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3. OPERATION OF CANADIAN RIGHTS PLANS
(a) How Rights Plans Work
Most Canadian-style plans are designed to result in all cash bids for all shares, to provide shareholders with time to evaluate the bid and to maximize the price shareholders obtain for their shares. As most Canadian plans contain permitted bid provisions which allow an acquiror to put its case directly to the shareholders, it is not possible for the board of a target corporation to use a plan to prevent an acquiror from picking up shares under the bid. The punitive effect of plans occurs as a result of shareholders of the target corporation being allowed to purchase shares in the corporation at a discounted rate (which in Canada has consistently been set at 50%) and nullifying the rights of the acquiring person, thereby significantly diluting the percentage holdings represented by any shares which the acquiror manages to obtain. The practical effect of such plans is to give the directors of a target corporation sufficient time to adequately analyze a tender offer, to negotiate with the bidder, to seek competitive bids and to otherwise employ any action which is deemed necessary. It has been said that plans provide the target corporation directors with “a shield to fend off coercive offers and with a gavel to run an auction”
Shareholder rights plans which contain permitted bid provisions accomplish the dual objectives of giving the directors of target corporation leverage to combat abusive or coercive take-over tactics in order to obtain the best deal for the target corporation’s shareholders while at the same time allowing shareholders to vote on take-over bids which comply with the terms of the plan. By reducing the time pressures often associated with take-over situations which occur in the absence of such plans, the directors of the target corporation are given a better opportunity to solicit or examine competing offers and to make a reasoned and informed recommendation to the shareholders whom they represent. Another argument in favour of the shareholder vote is that it eliminates the problem of the so-called “shareholder stampede” where shareholders tender into a bid not because they think it is the best bid but because they are worried about remaining as minority shareholders.
Characteristics of Canadian Plans
The fact that the Canadian corporate and legal communities have had the opportunity to observe the development of shareholder rights plans in the United States has resulted in a more refined form of plan in Canada and greater uniformity among the plans which have been introduced. There have also been several “made in Canada” adaptations to certain fundamental aspects of the form and operation of plans which have resulted from the different regulatory environment in this country. Major characteristics of the Canadian plans which are currently in place are summarized below
Form of Security
Shareholder rights plans are created by the entering into of a rights agreement between the corporation which is adopting the plan and a rights agent, which in Canada has consistently been a trust company. In many respects, a rights agreement is similar to a warrant indenture. Thus, the basis of a plan is contractual in nature.
The rights distributions in Canadian plans have usually taken the form of an issuance of one right for each common share issued and outstanding as at the record time (which is generally on or soon after the date of implementation of the plan). There are no actual certificates issued in respect of these rights; instead they are evidenced by a legend printed on common share certificates issued after the record time but prior to the earlier of the Separation Time (the time at which the rights detach from the common shares and become transferable in their own right) and the Expiration Time (the time at which the rights are no longer exercisable, either due to the termination of the rights pursuant to the plan or the expiration of the plan itself). The rights plans provide that certificates representing common shares that are issued and outstanding at the record time evidence one right for each common share notwithstanding the absence of the legend setting out this fact.
Variations on this format have occurred where the share structure of the adopting company required it, e.g., the corporation has more than one class of common shares or has a class of securities outstanding that is convertible into common shares. For example, the Maclean Hunter Ltd. plan provided that one right be issued in respect of each Class X and Class Y share of Maclean Hunter. This plan was announced in conjunction with the intention of the company to reclassify the outstanding Class X voting participating shares and the Class Y non-voting participating shares into a single class of voting shares on a one-for-one basis.
The Dominion Textile Inc. and Canadian Pacific Ltd. rights plans provided for the issuance of one right for each common share issued and outstanding and one convertible right for each convertible preferred share. The Dominion Textile plan entitles the holder of each convertible right to one right for each whole common share issued to the holder upon exercise of the conversion privilege attached to the preferred share. The convertible right is deemed to automatically have been converted into one right upon the conversion of the preferred share to a common share of the corporation.
The Canadian Pacific plan provides that each convertible right entitles the holder to a fraction of a right equal to the ratio of the value of a preference share to the value of a common share, as at the date immediately preceding the event giving rise to the separation of the rights. This relative value is to be determined by an internationally recognized Canadian investment dealer or investment banker taking into account the attributes of the shares and other matters considered by such dealer or banker to be relevant. Like the Dominion Textile plan, this plan provides that the conversion of a convertible right to a right is deemed to have occurred upon the conversion of the preferred share to a common share. Unlike the Dominion Textile plan, this plan provides for the issuance of fractional rights to holders who convert their preferred shares.
In all Canadian rights plans, prior to a triggering event, the rights are transferable with and only with the shares to which they are attached. After the rights have separated from the common shares, separate rights certificates are issued in respect of the rights by the rights agent which enable the rights to be transferred by themselves. The rights agent is responsible for maintaining a register which records the ownership and transfer of the issued rights.
Length of Plan
Nearly all of the rights plans which have been introduced in Canada have had a life of ten years from the date of implementation. The choice of this term gives the directors a sizeable time frame over which to exercise the powers which are granted to them pursuant to the rights plan while at the same time ensuring that such plans can be reviewed and altered should the needs of the corporation change. Recent plans have had express conditions in the terms of the plans stating that they are to expire on a given date unless confirmed at a meeting of shareholders prior to that time, in which case the life of the plans are extended to the standard ten years. This is because of the requirement imposed by the regulators of obtaining shareholder approval for the plan within a period of six months from its adoption.
There have been two exceptions to this ten year term. The shareholder rights plan introduced by Numac Oil & Gas Ltd. was adopted on July 28, 1989 and had a term which lasted until November 28, 1989 and was extendable by the Board of Directors to not later than January 28, 1990. The plan which Numac had adopted was allowed to expire on November 28 of last year, after the easing of tensions between Enfield Corp. Ltd. and Hees International Bancorp Inc. resulted in Numac allowing Hees to name two representatives to its eight member Board. Numac, which was controlled by Enfield, implemented the plan during the struggle for control of Enfield between the management of Enfield and the management of Hees. Numac president William McGregor had stated at the time of implementation of the plan that he wanted the fate of Numac to be determined through negotiations between Enfield and Hees and not by the outcome of a power struggle between the corporations. Since the reason for the introduction of the rights plan no longer existed at the time that it was up for renewal the pill was deemed to be no longer necessary.
The other exception to the ten year standard is the plan which was adopted by Aur Resources Inc. on July 19, 1989 which is not set to expire until September 30, 2004.
Separation Time
The Separation Time is the time at which the rights become “unstapled” from the shares to which they are attached. This date is generally set out as being on or soon after the earlier of the Stock Acquisition Date (the date at which a person becomes or announces an intention to become the beneficial owner of a percentage of shares of the corporation which is greater than the threshold percentage) and the date of commencement of, or public announcement of the intent to commence, a non-permitted take-over bid. Generally, plans provide that where a bid is abandoned, separation is deemed never to have occurred. The more recent plans contain a provision that allows the board of the target corporation, acting in good faith, to defer the Separation Time as they determine necessary. The Canadian Pacific rights plan allows the board to set a later or earlier date for the Separation Time than that which is set out in the terms of the plan. As the rights trade separately on separation, a potential acquiror cannot tender for the shares and accompanying rights but would have to tender separately for the rights. This makes it more difficult to obtain all or substantially all the rights and thus defuse the effect of the plan.
All of the most recently introduced rights plans have an eight or ten day period between the occurrence of the triggering event and the Separation Time. This is desirable from the standpoint of the directors of the target corporation, as it allows them to examine the event which has triggered the separation of the rights and to determine whether or not to waive the application of the plan provisions to any particular flip-in event or to redeem the rights. This “window period” prior to the Separation Time can be used to prevent the separation of the rights in cases where the threshold percentage level of shares has been inadvertently breached or where the directors of the target corporation have been able to come to a satisfactory arrangement with the triggering corporation. A possible downside to a redemption window is that a potential acquiror may go over the percentage threshold with the intention of putting the target corporation into play and this can result in the target being taken over, although not necessarily by the original suitor.
Flip-in Event
The key feature in all plans is their provision for certain events known as flip-in events which when they occur allow all rights holders, other than the person who triggers the flip-in event, to purchase common shares of the corporation at a 50% discount to market. In all of the Canadian plans introduced, the flip-in event is defined as the acquisition of beneficial ownership of voting shares of the corporation equal to or greater than a threshold percentage by a person other than the target corporation itself, or such entities such as a subsidiary of the target corporation, an employee benefit plan or trust. There is also an exception for a person who crosses the threshold percentage as a result of an acquisition or redemption by the target corporation or a subsidiary of the target corporation of voting shares of the corporation which, by reducing the number of common shares outstanding, increases the proportionate number of common shares beneficially owned by the person in question to greater than the threshold percentage. The percentage chosen as the triggering threshold has varied from a low of ten percent for Canadian Pacific Ltd., Dofasco Inc., and Maclean Hunter Ltd. rights plans to a high of 20.5% for the Canadian Turbo Inc. rights plan (the limit of 20.5% was set to allow equity accounting for parties that wish a substantial investment in Turbo). Many of the plans have “grandfather” provisions, which prevent any shareholders who may already have holdings in excess of the threshold percentage from being deemed to be acquiring persons. Such provisions are necessary in any case where a corporation which wishes to adopt a shareholder rights plan already has a major shareholder whose holdings in the corporation surpass the threshold percentage proposed in any plan. Grandfather provisions are drafted such that the acquisition of any additional shares of the corporation (or any shares beyond an allowed additional percentage) by the grandfathered person would trigger a flip-in event.
Exercise Price Before Flip-in Event
The exercise price for the rights on separation but prior to the flip-in event is generally set at a high level relative to the current market value of the common stock of the corporation, rendering the rights of little, if any, value. The exercise price is intended to be an estimate of the maximum trading price of the common shares during the life of the plan and is generally arrived at through consultation with the corporation’s investment bankers. For instance, the pre-flip-in exercise price for the rights which attached to the common shares in the Inco plans was set at $100.00 for one common share at a time when the shares of Inco had traded on the TSE at prices between a low of $22-1/8 to a high of $42-1/2 in the previous year (on the last trading day prior to the date of the public announcement of the rights plan, the common shares of Inco were trading on the TSE at $33-3/4 per common share).
Flip-over Event
Almost all Canadian plans adopted to date also provide for flip-over events. Flip-over events have been rather uniformly defined in Canadian right plans. They include a transaction, or series of transactions, whereby the corporation consolidates, merges, amalgamates or is in some other way reorganized in a manner which causes the common shares of the corporation to be reclassified, exchanged, redeemed or changed in some manner. A flip-over event is also constituted by a transaction whereby the company sells, assigns, transfers, leases or in some other way deals with assets which are more than 50% (book or fair market value) of the assets of the corporation or which generated in the last fiscal year or are expected to generate in the current fiscal year more than 50% of the operating income or cash flow of the corporation. (Such assets would not necessarily meet the “all or substantially all” test under the corporation statutes, which when met requires a shareholder vote before such assets can be sold.) An exception is made where any of the above transactions occurs in connection with a wholly-owned subsidiary.
Upon the happening of a flip-over event, it is generally the case that the holders of the rights of the target corporation have the right to purchase shares of the entity (the “flip-over entity”) with which the target corporation has been consolidated, merged or amalgamated (or of the merged entity) or to which the target corporation has dealt assets, equal to twice the exercise price for an amount in cash equal to the exercise price. All of the rights plans contain provisions which require the corporation to ensure that the flip-over entity complies with the flip-over provisions of the plan and will issue its shares at a discount. This includes entering into a supplemental agreement in which the flip-over entity agrees to assume all of the obligations, liabilities and duties of the corporation pursuant to the rights plan. The corporation must take all steps within its control to ensure that the flip-over entity complies with such agreement and the terms of the plan. Not all Canadian plans have provided for flip-over events. It is questionable as to whether a target corporation gains a great deal more protection by having a flip-over event as part of the plan since the type of events that are flip-over events will not take place without the consent of the board of directors of the target corporation. That being the case, if the board approves these transactions, they would redeem the rights before a flip-over event takes place. One advantage to having a flip-over event is that any decision by the directors to redeem the rights so as to permit a flip-over event would have to be made within the parameters of their fiduciary obligations. This is particularly important if a shareholder who acquires control changes the composition of the board so as to facilitate a flip-over event.
Redemption Rights and Waiver
All of the rights plans provide for the redemption of the rights by the board of directors of the adopting company for no or nominal consideration. Such redemption must be made for all and not less than all rights and must be made prior to the occurrence of a flip-in event. The earlier plans generally placed a good faith requirement on the board but this has been eliminated in the more recent versions of the plans. Recent plans also have set a negligible consideration requirement (of $0.01 per right, or less) which must be paid to the rights holders in order to redeem the rights. Some plans also permit the board, until the first to occur of a flip-in event or flip-over event, to waive the application of the plan to a particular event. This provides the board with added flexibility in that it is not actually forced to redeem the rights.
Deemed Redemption
Most of the early plans did not have deemed redemption provisions. This type of provision provides that upon a certain percentage of common shares of the target corporation being acquired under a permitted bid (other than shares already held by the acquiror bidder), the rights are without further formality deemed to have been redeemed by the board of the target corporation. This threshold percentage ranges from 50% in the Falconbridge plan to 90% in the Domtex, Maclean Hunter, Sherritt Gordon and Pegasus plans. This type of provision operates on the theory that at a certain point in time, the directors must cease to stand in the way of an acquiror. The argument in favour of a 50% threshold is that if a majority of the shareholders have tendered their shares, then the board should redeem the rights. The opposing argument is that if over 50% but less than 90% have tendered their shares such that there is still a sizeable minority, removal of the rights would allow an acquiror who has obtained over 50% of the shares to acquire more shares through a creeping take-over bid. The argument in favour of the 90% redemption threshold is that it ties in nicely with the compulsory acquisition provisions of the corporation statutes and that if an acquiror has acquired over 90% of the common shares such that it is entitled to compulsorily acquire the remainder, it should be allowed to do so without being hindered by the rights.
Permitted Bids
The original Inco plan did not contain a provision for a permitted bid. It was this lack of ultimate shareholder capacity to pass judgment on a bid made for all shares of the corporation which was the source of major objections to the plan. All subsequent rights plans except for the Numac plan have contained permitted bid provisions which allow acquirors to make tender offers which do not trigger the activation of the rights. In order to qualify as a permitted bid, Canadian shareholder rights plans require most or all of the following:
· The bid must be a non-exempt take-over bid in compliance with and not on a basis which is exempt from securities legislation in Canada, the United States and any other relevant jurisdiction;
· The bid must be in compliance with all other applicable laws. Some rights plans, such as the Maclean Hunter and Canadian Pacific plans, have included an explicit requirement that the bid or its consummation may not result in the target corporation being in default, or in contravention of any laws, regulations, rules, policy statements, cabinet directions or conditions of licence or franchise relating to a change of ownership or effective control of the corporation. These provisions address the special legislative regimes which these corporations operate under (the Broadcasting Act and the National Transportation Act, respectively).
· The bid must be made to all holders of voting shares and (in most recent plans) for any and all voting shares;
· Most of the earlier plans called for a fairness opinion from a nationally or internationally recognized investment dealer or investment banker with respect to the fairness of the bid and the adequacy of any non-cash consideration. Several of the more recently introduced rights plans, such as the plan introduced by Sherritt Gordon, have dispensed with this requirement. Given the time and expense involved in obtaining such an opinion, the exclusion of this requirement as a condition of a permitted bid makes the undertaking of such bids a less daunting proposition and is thus less likely to discourage such action. An additional rationale for omitting the fairness opinion is that it is perceived by some target corporations that it would not be very difficult for an acquiror to obtain an opinion that the bid is fair from a financial point of view and accordingly the requirement for a fairness opinion does not serve much of a purpose;
· The bidder must not beneficially own more than 5% of the voting shares of the corporation at the date of the bid or else be a grandfathered person (as we have discussed earlier in this paper). The idea here is not to allow the acquiror to establish a substantial foothold in the corporation before beginning its bid;
· Within a specified time, the bidder must submit a list which sets out all of the voting shares of which the bidder is beneficial owner and undertake to keep the list updated during the course of the bid;
· A condition of the bid must be that no shares will be taken up under the bid unless a resolution is passed by a majority of the votes of non-bidder shareholders voting on whether to accept the offer at a special meeting called for that purpose (earlier plans called for a majority of the votes attaching to all non-bidder shareholders rather than the majority of the votes cast at the meeting);
· The bidder must agree to pay 50% of the costs of the above meeting; and
· The bid must be open for a certain minimum period, which is generally the earlier of ten days after the above meeting or 120 days after the bid has been made (and a minimum five days after the meeting in any event).
Recent plans have added additional conditions such as the undertaking of the bidder not to acquire any additional shares of the corporation during the course of the bid other than pursuant to the bid and the requirement that a bidder provide evidence that it has obtained the financing necessary to take up and pay for the shares under the take-over bid.
This provision for a permitted take-over bid subject to conditions is virtually non-existent in the United States but has developed as a standard feature of Canadian plans. It appears to satisfy institutional investors which were upset at the lack of such a feature in the Inco plan, and in fact the Caisse de Depot, which voted against the Inco plan, indicated that it would abstain on the vote on the Dominion Textile plan which contained a permitted bid feature. A possible variation on the permitted bid plans as they currently stand would be to dispense with the shareholder vote entirely but provide that the rights must be redeemed if over a certain percentage of the shares are tendered into the bid. This type of provision was contained in the Falconbridge plan although the Falconbridge plan was somewhat unique in that it was adopted in the face of Amax’s friendly bid for Falconbridge and Noranda’s ongoing attempts to acquire control of Falconbridge. From the shareholder’s point of view, this variation would probably not substantially lessen the protection otherwise provided to him, although it does not eliminate the problem of the so-called “shareholder stampede” referred to earlier. From the target corporation’s point of view, it eliminates the additional time to search out alternatives that a vote under a permitted bid plan allows.
Exchange Option
Most of the more recent shareholder rights plans have included an exchange option, which provides that the directors of a corporation may, at their option and at any time after a flip-in event has occurred, authorize the corporation to deliver in return for each right which is not void, debt or equity securities or other assets (or a combination thereof) having a value equal to the exercise price; or in return for the exercise price and the right, such assets having a value equal to twice the exercise price. Some plans only allow the board to utilize the exchange option where the board acting in good faith determines that conditions exist which would eliminate or otherwise materially diminish in any respect the benefits intended to be afforded to holders of rights.
Objections to Rights Plans
Detractors of shareholders rights plans, and there have been many, list several grounds for their objections. The major objection which is cited by such critics is that plans remove the decision as to the sale of control from the shareholders, where it belongs, and give it to the directors of a corporation. Even in cases where there are permitted bid provisions, plans are seen as discouraging bidders from attempting to acquire a given stock. Rather than facilitating an auction for the stock of a target corporation, plans are seen as potentially pre-empting such a bidding war. Critics claim that the directors of corporations which introduce such plans are attempting to entrench their positions rather than uphold the best interests of the shareholders. This view is understandable given the reality that a change in the control of a corporation will often result in the termination of the directors’ positions with the company. As such, a conflict of interest exists which is bound to focus attention on the motives of boards which institute such plans.
Other criticisms of rights plans are that the share price of the adopting corporation has a tendency to decrease after the introduction of the plan (this has been the tendency in Canada, although the sample size may be too small to draw conclusions from at this point and, in any event, the price fluctuations have not been great and may be attributable to other factors) and that the plan may in fact serve to put the corporation in play.
LEGAL CONSIDERATIONS
The regulation of shareholder rights plans in Canada is within the sphere of influence of the provincial securities commissions, the listing stock exchanges, in the case of listed stocks, and the courts. We will examine each of these in turn. When we discuss the relevant judicial considerations, we will first focus on certain U.S. jurisprudence.
(a) Regulatory Considerations
(i) Provincial Securities Commissions
There are several issues in connection with the issue of rights which the Ontario Securities Commission (the “OSC”) and other provincial commissions have been called upon to consider:
Shareholder approval: The creation of a shareholder rights plan involves the distribution of rights to existing shareholders of the adopting corporation and in this respect it is no different than any other rights offering. As such, no shareholder approval is required under either the Canada Business Corporation Act (the “CBCA”) or the Business Corporations Act, 1982 (Ontario) (the “OBCA”) and rights plans may be instituted upon authorization by the board of directors of a company. This is in the fact the position in the United States where rights plans are effective upon adoption by the board of directors.
Notwithstanding the absence of this requirement at corporate law, it is an unwritten policy of the OSC that such approval be obtained. Shareholder approval of such plans is also a condition of listing on the TSE. Most Canadian shareholder rights plans have required that the approval be by a simple majority of the shareholders of the corporation, although some plans, such as the one recently instituted by Canada Packers Inc., require that such plan be ratified by a special resolution of the shareholders of the corporation requiring at least 2/3 of the votes cast at a special meeting called to consider the rights plan.
It is the position of the OSC that rights plans may be instituted by resolution of the directors of an adopting corporation so long as a shareholder meeting to approve the plan is held within a reasonable time period, which seems to be three to six months from the adoption of the plan. The OSC is also concerned that shareholders get an opportunity to pass judgment on the merits of a rights plan, and as such, appears to take the position that the shareholder vote to approve such a plan be considered independently from any other resolution. This informal policy is designed to prevent shareholders from being “bribed” into accepting a rights plan by including the plan with a package of favourable proposals.
Prospectus exemptions: When plans were first introduced, there was some question as to whether a prospectus was required in connection with the issue of the rights and, if not, which prospectus exemption was applicable. It now appears that the OSC is prepared to accept the proposition that the distribution of rights pursuant to a plan is not a “trade” for the purposes of the Ontario Securities Act. This position is in accordance with the treatment given such plans in the United States, but on the surface does not appear consistent with the position taken by the OSC with respect to traditional rights offerings.
The consequences of this view are that corporations distributing rights under a plan do not need to rely on section 71(1)(h)(i) of the Securities Act in order to undertake the distribution. This means that the pre-clearance procedure set up by this section is not position that the subsequent prospectus exemption commonly used for the issuance of shares upon the exercise of the rights (section 71(1)(f)(iii)) is not available. Therefore, a prospectus for the issue of shares pursuant to the plan would have to be filed should the rights ever become activated. The position taken by the OSC is difficult to justify under our reading of the statute but given that the purpose of a plan is to deter any need for it ever having to be put into use, this potential requirement should not discourage a corporation which is considering the adoption of a shareholder rights plan. The securities authorities in Quebec and Nova Scotia take the position that exemption orders are needed for the issuance of rights under rights plans applicable, but it also means that the OSC takes the and it is possible that Ontario may eventually rethink its position.
To reiterate, the above regime is premised on the assumption that shareholder approval will be obtained within six months after the adoption of a plan. As adoption of a rights plan would appear to constitute a material change in the affairs of the adopting corporation, most corporations which have adopted a shareholder rights plan have filed a detailed material change report with a copy of the plan attached as a schedule. National Policy No. 38: The applicability of National Policy No. 38 should also be considered. That Policy sets out the views of provincial securities administrators with respect to defensive tactics in response to take-over bids and is applicable in all jurisdictions of Canada. The Policy states that “the primary objective of take-over bid legislation is the protection of the bona fide interests of the shareholders of the target company”. In accomplishing this objective, it is stated that the rules governing take-over bids should favour neither the offeror nor the management of the target company but should instead “leave the shareholders of the offeree company free to make a fully informed decision”. In order to leave a measure of discretion in the hands of securities administrators, the Policy does not set out a specific code of conduct for the directors of a target company. The Policy does, however, make note of the following factors which will affect the degree of scrutiny to which defensive tactics undertaken during the course of a bid, or immediately prior to a bid if the board of directors has reason to believe that an offer might be imminent, will be subjected:
· The presence of prior shareholder approval of corporate action (which is now required by the Ontario Securities Commission in cases where a shareholder rights plan is being introduced) will, in appropriate cases, diminish the concern of securities administrators;
· The undertaking of extraordinary corporate action including, inter alia, the granting of an option on securities representing a significant percentage of the outstanding securities of the target company;
· The effect of defensive tactics on the ability of shareholders to respond to a take- over bid or to a competing bid.
The Policy recognizes the legitimacy of many defensive tactics (which would include shareholder rights plans) which may be taken by the board of a target company in order to maximize value to shareholders in a take-over bid situation. The Policy states that, “it is only those tactics that are likely to deny or severely limit the ability of shareholders to respond to a take-over bid or a competing bid, that may result in action by the administrators”.
It should also be noted that pre-bid defensive tactics may not be governed by the Policy if they are undertaken at a time when no take-over bid is imminently anticipated. Given that most plans have been introduced with no suitor on the horizon, it is our view that National Policy No. 38 is not likely to be applicable to the introduction of most plans.
The Ontario Securities Commission may still attempt to examine the actions of the directors of a target company under National Policy No. 38 in the event of a take-over bid made in the face of a previously implemented plan. At this point in time, no such take-overs have been attempted and it remains to be seen to what extent the OSC will intervene in cases where it feels the directors of a target company are not properly exercising their discretion granted under a rights plan. It is possible that that in so doing, the Commission would judge the actions of such directors in a manner similar to the way in which American courts have used the business judgment rule to review the reasonableness of directors’ actions in like cases. This jurisprudence is discussed at a subsequent stage of this paper.
(ii) Toronto Stock Exchange Requirements
The Toronto Stock Exchange (the “TSE”) constitutes a second level of regulation with respect to shareholder rights plans of corporations whose shares are listed on the TSE. The TSE takes the position that section 19.06 of the Toronto Stock Exchange General By-law applies to the distribution of rights to acquire securities. Under this section, a corporation proceeding with such a distribution must give notice to the TSE and the distribution may not proceed if it is rejected by the TSE.
The TSE has the power under section 19.06 of the By-law to require shareholder approval of a proposal if it deems such approval to be desirable, having regard to the interest of the shareholders of the corporation and the investing public. While this requirement has been redundant since the OSC stated in February of 1989 that it would also require shareholder approval of the adoption of a rights plan, it was the TSE which initially insisted that such a vote take place. When the Pegasus Gold Inc. rights plan was introduced in December of 1988, Pegasus attempted to argue that a shareholder vote for approval of the plan was unnecessary because the permitted bid provision contained in the plan allowed the shareholders to vote to redeem the rights should such a bid ever occur. This argument was unsuccessful, although the TSE did allow Pegasus to limit to some degree the shareholders who could vote on the proposal to prevent opponents of the rights plan from acquiring amounts of stock prior to the vote with the objective of defeating the adoption of the plan.
Relevant Jurisprudence
Many of the legal aspects surrounding rights plans in Canada are largely untested and thus can only be the subject of speculation. Conversely, there is a fairly large body of case law dealing with the legality of rights plans in the United States, which although not of a binding nature would undoubtedly have some impact on any judicial consideration of rights plans in a Canadian context. As such, it is worth undertaking a review of American jurisprudence on the subject prior to examining Canadian legal considerations with respect to such plans.
Management has the following options to prevent hostile takeover offers:
It is normal for the target to issue a press release acknowledging the proposed bid shortly after the bidder announces its intention to make a hostile bid. The announcement usually informs shareholders that the directors are studying the available information concerning the bid, and advises them not to tender their shares into the bid until the target's board evaluates and recommends acceptance or rejection of the bid. This is sometimes referred to as a "stop, look and listen" press release.
Subject to directors’ fiduciary duties, a target may take various actions to defend itself against a hostile takeover. However, the courts have held that once it is apparent that there will be a sale of the target's equity and/or voting control, the duty of the target board is to act in the best interests of the shareholders as a whole. It should not block the sale, but take active and reasonable steps to maximise shareholder value. These steps could include conducting a market canvas to assess the likelihood of superior bids, or initiating an auction of the target.
Canadian securities regulatory authorities scrutinise the defensive tactics adopted by a target and take action if they consider that the defensive measures frustrate an open bidding process or deny shareholders the ability to decide whether or not to accept an offer.
There are numerous reasons why a target may contest either the bid itself, or the behaviour of the hostile bidder. It may be trying to buy time to enable competing offers to surface, or to distract and divide the energies of the bidder, or to block an unfavourable transaction entirely. Since it is difficult to gauge the efficacy of any single defensive tactic in advance, the target generally adopts different tactics in combination. These may include:
. What actions can a target’s board take to defend a hostile bid (pre-and post-bid)?
• Adopting a poison pill. This action does not initially require shareholder approval so can be taken swiftly.
• Initiating securities regulatory proceedings. The target can allege, for example, unlawful pre-bid stake-building, inadequate or misleading disclosure in the takeover bid circular, or deals with shareholders that contravene the collateral agreement prohibition.
• Initiating litigation in the courts. The target can allege wrongful conduct on the part of the bidder by, for example, challenging the proposed takeover on antitrust or other statutory grounds.
• Seeking an alternative bid from a “white knight”.
• Seeking a friendly “white squire”. The target may place a substantial block of shares with
a third party, or enter into a significant joint venture or co-operative transaction with it.
• Seeking a sale of strategic assets that the bidder is known to be interested in acquiring.
• Making an acquisition that makes the takeover too expensive for the bidder, or presents
the bidder with competition problems.
Here are the key requirements related to percent of stock ownership by acquirer: Note that Inmet has not filed the PR required for 10 percent ownership.
Key thresholds are:
• 10%. Filing of press release and early warning report required
• 20%. Bidder is required to make a takeover bid to all shareholders of the target
• 33 1/3%. Ability to block special resolutions.
• 50%. Control of a corporation is conclusively obtained when a shareholder acquires
voting securities carrying more than 50% of the votes required for the election of directors, although effective control of a widely held company can be obtained at lower levels of share ownership.
• 66 2/3%. Special resolutions of a corporation’s shareholders require the approval of two- thirds of the votes cast under most Canadian corporate statutes (for corporations incorporated under the British Columbia Company Act, 75% approval is required). Matters that require approval by special resolution include, for example:
significant amendments to the company’s articles of incorporation; o amalgamations other than with subsidiaries; continuance or re-incorporation of the company to the laws of another
jurisdiction; and o dissolution.
• 66 2/3% of all shares plus 50% of shares held at the date of the bid by shareholders unrelated to the bidder. Generally permits bidder to squeeze out minority shareholders.
• 90% (other than shares held by the bidder at date of the bid). A bidder may take advantage of compulsory acquisition procedures.
Company posted the Gold and Silver purchase agreements with DB on Sedar Thursday. I don't know if this was related to a change in the agreements or something else such as the regulators asking that it be posted because it is a significant event. It could also have something to do with Inmet asking for documents but I'm just guessing on this. In looking over the agreements, section 14-3 on page 48 states that if we want to buy it out early, DB will give us a quote on what it thinks the remainder of the contract is worth. Doesn't seem we'd have much choice but to except DB terms unless the offer was totally unreasonable. I didn't copy in the Sedar posting because it is over 100 pages long.
Thanks Peta, that make a lot of sense to me. An outside financial advisor will be a lot more believable if it gives us a high current value.
Petabull, did they hire the financial advisor because of possible competing bid?
This is too funny. Zack's comes out with a $1.70 price target and Inmet states it's going ahead with its offer of around $0.60 per share based on Inmet's current SP. The only thing that worries me is that they have a lot of our stock and have a leg up.
It means understand
A post on Stockhub states that the reason the SP is holding at around 60 cents is that Inmet tied the offer price to its stock which was trading at $43 on the day of the PR. Inmet SP has gone up since then so according to the poster, our SP has gone up accordingly.
Does anyone understand why are SP drop so much on Inmet's PR? Was it's Inmet lack of an increased offer in the PR that scared off investors looking for a quick buck? I guess those people that sold in a knee-jerk reaction didn't look at the other news or didn't believe it.
Zack's posted an update about a hour ago. New target price $1.70. Reaffirms outperform rating.
Nice numbers. We continue to be a growing, producing, and profitable company. What I don't understand is how the SP can stay this low. We have 500,000 ounces of proven gold for the mill and will be getting more from LP. At current gold prices were making a net profit of around $700 an ounce. That's $1.50 EPS on the proven reserves, even if we find no more millable gold, which I don't believe. When you add in PDI and heap-leach we are way under valued. Just hard to understand.
We're trying to get contracts with Inmet. Saying bad things about them probably wouldn't help. However, I agree that PTQ has not fully closed the door on a reasonable offer.
Lojiko, you haven't posted all day. I need sanity. Make some sense out of all this. Peta posted and I didn't understand it. Helicopter Ben is in action. Dollar down, gold up, oil up. My girl friend says I'm an Idiot because Helicopter Ben did this to weaken dollar to get more business in China. She says ignore all other BS about U.S. election. Real issue is China vs United States in trade. Trade between China and U.S. will be $5 trillion in 5 years. 30% of U.S. economy. U.S. has technology which China needs. China supplies cheap labor. Lojiko, we have new face for Petaquilla.com. I read as trying to fight off Inmet attacks. SP jumps after QE3 - is this related to expected gold increase to $2,000 or insider info. What a day.
Its politics, Romney has publicly stated he will fire Helicopter Ben if he is elected. Ben is trying to help Obama get reelected by pumping money into the system to keep unemployment down.
someones holding the SP at $0.60 peta, any ideas?
Good Post my german friend. Inmet isn't buying much stock which doesn't make sense. I can't think of a reason why Inmet wouldn't have scooped up 30 to 40 million shares in the last two months. Inmets balance sheet shows they have $3 billion in cash. Now with $3 billion in cash, Inmet could afford to offer us $1 to $2 a share with no sweat. Why they haven't made a reasonable offer is beyond me if they really need us that badly.
I should have gone to the Chicago presentation as I'm only 400 miles away but I'm too lazy. No wonder you get upset with us MJK. Did anybody go and can help this lazy bum out about how it went?
Nothing on Sedar regarding Inmet reaching 5 or 10% threshold. The threshold would be around 22 million shares. If they were serious they would have bought heavily prior to buy-out and heavily afterward. I'm beginning to wonder if this is just a feeler by Inmet to see what the effect on the SP was. Might also wanted to insult us with low-ball offer as this is beginning to look like an alley fight. Inmet will probably up offer to $1 to $1.20 based on Petaquilla Copper premium offer.
Looks like someone is trying to hold the SP at $0.63. Who could it be now?
Thanks, Peta, I believe it now.
Yes Jal, it is strange that Inmet would be so hostile. It supports german friends story about Inmet needing land from us and we refused. Petabull has been right so many times that I can't argue that this is wrong. Must be some documents or agreements from the sale of Petaquilla Copper that we haven't seen but other members of this board have.
Nice work Sabfour, it didn't make any sense that Inmet didn't cover itself in a $6 billion deal. Now the reason Inmet wants us is it thinks it can get us cheap or as Lojiko says Inmets worried about losing copper deposit to us because the value of Au and Ag is higher than the copper. Too bad, it was nice thinking we had Inmet over a barrel.
If you review Inmet's MD&A for Cobre Panama, you''ll see that Inmet plans to locate its copper processing plant in the middle of the Botija grid. You can find the grids I'm posting about in the map above in the intro so nicely provided by Lojiko, Inmet has rights to use the grids to either side and below the Botija grid. These grids are Petaquilla Zones 2, 3 and 4 respectively. It looks to me that Inmet has plenty of room to put tailing ponds in the Botija and/or Petaquilla Zones but maybe the terrain won't allow the construction of tailing ponds in these zones. That would mean that two concessions (zones) Inmet must have to put the tailing ponds in would be San Juan 1 and San Juan 2 that are shown just above the Botija grid. For our german friend, is this right, Inmet needs to construct its tailing ponds in the San Juan grids?
Very Good Post sabfour, now we know that Inmet has land for port and road access to port. For our german friend, can you tell us in which of the boxes, in the intro map above, Inmet plans to locate the copper processing plant and the tailings ponds? Also, will Inmet run the copper slurry line along the road to be built to the port? If not, does Inmet have right to buy access from us? Also, where will the power plant be built and has Inmet secured the right to that land? Thanks for all your help.
Peta, did this new buyer gobble up a lot of shares on Thrusday through Casmir? Is the buyer named Teck?
Great News Peta -danka as our german friend would say.
So if I get you right, the german person is right and we can deny Inmet the right to build a road, tailing ponds, power plant and port on our property? This right wasn't negotaited for by Inmet in prior agreements?
Still nothing on Sedar about Inmet reaching 10 percent threshold. Better and Better. No news, its going to be a long weekend.
Nice to have you back on the positive side MJK. You had me very worried yesterday and this morning.
Still find it hard to believe. Would the Korean's have invested $1 billion in Cobre with this issue hanging over the project? If true and Inmet didn't disclose what a lawsuit. Just too far-out to believe. IMO, if true, Inmet would have quietly bought 10 percent at these low prices and then made offer and then would have bought ever share it get it hands up to a $2 -$4 price. Not only would that insure access to port but would also give a company probably worth $7 to $10 long-term. At this point, it doesn't appear to be happening. Just too too far out.
Share price still going up. Petabull is a genius. What do you see Peta on the german person posts?
Hope this is all true, can't believe Inmet would be dumb enough to not get all the land it needed to build out plant and port. I just don't believe it.
If I had bought a large position in the stock in the past such as Sprott at a cost higher than the buy-out offer, I would double down to protect my investment only if 1) I thought the real value of the company was much higher and 2) I thought the buy-out offer would drive the price much higher so I could exit on my terms. I believe the large volume was driven by large investors increasing their holdings so as to have a bigger say in how all of this shakes out. Inmet might have bought a lot of the stock in the past few weeks but they haven't hit the 10 percent threshold for disclosure yet which I believe is a good sign. MJK is right when you look at next two years projected numbers. Even without any heap-leach, the production numbers will be hugh. It's like he said, do you want $0.60 now or $4 in two years?
Canadian law requires that anyone acquiring more than 10% of the total voting stock must make a public disclosure and must disclose each 2% further addition. If a company or person makes a public offer to buy the company, then the threshold drops to 5% plus 2% additions. I don't know if Inmets PR of Sept 5 qualifies as an offer to buy as our PR of today says no written offer has been received. I checked Inmet on Sedar just now and there is no disclosure of PTQ stock ownership from Aug 1 to Sept 6. So as of right now, Inmet had not disclosed either the 10% or 5% threshold. You would think Inmet would have bought all it could up to 10% and disclosed it along with its buyout offer. If they bought a lot of stock in the last couple of days and the trades don't settle for a few days, we might not know if Inmet bought big for a couple of days but we should know within the next couple of trading days.
You're right , thank you
All the company has to do is close on the $210 million PP and the Inmet offer is moot. Its been about a month since the PR, wonder why they haven't closed yet? If the deal fell out for some reason that would give Inmet more leverage.
It's getting uglier by the minute. Inmet official is saying PTQ is having problems meeting environmental standards and Inmet needs to get hold of PTQ to prevent PTQs problems from tainting Inmets project. This coupled with the La Prenze press release that Fifer should be indicted for environmental crimes in 2007 shows how nasty this is going to be. This is a direct attack on Fifer. IF Fifer is the proud man I think he is. He is personally calling the large investors to keep them on-board and will fight any takeover attempt by Inmet.
Lojiko, note that Inmet offered a 105 percent premium in its initial offer for copper while this premium offer is much lower. Got to believe that Inmet will up the ante.