On May 2, 2014 the British Columbia Securities Commission (the BCSC) ruled in favour of Augusta Resource Corporation, permitting Augusta’s shareholder rights plan to remain in effect for an additional 75 days. HudBay Minerals Inc., which commenced its any and all offer for Augusta on February 10, 2014, had applied for an order cease trading the Augusta rights plan. Just hours prior to the conclusion of the hearing, Augusta shareholders overwhelmingly approved retaining Augusta’s rights plan, with holders of 73.78% of the outstanding shares voting in favour of the retention of the rights plan, representing 94% of all votes cast by Augusta shareholders other than HudBay. The BCSC ruled that the rights plan would remain in place unless HudBay extended its offer to July 16, 2014 and commits to extend its offer for an additional 10 days if shares are taken up by HudBay under its offer. If HudBay does extend its offer to July 16, 2014 and amends its offer to include an automatic 10 day extension, the rights plan will be cease traded effective as of 5:00 p.m. (Pacific Time) on July 15, 2014.
The decision of the BCSC is not surprising given the overwhelming shareholder support for the continuance of the Augusta rights plan, the commitment previously given by Augusta to waive the rights plan if any bid met certain conditions, and the fact that HudBay’s any and all take-over bid could have resulted in HudBay attaining a blocking position and thereby frustrating other potential offers for Augusta. Augusta had previously committed to waive the rights plan if any bid, including HudBay’s, was outstanding for 60 days, had a majority of independent shares deposited to the bid and a commitment to provide an additional 10 days to deposit after the first take up of shares under the offer.
As in Re Neo Material Technologies Inc., a 2009 decision by the Ontario Securities Commission, Augusta had called a special meeting of the shareholders to ratify the rights plan after the offer had been announced but prior to the conclusion of the hearing of the application to cease trade the rights plan. The BCSC may have taken the view that the shareholders’ recent and overwhelming approval of the rights plan could be viewed as an express rejection by shareholders of the offer. To read our Osler update of September 2010, The Path Forward: Poison Pills in Canada After Pulse Data, Neo and Lions Gate, click here.
The decision also follows the recent Osisko take-over battle, where the extra time given to Osisko to pursue alternatives to the Goldcorp offer with the protection of Osisko’s rights plan resulted in an alternative bidder and ultimately led to three increases in the value offered to Osisko shareholders.
The Augusta decision arises during a period of regulatory uncertainty. Just over a year ago the Canadian Securities Administrators released a proposed rule (the CSA Proposal) to regulate shareholder rights plans and the Autorité des marchés financiers of Québec put forward an alternative proposal (the AMF Proposal) which would leave it to the courts to oversee the propriety of defensive tactics, including rights plans, as part of the courts’ jurisdiction over the exercise of directors’ fiduciary duties. For our March 15, 2013 Osler update, New Rights Plan and Defensive Tactics Proposals Shift Canadian M&A Landscape, click here. In addition, on February 20, 2014, a task force (the Task Force) established by Québec’s Minister of Finance and the Economy and headed by Claude Séguin, Senior Vice President at CGI Group Inc., released recommendations to protect Québec businesses from unsolicited take-over bids and to encourage the development of head offices in the province. For our March 5, 2014 Osler update, Government of Québec Unveils Proposals to Preserve Head Office Jobs in the Province, click here.
The key features of the CSA and AMF Proposals and recommendations of the Task Force are as follows:
The CSA Proposal would provide for shareholders voting at a meeting to determine whether any rights plan of the company would stay in force. A rights plan would be effective when adopted by the board of directors of an issuer but would have to be approved by majority vote of shareholders within 90 days from the date of adoption or, if adopted after one or more take-over bids have been made, within 90 days from the earlier of the date of adoption and the earliest date on which any of those take-over bids were commenced. If not approved within 90 days, the rights plan would be of no force or effect. Following initial shareholder approval, a rights plan would have to be approved annually by a majority vote of shareholders to continue to remain effective. Provincial securities regulators would get out of the business of cease trading rights plans (absent exceptional circumstances), and the new regime would provide boards of directors of target companies more time to respond to hostile take-over bids and a greater ability to mount a successful “just say no” defense in certain circumstances.
The AMF Proposal considers defensive tactics more generally and is not limited only to rights plans. Under the AMF Proposal, courts would determine the propriety of defensive tactics – including rights plans – as part of their jurisdiction over the discharge of directors’ fiduciary duties. Securities regulators would only intervene where a board’s actions or decisions are clearly abusive of shareholders rights or negatively impact the efficiency of capital markets. Under the AMF Proposal, a rights plan could remain in effect indefinitely, subject to the aforementioned judicial review or the possibility of it being redeemed by a new board of directors of the target following the successful conclusion of a proxy contest initiated by the bidder.
The Task Force recommended amendments to Québec’s Business Corporations Act intended to protect Québec incorporated businesses from unsolicited take-over bids, including, among other things, additional voting rights for shares of a class held for over two years; limiting what an unsolicited acquirer could do with the assets it just acquired; prohibiting unsolicited bidders from having any voting rights with respect to shares held at the date of launching the unsolicited take-over bid, until the other shareholders restore the voting rights of the bidder by a 66⅔ percent vote; and preventing unsolicited acquirers from changing the composition of the board of directors of the target corporation for a specific time period by prohibiting them from replacing any director prior to the expiry of his or her term. These recommendations should be seen as complementary to the AMF Proposal.
Each of the CSA Proposal, the AMF Proposal and the recommendations of the Task Force remain outstanding and the timing and nature of any reforms to the regulation of take-overs in Canada remains unsettled.
The Augusta decision is noteworthy in that in seeking shareholder approval of a rights plan in the face of a hostile bid, the Augusta board aligned itself with the approach favoured by the CSA Proposal. The BCSC stopped short of permitting Augusta’s rights plan to remain in effect until Augusta’s next annual meeting – which was a feature of the CSA Proposal – opting instead to allow the rights plan to remain in effect for an additional 75 days. This may reflect new thinking by the regulators regarding the longevity of a rights plan and whether a bidder must requisition a meeting to seek a further shareholder vote on a rights plan. In addition, by mandating an automatic 10 day extension upon take up of any shares by HudBay, the BCSC has adopted one of the recommendations of the AMF Proposal as well as a long standing feature of “permitted bids” under shareholder approved rights plans.
The reasons of the BCSC for its Augusta decision, when released, may set out the approach that Canadian securities regulators will take while the competing proposals remain outstanding. The pattern that appears to be emerging is that if the target of a hostile bid is able to obtain shareholder approval for a rights plan in the face of an offer, the commissions will respect the voice of the shareholders and give the target time to pursue other options.
HudBay announced on May 5, 2014 that it would amend its offer to provide a 10-day extension if it takes up any shares and extend the expiration of its offer to May 16, 2014. Augusta subsequently announced that notwithstanding the extension of HudBay’s offer to May 16, 2014, Augusta’s rights plan will remain in full force and effect until the Company’s next annual general meeting of shareholders in 2015 and that Augusta’s rights plan will only be cease traded if HudBay extends its offer until July 16, 2014 and HudBay further extends its offer for an additional 10 days following any take up of Augusta shares.