On June 29, 2006, the Supreme Court of British Columbia (the "Court") reached the conclusion that a Confidentiality and Standstill Agreement dated October 19, 2005 (the "Northgate Agreement") between Aurizon Mines Ltd. ("Aurizon") and Northgate Minerals Corporation ("Northgate") remained valid and in force. Consequently, the Court granted a permanent injunction against Northgate for the duration of the Northgate Agreement, thus putting an end to a hostile take-over bid for Aurizon.
This decision is of particular interest because of the analysis of the Northgate Agreement made by Madam Justice Allan and its implications for hostile bidders who have previously entered into standstill arrangements.
During the course of October 2005, Aurizon and Northgate held discussions to explore the possibility of entering into a business combination. On October 19, 2005 they entered into the Northgate Agreement. Following this, Aurizon provided Northgate with non-confidential information. On November 17, 2005, Northgate made a presentation to Aurizon's management exploring the possibility of a possible business combination. On December 15, 2005, Aurizon advised Northgate that they were no longer interested in pursuing the discussions. In January 2006, Northgate wrote a letter informing Aurizon that the Northgate Agreement had expired and, more importantly, that Northgate was of the view that it was no longer bound by the provisions of the Northgate Agreement. Aurizon did not respond or follow-up on that letter. During the course of May 2006, Northgate announced its intention to proceed with an acquisition of all the outstanding shares of Aurizon and, on June 1, 2006, launched its offer (the "Offer"). In the Directors' Circular recommending that the Offer be rejected, Aurizon's board of directors expressed the opinion that Northgate remained bound by the Northgate Agreement and that the Offer was made in contravention of the Northgate Agreement.
Purpose of a Confidentiality and Standstill Agreement
In the decision, Madam Justice Allan reminds us that the purpose of such an agreement for publicly traded companies, such as Northgate and Aurizon, is to allow the exchange of information in order to ultimately enter into a transaction with some certainty that any confidential information disclosed during the course of discussions and negotiations will not be misused by a potential competitor. Typically, in such agreements, a party will undertake not to disclose any of the confidential information it has received. Furthermore, in the case of a publicly-traded company, the confidentiality component of the agreement will also include a standstill component to the agreement, whereby the receiving company will also agree not to acquire the securities of the disclosing company for a specified period of time.
The raison d'être of confidentiality agreements differs from the purpose of standstill agreements. A confidentiality agreement facilitates the exchange of information. On the other hand, standstill agreements are entered into because public companies entering into strategic discussions do not want to find themselves then exposed to a hostile take-over bid or other unsolicited offers from the party with whom it has had discussions.
For privately held companies, the standstill component is not as essential because (i) no share transfer can take place without the approval of the board of directors, (ii) the number of shareholders is limited, and (iii) shareholders are frequently bound by the provisions of a shareholders' agreement which limits the resale of securities. However, in the case of widely held public companies the board of directors does not have real means of preventing most unsolicited offers; the standstill component to the agreement allows such companies to limit in time an unsolicited offer.
Madam Justice Allan recognizes this distinction in stating that the mere fact that no confidential information had been exchanged by the parties had no bearing on the standstill component of the agreement. The standstill component remained in force for the mutually agreed period of one year, regardless of the fact that Aurizon and Northgate had ended their discussions in December 2005 and that no confidential information had been exchanged. Madam Justice Allan confirms that the purpose of the Northgate Agreement is to provide a "cone of safety" within which such strategic discussions and negotiations can take place. This decision reminds us that, regardless of the fact that negotiations have ended, a confidentiality and standstill agreement remains in force for the agreed duration unless the parties specifically waive the remaining term in writing.
Balance of Convenience
In answer to whether Aurizon is entitled to a permanent injunction, Northgate took the position that injunctive relief would be inequitable for numerous reasons but mostly because Aurizon's shareholders would be prejudiced should the Offer be withdrawn. Northgate submitted that, in the circumstances, even if the Northgate Agreement was not terminated the balance of convenience favoured the Aurizon shareholders making their own determination with respect to the Offer.
Seeking injunctive relief, Aurizon based its contention on Section 3.2 of the Northgate Agreement, which provided that legal remedies might be inadequate to protect Aurizon against any actual or threatened breach of the Northgate Agreement. As part of that specific section of the Northgate Agreement, Northgate acknowledges that the granting of injunctive relief in Aurizon's favour without evidence of any actual damages might be a valid solution.
However, Madam Justice Allan is careful in reminding us that, despite the fact that a contractual provision of the nature of Section 3.2 of the Northgate Agreement was breached by Northgate, the Court always keeps the discretion to reject an application for injunctive relief on equitable grounds. Consequently, the balance of convenience and irreparable harm must or should also be considered. Madam Justice Allan acknowledges that Section 3.2 can constitute the basis for an inference that Northgate "acknowledged the necessity of such relief to properly protect Aurizon's interests because of the irreparable harm which would result from Northgate's conduct and the difficulty to truly measure the extent of that harm".
Madam Justice Allan is of the view that the balance of convenience favours Aurizon. She further states that: "Enforcing the confidentiality and standstill provisions in agreements of this sort is in the interest of the public generally, and the business community specifically, by permitting market participants to enter into meaningful discussions and consider corporate transactions, strategically and cooperatively, without incurring the risk that, if those transactions are not pursued, the participant runs the risk of a hostile take-over bid".
In conclusion, companies that are considering a business combination or the sale of material assets should ensure that any interested party has entered into a confidentiality and standstill agreement to protect themselves against any unsolicited offer aimed at gaining control of the company.
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.