The Alberta Securities Commission (ASC) has released a notable ruling in Re Greenfire Resources Ltd addressing (1) the private agreement exemption (the Exemption) under Canada's takeover bid regime (the TOB Regime), and (2) directors' duties in the securities law context.
The extensive written reasons follow the ASC's oral ruling in November 2024 to cease-trade a shareholder rights plan (the SRP, or "poison pill") adopted by a public issuer (Issuer) after five entities managed by a private equity fund (collectively, Buyer) agreed to acquire (the Acquisition) 43.3 per cent of Issuer's shares from three non-CanadiFan shareholders (the Selling Shareholders) under a transaction designed to meet the conditions of the Exemption.
Our key practical takeaways include:
- The ruling stresses that a "crucial factor" in deciding whether to exercise the ASC's public interest jurisdiction is protecting "market certainty", including that sophisticated parties should be able to confidently structure their transactions under specific provisions of securities law.
- The ruling provides rare and instructive guidance regarding:
- the application of (and policy behind) the Exemption, including
that it strikes a balance between equal treatment of all
shareholders and the ability of a selling shareholder to obtain a
limited premium (i.e., capped at 15 per cent) on the market price
of the issuer's shares (subject to the requirements of the
Exemption); and
- the interaction of securities laws, fiduciary duties and the business judgment rule, including (1) where a director is also a shareholder of the issuer, and (2) the "limited jurisdiction" of securities commissions to consider these matters. In particular, the ASC refused to expand the scope of applicable fiduciary duties where a director also controls a large shareholder.
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The Facts in Brief
The Acquisition was agreed to on September 16, 2024, under three share purchase agreements. Notwithstanding that the Acquisition was not subject to the TOB Regime because none of the Selling Shareholders resided in Canada, Buyer structured the Acquisition to meet the parameters of the Exemption. This exempts from the TOB Regime share purchases from not more than 5 persons for a price not more than 115 per cent of the average closing price of the shares over the previous 20 days.
Issuer, Greenfire Resources Ltd., an oil sands company whose shares are publicly traded on the TSX and NYSE, adopted the SRP in response to the Acquisition on September 18, 2024. The SRP prohibited a transfer of 20 per cent or more of Issuer's shares unless structured as a "permitted bid" under the SRP. The SRP was also retroactive in that it expressly deemed Buyer to not be a pre-existing beneficial owner of Issuer shares notwithstanding the entry into the Acquisition.
When the SRP was adopted, the Acquisition had not yet closed because Competition Act approval was required and remained outstanding. Upon completion of the Acquisition, the SRP would have been triggered, significantly diluting Buyer's 43.3 per cent holding in Issuer. Buyer applied to the ASC to have the SRP cease-traded on September 26, 2024, arguing the ASC should exercise its public interest authority to do so. Issuer made a cross-application taking issue, inter alia, with the conduct of two directors of Issuer (the Directors), each of whom controlled one of the Selling Shareholders.
Two key sets of facts surrounded the entry into the Acquisition and the adoption of the SRP:
- In July 2024, Issuer's board of directors (the Board) retained external financial advisors to conduct a strategic alternatives process (the Strategic Process) intended to attract offers for the purchase of all of Issuer's shares. The initial timeline for the Strategic Process contemplated market outreach in early October 2024, a bid deadline in late November 2024, and an announced deal in January 2025. However, in August 2024, this timeline was delayed several months so that Issuer could complete an updated reserves report (the Reserves Report).
- The two Selling Shareholders controlled by the Directors together held the great majority of the 43.3 per cent interest in Issuer subject to the Acquisition. Over the course of August and early September 2024, the Directors had various discussions with Buyer regarding a potential transaction under the Exemption. The Directors disclosed these discussions to the broader Board and its financial advisors for the Strategic Process. The Directors initially stated they were uninterested in selling to Buyer under the price cap mandated by the Exemption. After the receipt of a nonbinding letter of intent from Buyer, and a recent decline in both the market price of Issuer's shares and the price of oil, the Directors informed the broader Board they were more interested in a transaction with Buyer. Upon the execution of the Acquisition agreements, the Directors recused themselves from the Board. After the adoption of the SRP, the Directors resigned from the Board.
The ASC's Public Interest Jurisdiction
The ASC cautioned that, while its public interest jurisdiction is "broad" given the ASC's "mandate to protect investors and foster a fair and efficient capital market", such jurisdiction should be "exercised with caution" to "avoid causing uncertainty and unfairness".
The ASC also repeatedly stressed that a "crucial factor" in considering whether to exercise its public interest jurisdiction was safeguarding "market certainty." It explained that "[p]redictability is an important aspect of take-over bid regulation" and that sophisticated parties "should be able to structure their affairs within the context of the specific provisions" of securities law.
Regarding the test applicable to exerting its public interest powers, the ASC noted there "remains some debate regarding the use of a 'clearly abusive' standard versus an 'animating principles' standard." The ASC explained that the clearly abusive standard is "generally viewed as applying when securities laws set out 'specific acts which constitute misconduct'." By contrast, the animating principles standard, which the ASC described as the "lower" of the two, "may be applied when the impugned conduct is contrary to certain underlying principles and when securities laws are generally silent" on the matter.
The ASC applied the "clearly abusive" standard to both Buyer's application and Issuer's cross-application. The ASC granted Buyer's application on the basis that Issuer's adoption of the SRP was clearly abusive, but denied Issuer's cross-application because the Directors' conduct did not meet this standard. However, the ASC also explained that the result would have been the same had it applied the animating principles standard.
The ASC acknowledged that the November 2024 ruling of the Ontario Capital Markets Tribunal (ONCMT) in Riotdeveloped an approach to reconcile the clearly abusive and animating principle standards in certain circumstances. However, as that ruling was issued after the parties' arguments and the ASC's oral ruling, the ASC decided to leave the ONCMT's newly devised approach "for a case in which all parties are able to present submissions on whether the ONCMT approach should be adopted by ASC panels."
The Private Agreement Exemption and the Rights Plan
The ASC began its analysis of Issuer's adoption of the SRP by underscoring two points. First, the Acquisition was not a takeover bid as the Selling Shareholders "were not located in Alberta, or even in Canada." Second, the Acquisition was structured "to comply with the [Exemption], even though it was not necessary to do so (as the TOB Regime was not engaged)." The ASC also noted that the "parties all agreed" that the Acquisition was "within the parameters of the [Exemption]," even though Issuer claimed the transaction was "contrary to the public interest in the circumstances."
The crux of Issuer's argument was that "implementing the [SRP] was justified in the circumstances to give its shareholders the protections of the TOB Regime and to allow the [Strategic Process] to continue" without Buyer owning any Issuer shares. Issuer also relied on the business judgment rule in support of its adoption of the SRP, arguing it was owed "considerable deference... for its decision to implement" the SRP as a "reasonable defensive tactic" to what amounted to a takeover bid.
The ASC reviewed the public policy behind the Exemption. It called the Exemption "a thoroughly considered and long-standing exemption from the TOB Regime and its underlying principles." The ASC explained that the Exemption, by "allowing the payment of a premium, but restricting it to 15 per cent," sought to strike a "balance between the competing policy objectives of equal treatment of security holder[s] and the private property view that security holders should be able to freely dispose of their securities without legislative interference."
The ASC stated that Issuer had "ignored that history, instead tendering evidence, opinions, and submissions which minimized everything other than equal treatment." The ASC "rejected the contention that adherence to the letter and spirit of the long-standing and well-supported [Exemption] can undermine the policy objectives of the TOB Regime."
A crucial issue for the ASC was the "retroactive effect" the SRP would have had on the Acquisition and the ensuant "grave affect" on the "efficiency of and confidence in" our capital market." The ASC concluded that allowing the SRP to stand would "send a message to the capital market that an issuer could implement an SRP after a private transaction has been signed and all but finalized, despite that private transaction complying with both the law... and the animating principles underlying the law". As such, permitting the SRP to stand "would defeat both fairness and market certainty."
The Issuer tried to justify the adoption of the SRP by arguing that the Acquisition constituted a "creeping take-over". The ASC dismissed this argument on the basis that Buyer's stake would go from 0 per cent to 43 per cent in a single exempt transaction. Also, while "not determinative," the ASC benchmarked the SRP against the key factors developed in Royal Host to find that such factors did not support the SRP.
Regarding Issuer's business judgment rule argument, the ASC repeated that the Acquisition was not a takeover bid. This meant that the Board's adoption of the SRP was "not within a range of reasonable alternatives and was thus not entitled to deference." The ASC also "questioned" whether the actions of the Board "met the standard of good faith required by the business judgment rule".
Lastly, the ASC weighed the notion of reasonable expectations. A major shareholder of the Issuer (who was granted intervenor status for the hearing) had argued that shareholders had a reasonable expectation that the Selling Shareholders would hold their shares "for a longer period – until a deal could be struck to sell all of the [shares] at once." In contrast, Buyer argued that the parties' reasonable expectations "were in line with the TOB Regime, including the [Exemption]". The ASC agreed with Buyer, namely that market participants would "reasonably expect that a virtually completed share purchase transaction which complied (although it did not have to) with the letter and spirit of the TOB Regime, including the [Exemption], would be upheld by an ASC panel."
The overall result for the ASC was that Issuer's adoption of the SRP "did not stand up to scrutiny, based on the TOB Regime... and the principles and factors considered by commission panels." Rather, the SRP was "premised on [Issuer's] desire to stop at all costs the acquisition by [Buyer] of any [Issuer shares] outside of a [takeover bid]." Its implementation was therefore "clearly abusive."
Directors' Duties in the Securities Law Context
The ASC's Jurisdiction to Consider Directors' Duties
Issuer conceded that an ASC hearing is not the forum for a formal determination of whether the Directors had breached their fiduciary duties. Nonetheless, Issuer argued the ASC should "consider if there had been prima facie misconduct, such that public interest orders were appropriate". While the ASC noted that "the court is generally the appropriate forum for disputes about directors' fiduciary duties," the ASC did not disagree. It held:
No Expanded Scope of Fiduciary Duties for Directors That Are Shareholders
Issuer argued that the scope of applicable fiduciary duties should be expanded where the directors "are also shareholders with significant shareholdings." It described this as a fiduciary duty from a "capital market public policy perspective". Issuer argued that such an expanded fiduciary duty would arise where the director wears "two 'hats' – one as director and one as shareholder." It argued that, in such circumstances, the "[d]irectors' interests as shareholders are subservient to their duties of loyalty". Issuer argued that such an expanded fiduciary duty requires that directors who are also shareholders "use their office for the benefit of all shareholders and not their own personal benefit", and that should they not do so their conduct is "clearly abusive (as well as unfair and unethical)..."
The ASC rejected Issuer's attempt to expand the scope of the applicable fiduciary duty, stating that Issuer had pointed to no supporting authority. On the other hand, the ASC held there is "a long-standing principle that a director who is also a shareholder 'is not generally prohibited from acting in his or her own best interest'". The ASC acknowledged precedent for the point that directors' interests as shareholders "must be subservient to [their] fiduciary duty". However, the ASC highlighted that the same ruling also noted that "[a] director will not be liable for breach of fiduciary duty when the conduct at issue is qua shareholder and not qua director".
Nor did the ASC agree with Issuer's assertion that "[i]t is reasonable for shareholders to expect that... directors... will use their office for the benefit of all shareholders and not their own personal benefit". The ASC held that shareholders only have a "reasonable expectation that directors... will act in the company's best interests, not those of 'all shareholders'." The ASC explained that the "latter would be an impossible standard, as the interests of all shareholders will not always align." The ASC continued:
The Directors' Conduct Under the Traditional Scope of Fiduciary Duties
Having dismissed Issuer's attempted expansion of the applicable fiduciary duties, the ASC judged the Directors' conduct under the "traditional scope" of such duties. It applied this standard to three allegations of improper conduct made by Issuer. These were that (1) the Acquisition improperly interfered with the Strategic Process and stole a corporate opportunity from Issuer, (2) the Directors failed to keep Issuer adequately informed of the possibility of the Acquisition, and (3) the Acquisition was improperly undertaken with the benefit of "confidential or superior" information. The ASC rejected each of these arguments.
Strategic Process and "Corporate Opportunity"
Issuer argued that, as the Strategic Process had begun, the Directors "could not deal" with their shares "until that process had run its course..." It also argued that the Acquisition "would likely kill" the Strategic Process by "discouraging other potential offerors" from vying for Issuer. It added that this amounted to "stealing a corporate opportunity" from Issuer in that the Strategic Process would likely result in a "considerably higher price" than the Acquisition.
The ASC rejected these arguments. The ASC highlighted that, while the Strategic Process had started, it remained in a "preliminary" phase and was "effectively on hold" pending completion of the Reserves Report. The ASC described Issuer's "corporate opportunity" argument as "novel", but did not need to decide the issue as it saw no opportunity to be stolen. It was "simply too early in a process which was still subject to too many variables..." The ASC did not see convincing evidence that the list of potential buyers' were "strong options" or that Issuer's "hoped-for bid was a strong or realistic possibility." Nor did the ASC see convincing evidence that Buyer itself "would refuse to sell the 43 per cent if an offer were to be made through the [Strategic Process]". The ASC expected that, "as a rational economic actor, Buyer would at least consider an offer if one were made."
The Directors' Communications With the Broader Board
Issuer argued that the Directors entered into the Acquisition "without adequate warning or consultation with the... Board".
The ASC accepted that directors are obligated to "communicate certain information to their board," but "declined to take that duty as far as [Issuer]... suggested." The ASC also held that the Directors made "made appropriate disclosure to the... Board and that their statements were not misleading in the circumstances." In particular, the ASC highlighted that (1) the Board knew the Directors "had expressed interest in selling" and had a "very low cost base" for their shares, (2) the Board knew that Issuer's share price and the price of oil were both declining, which "had the effect of making [Buyer's] offer more valuable", and (3) one of the Directors had expressly asked the Board "not to take actions which would impede" the sale of his shares under the Exemption.
Confidential or Superior Information
Issuer argued that the Directors could not sell their shares when they did "because they were in possession of confidential or superior information – primarily the existence of the [Strategic Process] and the plan for [the Reserves Report]."
The ASC stated that "[i]nformation about a sales process, reserve reports, or general company plans will, at some point, be considered material information." The ASC further explained that "[w]hen that stage is reached, insiders are restricted from trading in or purchasing securities until such material information is disclosed and disseminated." However, the ASC underscored that the Board having decided there was no need for a blackout "meant that it had concluded that the existence of the [Strategic Process] and the surrounding context did not, at that time, reach the level of material information" which would prevent the Directors from selling their shares.
Concluding Comments
While the revised TOB Regime enacted in 2016 brought into question the usefulness of shareholder rights plans going forward, many advocated for their continued use in preventing creeping bids and irrevocable lock-up agreements between a purchaser and a selling shareholder. The ASC's ruling reinforces other recent securities rulings indicating that, with the revised 2016 TOB Regime, Canadian securities regulators will be skeptical of corporate action seen as seeking to modify the TOB Regime's application. The ASC underscored that Canada's "capital market has operated for years under the expectation that the TOB Regime... is a consistent and certain system governing share transactions." In this case a result was that the TOB Regime was not undermined by compliance with the "letter and spirit" of the Exemption.
Two final points bear highlighting. First, the ASC stated that it was "significant" that "shareholders in a minority position after a single shareholder acquires a large position in a company have the protections of other provisions in securities laws," including MI 61-101. This meant that Issuer minority shareholders "would not have been without options and recourse should [Buyer] significantly increase its ownership of [Issuer]... above 43 per cent."
Second, the ASC emphasized that securities commissions have "expertise on, experience with, and knowledge of capital market matters." This meant that, while expert evidence "may be helpful in some circumstances, it is generally not necessary." The ASC cautioned that in "some situations, the tendering of excessive expert evidence can cause significant efficiency concerns that outweigh any potential usefulness." The ASC viewed the dispute at hand as such a case.
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