Canada: Canadian Securities Regulator Upholds Poison Pill: Shareholder Approval Buys Target Five Month Breather From Hostile Bid

The British Columbia Securities Commission ("BCSC") recently departed from past practice by permitting Augusta Resource Corporation's ("Augusta") shareholder rights plan or poison pill (the "SRP") to remain in effect for up to 156 days, in the face of a hostile take-over bid made by HudBay Minerals Inc. ("HudBay"). A defining feature of this case was that an absolute majority of shareholders of Augusta voted to maintain the SRP during the currency of HudBay's bid, with full knowledge that the bid may be impeded. The BCSC's decision places significant weight on informed shareholder support for a rights plan implemented in the face of a specific bid, while professing that this factor is not, in and of itself, determinative.

Background

As with all such cases, the specific facts are highly relevant to the determination of when the time has come for a rights plan to go. In this case, Augusta and HudBay had been in discussions concerning a possible business combination or other transaction since 2010. Coinciding with such discussions, HudBay began acquiring a significant stake in Augusta. By April 2013, HudBay had acquired 15% of the outstanding common shares of Augusta. In response, the Augusta board of directors implemented the SRP, which would be triggered by any further share acquisitions by HudBay. The SRP was ratified and approved by Augusta shareholders on October 17, 2013.

After continued discussions between Augusta and HudBay failed to result in a transaction, Hudbay announced its hostile bid on February 9, 2014. HudBay subsequently varied and extended its bid until May 5, 2014. HudBay had amended its bid to make it an "any or all" bid; that is, HudBay would acquire any shares tendered to the bid even if they did not constitute a majority of the outstanding shares.

On April 14, 2014, HudBay commenced an application before the BCSC to have the SRP cease-traded.

In what may turn out to be a distinguishing feature of this case going forward, Augusta held a shareholder meeting on May 2, 2014, prior to the expiry of HudBay's bid, at which Augusta's shareholders reaffirmed the SRP by an "absolute majority" of the "public float." Augusta represented that it was on the threshold of a value-enhancing event (the completion of the approval and permitting process for its only material mining project) and the SRP was necessary to prevent HudBay from securing a minority blocking position through an opportunistic and inadequate bid.

On May 2, 2014, the BCSC issued an Order providing that the SRP would be cease-traded on July 15, 2014, provided HudBay extended its bid until no earlier than July 16, 2014, and would provide a further 10-day extension if it took up any shares under the bid. At the time of the Order, the SRP had been outstanding for over 80 days.

On June 23, 2014, Augusta and HudBay announced that HudBay would improve its offer in exchange for the support of the Augusta board of directors and the termination of the SRP.

BCSC Order and Decision

In its reasons, released on June 24, 2014, the BCSC relied on the principles set out in its earlier decision in Re Icahn Partners LP, 2010 LNBCSC 398 (Icahn) in considering if it was in the public interest to cease-trade the SRP. The Commission confirmed that, in its view, the decisions of the Alberta and Ontario securities commissions in Re Pulse Data Inc., [2007] ABASC 895 and Re Neo Material Technologies Inc., 2009 LNOSC 638, respectively, are not inconsistent with the Icahn principles and do not define a set of circumstances where a board can "just say no." These decisions were of relevance given that the rights plans at issue in those cases received shareholder approval during the currency of a bid.

Accordingly, the BCSC turned to the factors set out in its leading decision in Re Royal Host Real Estate Investment Trust, 1999 LNBCSC 88 (Royal Host) to determine whether the time had come for the SRP to go, the most important of which included: 

• The length of time that the Augusta board had already had to run a process aimed at identifying a superior transaction to HudBay's bid
  The BCSC concluded that this factor weighed in favour of a finding that the SRP should be cease traded on the basis that Augusta had over 85 days since the announcement of its bid to pursue alternative transactions.
  
  It was recognized that Augusta was intent on completing the permitting and approvals process for its Rosemont copper project (the "Rosemont Project"), its only material property, and that this could not be completed during the currency of the bid. However, due to the timing and uncertainty of this process, the BCSC stated that it would not have considered this to be a basis for denying HudBay's application, in and of itself.
• The likelihood of the Augusta board being able to find a superior transaction
  The BCSC concluded that there was no "real and substantial possibility" that the Augusta Board would identify a superior transaction, and that the company was focused on completing the permitting and approvals process for the Rosemont Project. Accordingly, this factor weighed in favour of the relief sought by HudBay.
• HudBay's waiver of the minimum tender condition and whether the bid was coercive to Augusta's shareholders
  Despite Augusta's arguments to the contrary and the fact that HudBay waived its minimum tender condition, the BCSC found that HudBay's bid was not coercive to shareholders. The BCSC placed reliance on HudBay's commitment to extend its bid for 10 days if it took up any shares under the bid as a condition of any cease-trade order.
• The vote to approve continuation of the SRP by Augusta shareholders during the currency of and prior to the expiry of the bid
  The BCSC confirmed that shareholder approval of a rights plan, even during the currency of a bid, is not determinative. The weight to be accorded to such approval is fact-specific and there is no bright-line test. The BCSC outlined five factors relevant to determining how much weight to attribute to shareholder approval:
  
  i.    Is the approval obtained in the face of a specific bid versus prior approval unrelated to a specific bid?
  
  ii.   Is the approval an informed one (i.e., was all relevant information available to shareholders)?
  
  iii.  The context of the vote in relation to the bid;
  
  iv.  What level of shareholder turnout is reflected in the approval; and
  
  v.  What level of approval has been obtained (taking into consideration and excluding "interested" voters (i.e., insiders, bidders, related parties, etc.)).
  
  Applying these factors, the BCSC determined that "very significant weight" should be accorded to the approval of the SRP by Augusta's shareholders, which supported the idea that the SRP should not be cease-traded with immediate effect. In particular,  emphasis was placed on the conclusion that an absolute majority of Augusta's shares were voted in favour of continuing the SRP with knowledge that the SRP would continue to act as an impairment to the bid.
• The likelihood that if the SRP were ceased traded at the hearing or a future certain date, HudBay would extend its bid
  Based on witness testimony, the BCSC concluded that there was a "reasonable possibility" that HudBay would extend its bid if the commission decided to issue an order cease-trading the SRP effective at a future date. This factor weighed heavily against cease-trading the SRP with immediate effect. This, notwithstanding that HudBay stated that it would not extend its bid if the SRP were not cease traded.

Ultimately and in making the Order outlined above, the BCSC concluded that the shareholder approval of the SRP in combination with the likelihood that HudBay would extend its bid outweighed those factors that suggested that the SRP should be cease-traded immediately.

Conclusion and Implications

The atypical timelines, including lengthy negotiations between the parties and the significant period of time that HudBay remained willing to keep its bid open and the determination by the BCSC that HudBay would likely extend its bid, contributed to the unique factual circumstances of this case. Coupled with the shareholder vote during the currency of the bid, it remains to be seen whether future poison pill applications can draw guidance from this decision.  Nevertheless, the decision represents a departure from the BCSC's prior strong stance against rights plans and a willingness on the part of the regulator to adopt a flexible approach in the take-over bid context. While not explicitly referenced in the reasons, it remains an open question as to whether the BCSC was influenced by Augusta's assertions that the bid was opportunistic given the status of the approval and permitting process for the Rosemont Project.

Finally, it is noteworthy that despite specifically denying reliance on the proposed National Instrument 62-105 – Security Holder Rights Plans, the BCSC nevertheless fashioned an outcome that was consistent with the proposed new regime by placing significant weight on shareholder approval.

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.