Resolute’ s battle for ownership of 100% of Fibrek Inc. recently came to an end with a friendly “white knight” offer from Mercer being withdrawn after a lengthy court battle. Resolute’s hostile bid for Fibrek was successful, notwithstanding that Fibrek’s board had endorsed Mercer’s offer at a 40% premium to the hostile bid. The Fibrek saga causes us to ask whatCanadian regulators are trying to achieve with the regulation of defensive tactics, and where they may go next.
We won’t go over all of the history in this post, discussed in detail in our earlier blog post, but shortly after the Supreme Court of Canada denied Fibrek’s application for leave to appeal in connection with the Mercer bid, Mercer withdrew its bid to acquire the common shares of Fibrek at a price of $1.40 per share. This left Fibrek’s shareholders with only one offer – Resolute’s bid at a price of $1.00 per share, an amount that two respected financial advisors had at one point determined was inadequate to Fibrek’s shareholders from a financial point of view.
In the initial decision of the Québec Bureau de décision et de révision (the Bureau), much consideration was given to the purpose of the issuance of warrants to Mercer as part of its supported deal. The Bureau rejected the notion that Fibrek issued the warrants for bona fide financing purposes and suggested the goal was to issue a sufficient number of shares to Mercer to dilute the effect of the hard lock-up agreements Resolute had negotiated with several key shareholders. In addition, the Bureau suggested that the 5% break fee payable to Mercer was unjustified and that the warrants and break fee taken together were improper tactical defensive measures designed to get around valid lock-ups that Resolute had previously negotiated.
This outcome is at odds with other decisions in similar circumstances. For example, the British Columbia Supreme Court found in Icahn Partners LP v. Lions Gate Entertainment Corp. that a dilutive transaction in response to a hostile bid was not oppressive. In fact, in the appellate decision of the Bureau’s initial decision, the Court of Quebec focused on the effect of the proposed transaction with Mercer, rather than the purpose of the defensive tactics, finding the Bureau was effectively allowing Resolute to acquire control of Fibrek at a discount and noting that the Bureau should promote a competition and auction in the interests of shareholders. The Court of Appeal of Quebec overturned this decision, noting that deference to the expertise of the Bureau was required under the circumstances.
So what does this mean for defensive tactics? To what extent will the securities regulators and courts constrain the actions of boards of directors when faced with a hostile bid? Unfortunately the answers to these questions are far from clear.
There has long been a tension in the regulation of unsolicited bids in Canada between the highly discretionary public interest jurisdiction of the securities regulators and the fundamental corporate law duties of directors to act in the best interests of the corporation. This tension is most frequently seen in the context of securities commission hearings concerning shareholders rights plans. With very few exceptions, the securities regulators have to date made very clear that shareholder rights plans can only remain in place for a limited period of time, and that it is inappropriate for a board to preclude an offer being put to shareholders. This approach is entirely consistent with National Policy 62-202 – Take-Over Bids – Defensive Tactics, in which the securities regulators sanction the defensive actions of a target board to secure a better bid, but stop well short of allowing a “just say no” defense. While one might observe that the actions taken by Fibrek’s board seemed to fall squarely within the bounds of acceptable defensive tactics provided for in NP 62-202, the courts were unwilling to second-guess the judgment of the Bureau.
The various Canadian provincial securities commissions are currently considering revising their approach to the regulation of shareholder rights plans (for more on this, click here and click here). Among the ideas being considered is an approach that would give boards of directors more discretion to maintain a rights plan in the face of a hostile bid provided that shareholders have approved the plan at the company’s most recent annual meeting. In light of the importance of a consistent approach to the regulation of defensive tactics, we would encourage the regulators to undertake a much broader review of NP 62-202 given the very narrow interpretation that it was given in the Fibrek case.