Canada: Weed Wars: Securities Commissions Weigh In On Aurora/CanniMed Hostile Bid

After a joint hearing in mid-December, the Ontario and Saskatchewan securities commissions released identical orders in respect of the unsolicited take-over bid by Aurora Cannabis Inc. for the issued and outstanding common shares of CanniMed Therapeutics Inc. and CanniMed's use of a shareholder rights plan in response to Aurora's unsolicited offer. Although the reasons of the securities commissions have not yet been released, several important implications have emerged from the orders regarding the use of shareholder rights plans as a deal protection measure.

Background

On November 14, 2017, Aurora disclosed that it had submitted an acquisition proposal to the board of directors of CanniMed to acquire CanniMed in consideration for Aurora shares. In its disclosure, Aurora added that it had entered into irrevocable lock-up agreements with shareholders representing 38% of the issued and outstanding CanniMed shares (collectively, the Locked-Up Shareholders). Under the terms of the lock-up agreements, the Locked-Up Shareholders are required to tender their CanniMed shares into Aurora's offer and "vote against other acquisition proposals or actions which might prevent, delay or frustrate Aurora's proposal." Notably, these lock-up agreements do not include termination provisions that would allow the Locked-Up Shareholders to terminate the lock-up agreements in the event that a third party made a superior offer to acquire CanniMed.

Three days later, CanniMed announced that it had entered into an arrangement agreement with Newstrike Resources Ltd. pursuant to which it would acquire all of the issued and outstanding common shares of Newstrike in consideration for CanniMed shares. When Aurora formally launched its unsolicited offer on November 24, 2017, it was made conditional on the non-completion of the Newstrike acquisition.

On November 29, 2017, CanniMed announced that it had adopted a poison pill. The press release stated that the poison pill "prevents Aurora from acquiring any CanniMed shares other than those tendered to its Hostile Bid or from entering into a new lock-up agreement in respect of its Hostile Bid other than those it has already entered into." As to the purpose of the poison pill, the press release indicated that it was to protect CanniMed shareholders from being coerced into tendering to Aurora's bid and to allow for the possibility of another acquisition transaction for CanniMed. Moreover, the press release suggested that the primary purpose of the poison pill was to protect the Newstrike transaction and was "not intended to deter the Hostile Bid or any other bid."

Submissions of the Parties

Aurora

In its application to the securities commissions, Aurora sought an order to cease-trade the poison pill, which it argued was tactically designed to deter its unsolicited offer and contained certain unusual provisions aimed at restricting CanniMed shareholders from exercising their right to respond to Aurora's offer. In particular, Aurora argued that the terms of the poison pill were inconsistent with National Instrument 62-104 – Take-Over Bids and Issuer Bids (NI 62-104), in several respects. For example, the definition of "Permitted Bid" in the pill did not allow for the reduction of the 105-day minimum deposit period in the event of an "alternative transaction," and the definition required an extension of 10 business days, rather than the statutory 10 calendar days, upon the satisfaction of all bid conditions. In addition, Aurora argued that the pill prevented additional CanniMed shareholders from entering into lock-up agreements with Aurora, whether hard or soft. The definition of beneficial ownership in the poison pill provided that a "Person will be deemed to be the Beneficial Owner of...any securities which are subject to an agreement (including without limitation a Permitted Lock-Up Agreement) to tender or deposit them into any Take-over Bid made by such Person." As a result, Aurora was deemed to own the CanniMed shares held by the Locked-Up Shareholders for purposes of the pill and would be deemed to own any additional shares it might lock up whether by way of hard or soft lock-up.

Aurora also requested relief from the requirement in NI 62-104 that its bid remain open for a minimum of 105 days. In Aurora's view, CanniMed's proposed acquisition of Newstrike "in spirit" constituted an "alternative transaction." Although Aurora acknowledged that the Newstrike transaction did not meet the technical definition of "alternative transaction" in NI 62-104, which would automatically reduce the minimum deposit period for Aurora's offer to 35 days, Aurora made the policy argument that CanniMed did not require the 105-day minimum bid period to consider its bid and seek alternative transactions because it had already proposed the Newstrike acquisition. Aurora also argued that CanniMed shareholders should have the right to make a clear choice between two concurrent transactions. In Aurora's view, the 105-day minimum bid period for its offer would result in the "unequal treatment of offerors" in competing transactions, since CanniMed shareholders were scheduled to vote on the Newstrike acquisition on January 23, 2018, while the minimum bid period for Aurora's bid would expire over six weeks later.

CanniMed

CanniMed sought an order disentitling Aurora from relying on an exemption in NI 62-104 that would allow Aurora to purchase up to 5% of CanniMed's shares in the market. In CanniMed's view, should Aurora be permitted to purchase additional CanniMed shares, it would be in a de facto "blocking position" with respect to any alternative transaction, including the Newstrike acquisition, given the lock-up of 38% of the shares on terms that require holders to vote against any proposal that might frustrate Aurora's bid.

CanniMed Special Committee

The special committee of the CanniMed board sought an order from the securities commissions deeming Aurora and the Locked-Up Shareholders to be "joint actors" for the purpose of Multilateral Instrument 61-101 – Protection of Minority Shareholders in Special Transactions (MI 61-101). Such a determination would require Aurora to comply with the "insider bid" provisions of MI 61-101 and would significantly delay Aurora's offer. In support of its position, the CanniMed special committee argued that it was the Locked-Up Shareholders who approached Aurora to solicit a bid for CanniMed, usurping the function of the board, and that, notably, two directors of the CanniMed board were also directors and/or officers of three Locked-Up Shareholders at the relevant time. According to the CanniMed special committee's submissions, the Locked-Up Shareholders used confidential information obtained from directors of CanniMed to structure Aurora's bid and attempt to frustrate the acquisition of Newstrike. In addition, according to the CanniMed special committee, Newstrike's former financial adviser used confidential information it had obtained while it was engaged by Newstrike before it ceased its engagement in order to advise Aurora with respect to its offer.

The Orders

By orders dated December 22, 2017, the Ontario and Saskatchewan securities commissions cease-traded the poison pill and ordered Aurora to amend its bid circular to disclose any information that was obtained by Aurora from any person who was, at the relevant time, in a "special relationship" with CanniMed for the purpose of insider trading rules, or that was material to Aurora in structuring, or determining the timing of delivering, its proposal or implementing its bid.

However, the securities commissions denied the exemptive relief sought in Aurora's application relating to the characterization of the Newstrike acquisition as an alternative transaction, which would have reduced the 105-day minimum bid period to 35 days and allowed CanniMed shareholders to consider the Newstrike transaction and the unsolicited bid concurrently.

In addition, the securities commissions denied all of the relief sought by CanniMed and the CanniMed special committee, declining to restrict Aurora from purchasing additional shares in the open market or to characterize Aurora and the Locked-Up Shareholders as joint actors.

Implications of the Order

The facts and orders here give rise to numerous interesting and novel issues and will give the commissions the opportunity to provide guidance on a host of topics, from poison pills to deal protections. While we await the written reasons, two takeaways seem clear:

  • When securities regulators adopted amendments to Canada's take-over bid regime in 2016, it was expected that the tactical use of shareholder rights plans to interfere with the normal operation of the take-over bid rules would be met with swift intervention by securities regulators.1 The orders are consistent with this expectation. In a circumstance in which the poison pill was not designed to delay the take-up by Aurora of CanniMed shares tendered into Aurora's offer, but arguably to protect an existing transaction by seeking to limit Aurora's ability to consolidate a blocking position, the securities commissions nonetheless intervened.
  • By denying all the other relief sought by Aurora, CanniMed and the CanniMed special committee, the securities commissions have signalled an intention to strictly adhere to the rules set out in the existing take-over bid regime. Part of the rationale motivating the amendments to the take-over bid regime in 2016 was to introduce greater certainty in the treatment of take-over bids and to reduce the inconsistencies caused by unique poison pill hearings in respect of unsolicited take-over bids. The orders indicate that the securities commissions are keen to preserve the uniform and predictable treatment of take-over bids, and that they will be reluctant to vary the rules in the heat of battle.

What to Watch For

We will provide additional commentary when the written reasons are released. When they are, we will be keeping an eye out for the following:

  • There is limited case law (from both the courts and securities regulators) assessing the appropriateness of deal protections generally. Delaware courts have historically been suspicious of excessively strong deal protections, especially when they operate to make a transaction a fait accompli prior to a shareholder vote. We will be interested to see whether the securities commissions take this opportunity to comment on deal protections negotiated in transaction documents and the use of hard lock-up agreements.
  • We will also be interested to see whether the securities commissions comment on the ability of a target company to pursue an acquisition transaction in the context of defending against an unsolicited take-over bid. This form of take-over defence is unusual in Canada, and it is an open question whether securities regulators will apply to an acquisition transaction in a hostile bid context an analysis similar to that applicable to private placements as a defensive tactic.2
  • We expect the decision will focus on the potential disclosure of confidential information by insiders and advisers, including the directors on the CanniMed board who represented three Locked-Up Shareholders, and by the former financial advisers to Newstrike. The securities commissions were clearly troubled by the possibility that persons in a special relationship with CanniMed may have shared information with Aurora. Although they were not prepared to go so far as to deem Aurora and the Locked-Up Shareholders to be joint actors, they cleverly laid the problem at the bidder's feet, leaving Aurora to sort out the sources of its information and to disclose it in a document to which director and officer liability attaches.
  • We expect the commissions' reasons for not deeming the bidder and Locked-Up Shareholders to be joint actors will provide helpful illumination of this often grey and hazy concept.

Footnotes

1 See the Davies bulletin dated February 25, 2016, titled Take-over Bid Code Reset: 50-10-105.

2 See the Davies bulletin dated January 12, 2017, titled If Pills Are Out, Are Private Placements In?

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 Mondaq.com.

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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