Canada: Falconbridge Rights Plan Upheld to Prevent Xstrata from Accumulating Blocking Position

Last Updated: July 31 2006

By Philip Brown, Sharon Geraghty and Karrin Powys-Lybbe

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.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.