Within one week of each other earlier this year, the Ontario Securities Commission (the "OSC") and the Alberta Securities Commission (the "ASC") considered applications for cease trade orders with respect to shareholder rights plans in circumstances where one or more competing bids had been made following an initial unsolicited take-over bid for common shares of the target company. In both cases, the original unsolicited bidder sought to overcome rights plan waiver provisions in support agreements negotiated by the board of directors of the target companies to induce subsequent financially superior offers to be made to the shareholders of the target companies by "white knight" competing bidders.
In the first of these applications, In The Matter Of Chapters Inc. and Trilogy Retail Enterprises L.P., the OSC was asked by Trilogy Retail Enterprises L.P. to cease trade the shareholder rights plan of Chapters Inc. in the following general circumstances: Chapters had had some 54 days to react to the unsolicited partial cash take-over bid of Trilogy; Trilogy had increased its partial bid from $13 to $15 and Chapters had secured a $16 "white knight" bid from Future Shop Ltd.; Chapters and Future Shop had entered into a support agreement containing, among other things, a covenant by Chapters to waive Chapters’ shareholder rights plan in respect of the Future Shop bid, and all other outstanding bids, when Future Shop was in a position to take up and pay for Chapters common shares under the Future Shop bid – estimated to be some 38 days after the hearing; and Trilogy had, one day before the hearing, announced its intention to enhance its partial cash bid to $17 per Chapters common share if the OSC cease traded the Chapters shareholder rights plan.
In the other application, In the Matter of Bresea Resources Ltd., the ASC was asked to cease trade the shareholder rights plan of Bresea Resources Ltd. in the following general circumstances: there were at the time of the ASC hearing three competing bids for the common shares of Bresea – a securities exchange take-over bid by MacDonald Oil Exploration Ltd., a cash take-over bid by MFC Bancorp. Ltd. and a cash take-over bid by Matco Investments Ltd.; the cash offer price of the ranking bid – the Matco bid – represented approximately a 75% increase from the cash amount offered by MFC in its initial unsolicited bid. In order to induce Matco’s higher cash offer, Bresea had entered into a support agreement with Matco which included a provision that Bresea would waive the application of Bresea’s shareholder rights plan to Matco’s take-over bid and all other outstanding bids on a specific future date – 13 days after the hearing (the "Waiver Date"). The Waiver Date was later than the then current expiry date for the lower MFC cash take-over bid, but coincided with the expiry date of the Matco take-over bid: the ranking cash offer at the time of the hearing.
In both cases, the OSC and ASC granted the applications and issued cease trade orders in respect of the shareholder rights plans of the target companies. In the end result, Trilogy successfully completed its $17 partial bid for Chapters with the benefit of a ten day extension. Immediately after the ASC issued its cease trade order in respect of the Bresea shareholder rights plan, MFC increased its cash offer to match the Matco offer and extended its bid for 10 days – a date 3 days before the Waiver Date. At that time, MFC waived all the conditions under its bid and completed its offer.
In arriving at their decisions, both the OSC and ASC referred to principles set forth in National Policy 62-202, Take-Over Bid – Defensive Tactics as a starting point:
The Canadian securities regulatory authorities consider that unrestricted auctions produce the most desirable results in take-over bids and they are reluctant to intervene in contested bids. However, they will take appropriate action if they become aware of defensive tactics that will likely result in shareholders being deprived of the ability to respond to a take-over bid or a competing bid.
In the Chapters decision, the OSC referred to the 54 day duration of the contest and, most importantly, focussed on the specific wording of the waiver clause contained in the Chapters/Future Shop support agreement: Chapters shareholder rights plan would be waived for the Trilogy bid only when Future Shop decided to take up Chapters common shares under the Future Shop bid. The OSC was critical of this type of waiver provision.
[This provision] places a significant amount of control in the hands of Future Shop … [A]s it stands, if shareholders .. chose to tender to a competing bid, Future Shop could frustrate that choice by declining to take up any shares under its bid and therefore avoid triggering the deemed waiver clause. The use of the clause in this manner eliminates shareholder choice and subverts the very purpose for which a deemed waiver clause was intended. ..[As well,] Chapters has entered into an agreement with Future Shop not to waive the pill in favour of any other bid.
The OSC commented that it should not interfere with timing issues as between competing bidders since to do so would require the OSC to attempt to equalize the expiry dates for all existing and potential bids. In support of this position, the OSC noted that the equalization of time was not one of the stated purposes of the Chapters shareholder rights plan. Lastly, the OSC concluded that there was no reasonable possibility that, given a reasonable period of time, the Chapters board would be able to increase shareholder choice or value and that the Chapters shareholders would not receive Trilogy’s enhanced $17 offer unless the Chapters rights plan was cease traded.
In its Bresea decision, the ASC was not persuaded to leave the Bresea shareholder rights plan in place until the specific Waiver Date determined by the Bresea board of directors. Instead, the ASC recognized and respected the timing advantage which accrues to the initial or an early unsolicited bidder – even when the unsolicited bidder does not have the ranking offer to offeree shareholders – and rejected arguments that continuation of the Bresea shareholder rights plan until the Waiver Date (13 days away) was justified in this case to synchronize the timing of various offers or to increase shareholder choice and maximize shareholder value.
To the extent National Policy 62-202 is premised on unrestricted auctions producing the most desirable results in take-over bids, Canadian Securities Authorities are encouraged to follow its guidance. However, both the Chapters and Bresea decisions may limit the ability of boards of directors of target companies to use covenants to waive shareholder rights plans to support superior "white knight" offers and create an auction environment and thereby attempt to maximize shareholder choice and value. Canadian take-over bid rules provide offerors making unsolicited bids with a number of advantages when compared to the position of a target company or a potential competing bidder, once the unsolicited bid has been made. Boards of target companies can use shareholder rights plans and other devices to attempt to level the playing field between potential competing bidders and the offeror whose original unsolicited bid is on the table with time running. The ability of a board to waive the application of a shareholder rights plan to all bids, including a "white knight" bid and the original unsolicited bid, as of a specific date within a reasonable period of time is a "bargaining chip" which can be employed by the board to induce the making of a financially superior offer to shareholders. As well, the ability of a board of a target company to coordinate within a reasonable period of time the timing of various offers would also facilitate the creation of an auction environment which should improve shareholder choice and, perhaps, value. Such an outcome would be consistent with the proper discharge of a board’s fiduciary duties in the face of an inadequate unsolicited bid as well as the principles of National Policy 62-202.
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