting process have been well documented by numerous commentators, including us. In raising this issue we expect that the panel was mindful that if it were to find that a shareholder vote is determinative, that there could be a real risk that future votes could be manipulated by interested market participants. We believe the panel has touched on a real area of concern. These comments can also be viewed as raising a red flag with respect to the underlying premise of proposed National Instrument 62-105 Security Holder Rights Plans, which, as the panel noted, would make shareholder approval determinative. (A copy of our bulletin describing the rules proposed in National Instrument 62-105 is available here.)

LIKELIHOOD OF EXTENSION OF THE HUDBAY BID

The panel found that very significant weight should be given to the shareholder vote in light of the factors enumerated above. However, it was this factor in combination with its view that it was reasonably likely that HudBay would extend its bid if the panel were to fix a future date for the termination of the rights plan that ultimately convinced the panel to accord significant deference to the views of Augusta shareholders.

The BCSC has historically sided very strongly with the rights of individual shareholders, and in this circumstance, it was clear that the panel sought a compromise that would respect both the results of the overwhelming shareholder vote, while respecting the rights of individual Augusta shareholders to make their choice on whether to tender to the bid. The panel's finding that HudBay was reasonably likely to extend its bid if a future date for termination was fixed allowed the panel to strike this balance.

156 DAYS

While the panel was not prepared to allow the Augusta rights plan to effectively veto the HudBay bid, the timeframe afforded to Augusta management was unprecedented, notably so by BC standards.

Augusta argued that significant shareholder value would be unlocked once final permitting was completed on the Rosemont project, and that the shareholder vote was a clear message from shareholders that they supported management's views. At the hearing HudBay argued that the panel should cease trade the rights plan with immediate effect, but in the alternative, if they were not prepared to do so, that the panel should issue a cease trade order with a future date certain. Pressed by the panel at the hearing, HudBay conceded that the most logical date certain was one that was tied to Augusta's claim that all material permitting on the Rosemont Project would be completed by June 30, 2014.

Having found a logical future date, the panel concluded that it would be appropriate to grant Augusta management an additional 75 days to meet its stated timeline.

The panel's analysis strikes us a considered attempt to strike a reasonable compromise in the circumstances. But in doing so, we believe the panel has departed markedly from the analysis the BCSC had set out in its 2010 Lions Gate decision. In that decision the panel was unequivocal that the only legitimate purpose of a target rights plan is to provide the target board with adequate time to conduct an auction. Once the auction was complete, there was no legitimate reason to keep a rights plan in place, and the views of shareholders in that context would then be irrelevant.

Here, the panel concluded that there did not appear to be a real and substantial possibility of the Augusta board identifying a superior transaction, and noted that this was a clear factor suggesting that it was time for the rights plan "to go" immediately. Further, the panel found that Augusta's decision not to establish a special committee of independent directors to consider the HudBay bid was "an unusual decision in the circumstances" and "made us question just how seriously Augusta was pursuing the search for alternative transactions and whether, in reality, the board's first choice was to attempt to complete the permitting and approvals for the Rosemont Project."

Faced with these findings, and a rights plan that had already been in place for 85 days, we believe it is highly likely that the panel in Lions Gate would have cease traded the Augusta plan with immediate effect. The panel in Augusta declined to do so, instead affording significant deference to the collective views of target shareholders, even where there was no real prospect of a superior transaction.

WAS THE HUDBAY BID COERCIVE?

One of the most interesting elements of the panel's decision was its analysis of Augusta's claim that the HudBay bid was coercive on account of is "opportunistic" timing and HudBay's decision to waive the minimum tender condition which could result in Augusta shareholders feeling pressure to tender to the bid to avoid being "left behind".

On the first point the panel found that hostile take-over bids, almost by definition, are opportunistic in nature, and whether a bid is opportunistic or not is irrelevant to its analysis and not a matter for argument at a regulatory hearing. Target management is free to make its case to shareholders, but from a regulatory perspective, the panel's view was that this was a non-issue. It will be interesting to see how the panel's reasons on this point impact how hostile bids are characterized in the future.

On the second point, the panel found that the fact that a hostile bidder drops its minimum tender condition in a bid for 100% of a target's securities does not make the bid coercive (we expect a partial bid might have been treated differently), even where there was a significant risk, as was the case here, that the bidder would be able to establish a blocking position that could preclude any future bids by competing buyers.

In reaching this conclusion, the panel noted that previous rights plan decisions have determined that a bid is not coercive simply because it contains a right on the party of the bidder to waive the minimum tender conditions.

The panel acknowledged Augusta's argument that the waiver of the minimum tender condition in its bid would allow for the possible creation of a larger blocking position on the part of HudBay and conceded that in these circumstances shareholders could feel some coercion due to the uncertainty and breadth of possible outcomes. At the hearing HudBay offered to include a ten day extension under its bid, which the panel accepted and incorporated into their order. While the panel was not required to specifically decide this point, the panel did state that it would have been appropriate to impose a ten day extension condition on the process where a bidder has removed a minimum tender condition and there are questions about the resulting shareholder dynamics arising from multiple "blocking positions". This approach is in line with the recent regulatory proposals included in proposed National Instrument 62-105.

The panel's approach does not entirely address the underlying issue of coercion. If HudBay were to take up sufficient shares to establish a 33% blocking position (noting that HudBay entered the contest with a 15% toehold) would shareholders not feel pressure to tender to the extended bid?

The panel's view appears to be and that HudBay's ability to secure a larger potential blocking position is simply a consequence of the current rules, and the most a regulator should be expected to do in this circumstance is to mandate an extension that would allow shareholders to make an informed decision once initial take-up amounts were known. The panel also found that the reality of the Augusta shareholder composition was such that there were already several large share ownership positions in place. In this circumstance, the success of a change of control transaction would require significant shareholder synergy, and in this circumstance the panel concluded that it did not see this situation being made appreciably more difficult with the possibility of an increased HudBay share ownership position.

TAKEAWAYS AND CONCLUSIONS

We agree with the panel's assessment that contested bids generally involve unique facts and circumstances, and for the time being until a new regulatory code is adopted, we fully expect that regulatory decisions in this area will continue to reflect the specific circumstances of each contest along with the views of the panel members hearing each application.

With that said, we believe there are a few lessons to be taken from the panel's reasons:

  • Shareholder approval in the face of a bid will be given significant weight. The panel found that a shareholder vote in the face of a specific bid should generally be accorded more weight than a vote held prior to bid being launched. For the time being, the best hope that a target board of a Canadian company has to maximize the amount of time it will be permitted to keep a rights plan in place in the face of a hostile bid is to have the rights plan ratified at a special meeting held after announcement of the bid. This has emerged as the "play book" in contested bids in Canada, and the panel's decision is certainly in line with this approach.
  • Appoint a special committee. The panel made an adverse inference against Augusta, and their commitment to the auction process, as a result of their decision not to appoint a special committee of independent non-management directors to consider the bid.
  • Be conscious of specific timeframes. The panel's decision suggests that, faced with significant shareholder support for a rights plan in the face of a hostile bid, our regulatory may look to fix a future date when a rights plan "must go" in order to strike an appropriate balance between the collective views of shareholders as a group, and the rights of individual shareholders to tender to a bid if they so choose. In this context, target management should be mindful of setting out future deadlines that could be used to support a future termination date. Bidders should also expect to be pressed by our regulators on how long they are prepared to extend a bid.

The panel's reasons are available here

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