In Re Osum Oil Sands Corp., the Alberta Securities Commission (the Commission) dismissed the application of Osum Oil Sands Corp. (Osum) to cease trade a hostile take-over bid commenced by Waterous Energy Fund (Waterous), an insider of Osum. The Commission’s reasons provide guidance on several issues, including, for the first time in a reported decision, the previous arm’s length negotiation exemption to formal valuation (the Valuation Exemption).
Osum is a widely held private company. In July 2020, Waterous was the successful bidder for a 45 per cent equity interest in Osum and associated investor rights that included representation on the Osum Board.
In November 2020, Waterous commenced a partial take-over bid under National Instrument 62-104 (NI 62-104) to acquire additional shares of Osum at the same price that had been paid to acquire Waterous’s initial interest in Osum (the Offer).
In response to the Offer, Osum applied to the Commission for a cease trade order on the basis that the Offer was inadequately financed, contrary to 62-104. Osum also argued that Waterous failed to disclose prior valuations, and improperly relied on the Valuation Exemption, contrary to Multilateral Instrument 61-101 (MI 61-101).
ADEQUATE FINANCING REQUIREMENT
NI 62-104 requires that adequate financing arrangements be made for a cash bid. Waterous secured a credit facility to pay for the shares taken up pursuant to the Offer. Access to the credit facility depended, in part, on the grant of a royalty interest in certain of Osum’s assets in conjunction with completion of the Offer (the Asset Monetization).
After the Offer was made, an unanticipated issue was identified that would have affected the timing of the Asset Monetization and Waterous’s access to the credit facility. This issue was resolved by amendment of the terms of the Asset Monetization. Osum argued, however, that the financing arrangements were inadequate because they were not "clear and unequivocal" at the time the Offer was commenced.
The Commission agreed with Waterous that the "clear and unequivocal" standard had been superseded by section 2.27(2) of NI 62-104, which expressly allows for conditional financing where a bidder has a reasonable belief that, if the conditions to a bid are satisfied, the possibility is remote that the bidder will be unable to finance the bid. The Commission found that Waterous had a reasonable belief in the adequacy of financing at the time the Offer was commenced.
The Commission also agreed with Waterous’s recognition of a distinction between bid conditions and financing conditions, noting that "a financing condition does not arise unless the offer conditions are satisfied and the offer succeeds." The conditions of the Offer included the receipt of third-party approvals necessary to complete the Asset Monetization. Therefore, upon satisfaction of the conditions of the Offer, the Asset Monetization would not have a persisting effect on the availability of credit and no financing condition would be at issue.
FORMAL VALUATION REQUIREMENT
MI 61-101 requires an insider to obtain a formal valuation from an independent valuator, and to disclose such valuation, unless an exemption applies. Waterous relied on the Valuation Exemption on the basis that fair market value of Osum shares had been determined through its initial share purchase, as well as through lock-up agreements signed in connection with the Offer.
Osum argued that the Valuation Exemption was not available because Waterous possessed material undisclosed information that was not available to other shareholders. The Commission considered Waterous’s dual role as insider and bidder, and recognized that disclosure obligations must be balanced with a bidder’s need to preserve a competitive advantage by maintaining confidentiality. The Commission agreed with Waterous that its preparations for the Offer did not have to be disclosed.
With respect to the materiality of undisclosed information that Waterous had obtained on the Osum Board, the Commission confirmed that the appropriate materiality standard requires a level of significance to shareholders. The Commission agreed with Waterous that the information provided to the Osum Board was not likely to have been important or useful to a reasonable Osum shareholder in deciding whether to tender shares to the Offer.
Finally, the Commission considered whether reliance on the Valuation Exemption was improper because some of the parties to the negotiations did not have access to all of the information that had been available to Waterous. As argued by Waterous, the Commission found that it was not necessary for every party to the negotiations to have had information identical to that of Waterous.
MI 61-101 further requires disclosure of prior valuations that are known to a bidder after reasonable inquiry. While prior valuations were ultimately found to exist, no prior valuations had been disclosed by Waterous because none had been brought to Waterous’s attention in the course of the initial share purchase in July 2020, nor through Waterous’s participation on the Osum Board.
The Commission found that Waterous acted reasonably in not discovering the prior valuations. The Commission agreed with Waterous that it was not required to make direct inquiries about prior valuations, as such inquiries could have alerted Osum to the contemplated take-over and undermined the competitive nature of the bid process.
In Re Osum Oil Sands Corp., the Commission’s overriding concern was substantive compliance with bid requirements. Technical arguments were rejected in favour of a pragmatic review of the adequacy of financing and disclosure. The decision supports the right of shareholders, in the absence of inadequate financing or an unfair information disparity, to make their own decisions about tendering to a bid.