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 Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions