On June 30, the Ontario Securities Commission (OSC) decided that Falconbridge Limited’s rights plan, adopted in March, can remain in place until bidder Xstrata takes up sufficient shares to meet its majority-of-the-minority condition or July 28, 2006, whichever is earlier (July 28 is two weeks after the current expiry of Inco’s competing bid). Although the OSC has not yet released its reasons, it confirms that rights plans can be used to prevent a bidder from accumulating a blocking position of target shares, either through market purchases or by waiving a minimum tender condition.
Despite increasing pressure from institutional shareholders in Canada and the United States to restrict the use of defensive tactics, a rights plan is a common defensive tactic used by companies to prevent creeping takeover bids and bids not supported by the target’s board. It is also common for a bidder whose bid is being blocked to seek a cease trade of the plan to permit the deal to be completed.
Xstrata, which owns nearly 20% of Falconbridge’s common shares, made a bid on May 17, 2006 to acquire all the shares of Falconbridge that it does not already own. Xstrata’s minimum tender condition is that Falconbridge shareholders tender (i) a sufficient number of shares to give it at least 66 2/3% of the outstanding Falconbridge shares, and (ii) at least a majority of the minority’s shares.
Xstrata’s bid is not a "permitted bid" under Falconbridge’s rights plan because Xstrata can waive its minimum tender condition and take up any shares tendered to the bid. Xstrata is, therefore, prevented from taking up any shares under its bid while the plan is in place. Any purchase of Falconbridge shares by Xstrata, in the market or otherwise, would trigger catastrophic dilution to Falconbridge. After announcing its bid, Xstrata asked the OSC to cease trade the Falconbridge plan.
The following well-known factors are among those that Canadian securities regulators consider when assessing whether to uphold a Canadian rights plan. Except for one very important fact—Xstrata’s near 20% position in Falconbridge—the OSC would likely have cease traded the Falconbridge plan, for the reasons outlined under each factor.
- Whether the plan has been approved by shareholders
No shareholder approval was sought (and in fact a scheduled meeting of shareholders was delayed) because Falconbridge was concerned that Xstrata’s near 20% position would carry the day and defeat the plan. In a separate proceeding, the Ontario Superior Court has ruled that Falconbridge is entitled to delay until October its annual shareholders’ meeting, which is normally held in April.
- Whether the plan is a response to a coercive offer
Xstrata’s bid is an all-cash bid for all the shares, which is difficult to characterize as coercive.
- How long the plan has been in place
The plan has been in place for over 100 days and was adopted immediately before expiry of a similar plan that had been in place for six months (and not approved by shareholders).
- The number of other potential, viable bidders
There is an active auction for Falconbridge between Inco Limited, which first made an offer in October 2005 that is supported by Falconbridge, and Xstrata.
- The steps being taken by the target board to find a better deal
Falconbridge’s obligations under its support agreement with Inco require it to support Inco’s bid and take no steps toward facilitating or encouraging an auction; therefore, the plan is arguably not to further an auction but rather to protect Inco’s position.
But, in this case, the OSC concluded that the plan was actually protecting shareholders by preventing Xstrata from increasing its share ownership of Falconbridge to a blocking position. The OSC heard evidence from Falconbridge’s financial adviser about recent tender rates in takeover bids and was likely persuaded that if Xstrata held a 25% position, the Inco bid would fail. And if the conditions to the Xstrata bid were not all satisfied, shareholders would be left with no deal.
The OSC also effectively removed Xstrata’s right to waive its minimum tender condition so that Xstrata could not acquire a blocking position by taking up the shares tendered to its bid. This unprecedented decision appears to remove the flexibility that bidders have always had to take up any shares tendered and extend their bid in the hope of receiving additional tenders. This is akin to preventing a partial bid, which is ordinarily permitted under Canadian securities laws. The decision also prevents Xstrata from accumulating shares in the market while the rights plan is in place. This is prevented by the plan in any case, but underscores the OSC’s position that Xstrata’s hands are to be tied until it can acquire a majority of the minority’s shares or until July 28.
The decision, together with the submissions of OSC staff, raises a question about the ability of bidders to make market purchases during a takeover bid. This is not permitted in the United States, and this case highlights the issues such purchases can cause.
The OSC has effectively concluded that a target board has more latitude to adopt defences when one of the bidders has a significant ownership position that could block another bidder and leave shareholders without an offer. The OSC seems to be signalling that it will adopt the more flexible approach of the Delaware courts in the United States—making decisions on the facts of each case and with a view to keeping an auction alive—and, if necessary, exercising its public interest jurisdiction to override the technical takeover bid rules to protect shareholders.
No doubt, when Xstrata acquired its 20% block, it believed that its stake would make it easier to acquire Falconbridge. It will be interesting to see the impact of this decision on pre-bid strategies in the future.
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