On March 14, 2013, the Canadian Securities Administrators (otherwise known as the “CSA”) published a request and notice for comments regarding Proposal National Instrument 62-105 – Security Holder Rights Plans, the purpose of which is to introduce the CSA’s proposed regulatory regime for rights plans.

The proposed rule, which is discussed in more detail in our publication Securities Regulators Proposed New Rules for Shareholder Rights Plans, does not address other defensive tactics.

In addition, the Autorité des marchés financiers has published An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics, (the “AMF Proposal”), which will be the subject of a separate publication by McCarthy Tétrault. The AMF Proposal is more general and far reaching in that it applies not just to Rights Plans but to all defensive measures adopted by a board to fend off a hostile bid, and does not contemplate any shareholder approval or ratification requirement. The AMF approach in particular would bring the Canadian regime as regards defensive measures more in line with the US (Delaware) regime, where boards have generally been able to “just say no” to a hostile bid by implementing a rights plan or other defensive measures.

The CSA Proposal – Why is the Change Necessary?

There has been much recent comment in Canada that our rules have been a little too kind to hostile bidders at the expense of target companies, their Boards of Directors and their shareholders.  Everyone agrees that hostile bids have a legitimate role in a free-market system in allocating economic resources to their best use, but the absence of robust defence options generally means that once a hostile bid is launched a sale becomes inevitable.  The current regime, which allows the target Board a mere 45-55 days to canvass alternative transactions after a surprise announcement of a hostile bid is seen by many to create an environment which is too bidder friendly.

How will the Proposed New Rule Work?

The basic elements of the proposed rule are as follows:

1. a rights plan will be effective when adopted by the board of directors but it must be approved by security holders within 90 days from the date of adoption or, if adopted after a take-over bid has been made, within 90 days from the date the take-over bid was commenced;
2. a rights plan must be approved annually by majority vote of securityholders to continue to remain effective;
3. security holders can terminate a rights plan at any time by majority vote;
4. any shares held by the bidder are excluded from a security holder vote to adopt, maintain or amend a rights plan;
5. material amendments to a rights plan must be approved by security holders within 90 days of the date of adoption;
6. a rights plan is effective only against take-over bids or an acquisition by a person of securities of the issuer (e.g. it cannot be triggered by a proxy contest to change the board of directors or some other shareholder vote); and
7. a rights plan cannot be used to discriminate between take-over bids, so if it is waived or modified with respect to one take-over bid it must be waived or modified with respect to any other take-over bid.

What Will Change?

We expect the consequence of this proposed rule will be that target Boards of Directors will have more time to seek out a white knight or to canvass other potential transactions to increase shareholder value.  Instead of working within a 45-55 day time period, a target Board will have 90 days or more to identify alternatives.  Potentially, if shareholders agree, the Board could now “just say no” and hold off a hostile bidder indefinitely.

Under the proposed rule, if the target company does not have a rights plan in place that has been approved at the most recent AGM, its first reaction to a hostile take-over bid will likely be to adopt a Shareholder rights plan and to call a meeting of shareholders to be held on the 90^th day following the commencement of the bid (as opposed to the announcement).  The CSA is stating that barring extraordinary circumstances, the provincial securities commissions will not step in to cease-trade the rights plan.  If a value maximizing alternative is identified within the 90 days, the target could cancel the shareholder meeting and waive the rights plan, as it will have served its purpose.  If not, the target will be waging a proxy battle with the hostile bidder over the vote to approve or terminate the rights plan and the Plan will either remain in place or die at the shareholders meeting.  Or, the target might conclude that 90 days is sufficient to canvass alternatives and not call the shareholders meeting or engage in a proxy battle.  In that scenario, if there is no alternative transaction identified, shareholders will indicate their support (or not) for the hostile bid by tendering (or not) their shares to the bid.

One implication of the proposed rule is that public companies with rights plans currently in place may want to amend those Plans to change the “permitted bid” definition.  It will be interesting to see whether Canadian companies follow the route of U.S. style rights plans and eliminate altogether the concept of a “permitted bid”, or whether the common 60 day permitted bid period becomes 90 days or longer.

At the moment, it is not clear to us that Canadian public companies will routinely submit a rights plan for approval by the shareholders at each annual general meeting.  It may be easier to put a tougher “tactical” rights plan in place upon the commencement of a hostile bid and not have to worry about the restrictive guidelines of the shareholder advisory services when seeking advance shareholder approval.  The advantage, however, of obtaining advance shareholder approval would be that, provided the shareholders approve the Plan, the target Board would potentially have much longer than 90 days to defend against a hostile bid.  The annual general meeting of many public companies is held in March.  A hostile bidder that commences a bid in April may have to wait 11 months or more before the shareholders have the opportunity to vote down the rights plan so that they can tender to the bid.

It will be open to a hostile bidder to buy some shares of the target (typically at least 5%) and requisition a shareholders meeting to vote on the termination of the rights plan.  A hostile bidder offering a substantial premium to market might be confident of winning that vote.  Although the corporate statutes require the target company to call that meeting, they do not specify when the meeting must be called.  You can be sure that in the context of a hostile bid, where the target Board is canvassing alternatives, they will be in no hurry to call a shareholders meeting to vote again on a previously shareholder approved rights plan.  Litigation concerning the timing for calling a shareholders meeting is highly likely.

If issuers decide to submit a rights plan for approval by their shareholders at an annual meeting, they may or may not receive that approval.  We can imagine some institutional shareholders, and some retail shareholders, feeling that arming the board of directors with a 90 day tactical rights plan is sufficient, and that a rights plan that could potentially be effective for 12 months is more power in the hand of directors than they prefer.  We shall see.

The CSA have said that where a company puts a rights plan to its shareholders for a vote at its AGM, and the shareholders vote ”no”, that company may still adopt a rights plan following the announcement of a hostile take-over bid provided another shareholder meeting is called within 90 days.  That means there may be little downside to asking the shareholders to approve a rights plan at each AGM.  If shareholders decline to approve the rights plan, the Board can still achieve a 90 day window to canvass alternatives by adopting a tactical rights plan after the announcement of the hostile bid.

Comments?

Do you have a view on the regulation of shareholder rights plans?  If so, be sure to submit your written comments on or before June 12, 2013:

The Secretary
Ontario Securities Commission
20 Queen Street West
19^th Floor, Box 55
Toronto, Ontario, M5H 3S8
Fax: 416-593-2318
e-mail: comments@osc.gov.on.ca

Anne-Marie Beaudoin
Corporate Secretary
Autorité des marchés financiers
800, square Victoria, 22e étage
C.P. 246, Tour de la Bourse
Montréal, Québec, H4Z 1G3
Fax : 514-864-6381
e-mail: consultation-en-cours@lautorite.qc.ca

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.

On June 21, 2012, the Canadian Securities Administrators (otherwise known as the “CSA”) published Consultation Paper 25-401 – Potential Regulation of Proxy Advisory Firms, the purpose of which is to obtain feedback regarding some of the concerns raised by market participants in order to assist the CSA with determining whether there is a need to regulate proxy advisory firms and to outline and solicit feedback on potential regulatory responses and frameworks that may be used to regulate proxy advisory firms.

Proxy advisory firms are businesses that review and analyze matters that are put before shareholders of public companies for a vote.  A proxy advisory firm will make a recommendation in respect of a shareholder vote related to a variety of matters involving a voting decision by shareholders, including M&A transactions.  Some proxy advisory firms provide additional services to clients, including consulting services on corporate governance matters, automatic vote execution (which can be overridden by a client) and back-office support.  Currently, proxy advisory firms are not regulated in Canada.

The Consultation Paper notes that there is a growing demand for proxy advisors who play an important role by facilitating investor participation, providing research and aggregating information, among other things.  However, the CSA discusses a number of concerns raised by market participants regarding proxy advisors, including:

• potential conflicts of interest;
• a perceived lack of transparency;
• potential inaccuracies and limited engagement with issuers;
• potential corporate governance implications; and
• the extent of reliance of institutional investors on the recommendations provided by proxy advisory firms.

A number of potential regulatory responses are outlined by the CSA, including:

• enhanced disclosure requirements to mitigate conflicts of interest and increase transparency;
• regulation of proxy advisory firms;
• a certification framework;
• requiring proxy advisory firms to comply with best practices or explain why it has not done so; and
• the provision of best practices guidelines.

In the Consultation Paper, the CSA notes that based on its analysis to date, enhanced disclosure requirements are the preferred alternative for any potential regulation of proxy advisory firms.

In the Consultation Paper, the CSA poses a number of questions to market participants, issuers, institutional investors and proxy advisory firms, perhaps the most interesting of which include questions related to:

• potential amendments to National Instrument 51-102 – Continuous Disclosure Obligations that would require reporting issuers to disclose consulting services from proxy advisors in their circulars;
• a question posed to institutional investors regarding how they view their duty to vote and how the vote recommendations of proxy advisory firms play a part in the decision making process; and
• a question posed to issuers regarding the extent to which such issuers adopt the corporate governance standards proposed by proxy advisors even if the standards are not appropriate for the issuer.

Do you have a view on the regulation of proxy advisory firms?  If so, be sure to submit your written comments on or before August 20, 2012 to:

Me Anne-Marie Beaudoin
Corporate Secretary
Autorité des marchés financiers
800, square Victoria, 22e étage
C.P. 246, Tour de la Bourse
Montréal, Québec, H4Z 1G3
Fax : 514-864-6381
e-mail: consultation-en-cours@lautorite.qc.ca

John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 1900, Box 55
Toronto, Ontario, M5H 3S8
Fax: 416-593-2318
e-mail: jstevenson@osc.gov.on.ca

The recent saga of Fibrek Inc. has been of great interest to those in the M&A community. Many hoped that it would lead to the Supreme Court of Canada giving its view of defensive tactics and strengthen the hand of boards of directors seeking ways to maximize shareholder value in the face of an unsolicited offer.  This would have been very timely as regulators have recently been considering the future of certain defensive tactics (for more on this, please see one of our earlier posts: here). Despite the SCC dismissing Fibrek’s application for leave to appeal, the regulatory and court decisions may still very well have implications for M&A inCanada. 

In the spirit of full disclosure, I feel inclined to tell you that I’ve just returned to McCarthy Tétrault after a very exciting six month secondment to the Corporate Finance Branch and M&A Team of the Ontario Securities Commission. While at the OSC, I worked on aspects of the Fibrek matter. I’m going to post about the saga and its implications over the coming weeks. I note that my posts are limited to publicly available information. 

For those not as familiar with the matter, I thought I’d start out with a short history of the offers for Fibrek and the related proceedings.     

On December 15, 2011, AbitibiBowater Inc. (d.b.a. Resolute Forest Products) made a take-over bid to acquire all of the shares of Fibrek for $1.00 per share (shareholders were also permitted to select consideration in the form of shares or a combination of shares and cash). Abitibi also entered into irrevocable lock-up agreements with three of Fibrek’s largest shareholders, representing approximately 46% of the outstanding Fibrek shares. About a week later, Fibrek’s board recommended that the shareholders reject Abitibi’s offer and adopted a shareholders rights plan. On February 9, 2012, the Québec Bureau de décision et de révision (the Bureau) issued a cease trade order with respect to Fibrek’s shareholders rights plan.

On February 10, the public learned that Fibrek and Mercer International Inc. had entered into a support agreement pursuant to which Mercer would make an offer at $1.30 per share (again, shareholders were also permitted to select consideration in the form of shares or a combination of cash and shares). At the same time, it was announced that Mercer had agreed to subscribe for special warrants pursuant to a private placement at a price of $1.00 per special warrant for an aggregate subscription price of $32.32 million. Because each special warrant entitled Mercer to acquire one Fibrek share without further payment, if issued, the special warrants would result in the holdings of the locked-up shareholders being reduced to 40%. Shortly thereafter, Mercer’s take-over bid was launched.

A couple of days later, Abitibi applied to the Bureau for a cease trade of the Mercer offer and the special warrants, after which the Bureau issued an order that prohibited Fibrek from issuing the special warrants, reasoning that the special warrants and break-up fee contained in the support agreement with Mercer were inappropriate defensive tactics; however, the Bureau also found there was no reason to prevent Mercer from proceeding with its offer.

On March 13, the Bureau’s decision was reversed by the Court of Québec, a decision which was in turn appealed and, on March 27, the Québec Court of Appeal reinstated the Bureau’s decision. 

During this time, Fairfax Financial Holdings Limited, the largest shareholder of both Abitibi and Fibrek, filed an application for hearing and review to the OSC seeking to set aside the decision of the Toronto Stock Exchange to approve issuance of the special warrants and suspend the decision of the TSX until the application is heard by the OSC (the hearing had been adjourned until May 3).

On March 28, Fibrek announced its intention to apply for leave to appeal to the SCC. Shortly after, the SCC granted Fibrek’s motion seeking permission for an expedited process to hear an application for leave to appeal and, if leave was granted, the appeal itself of the Québec Court of Appeal’s decision to maintain the cease trade order of Fibrek’s proposed private placement of special warrants to Mercer. 

On March 28, Mercer filed an application with the OSC requesting a simultaneous hearing with the Bureau to consider whether Abitibi’s offer should be cease traded and other relief granted. After a preliminary hearing, the OSC dismissed the application. The Bureau did hear the matter in early April. Shortly after the application was filed Fibrek’s second largest shareholder, Steelhead Partners LLC, announced it would not tender its approximately 5% holdings of Fibrek shares until Abitibi’s minimum tender condition was met.

On April 11, Mercer announced that it had increased its bid to $1.40 per Fibrek share. On the same day, Fibrek announced it had adopted a second shareholder rights plan that would automatically terminate on May 11. The timing of these actions was critical because the locked-up shareholders of Abitibi were entitled to terminate the lock-up agreements on or after April 13, and the Abitibi offer was to expire at 11:59 p.m. on April 11. Later that same day, the Bureau cease traded Fibrek’s shareholders rights plan. The following day it was announced that Abitibi had taken up 46.8% of Fibrek’s shares and extended its offer to April 23.

On April 18, the SCC dismissed Fibrek`s application for leave to appeal. As a result, the private placement to Mercer cannot be completed.  Shortly thereafter, it was announced that Mercer withdrew its application from the Bureau. 

As of today, both the Mercer and Abitibi offers remain outstanding and 53.2% of Fibrek’s shares remain in play. Currently, Abitibi has taken up 46.8% of Fibrek’s shares and is now its largest shareholder. Many expect that Abitibi will win the battle for Fibrek at the end of the day.  But if this battle has taught us anything, it is to expect the unexpected.

So how will the saga end? And what does it mean for boards of directors? Stay tuned…

Contested shareholder meetings are often dramatic events which have the potential to result in, among other things, enhanced scrutiny of a board of directors, increased media coverage and litigation. Emotions tend to run high and decisions often need to be made quickly (particularly for those facing a dissident group who followed the advice given in Matthew Cumming’s blog post, Dissident Ambush of a Shareholders’ Meeting – Tactics to Consider).

If faced with a dissident proxy battle, a careful and deliberate approach can mitigate reputational risk, result in an orderly meeting and assist in avoiding unnecessary costs and litigation. The following are some items for a board of directors of a company faced with a dissident proxy solicitation to consider:

1. Has outside counsel and a proxy solicitation firm been engaged? If not, these should be the first items on the board’s action plan.
2. What are the views of the company’s shareholders? Shareholder outreach and education are often key elements to a successful proxy battle. A proxy solicitation firm can provide tremendous assistance on this front.
3. Know your dissident group. Understanding the dissident group, their goals and their past campaigns (if any) can yield valuable information.
4. Ensure that a careful review of the company’s constating documents is undertaken and all requirements regarding proxies and shareholder meetings are met.
5. Confirm the management proxy and circular and that of the dissident group comply with applicable laws.
6. Consider engaging an independent chair for a contested meeting. This may reduce vulnerability to claims of bias or conflicts of interest, which can cloud the issues at hand and increase the likelihood of a legal challenge.
7. Consider negotiating the “ground rules” for the shareholder meeting with the dissident group to deal with items including permitted dissident attendees, the meeting agenda, protocol for tabulation and inspection of proxies and the procedures to deal with over-voting.
8. Ensure ongoing custody of evidence including proxy materials, ballots and other relevant materials related to the shareholder meeting.
9. Consider if the company’s board is entitled to adjourn the meeting and what advantage, if any, will that result in?

What is the best strategy to deal with a dissident proxy battle? The truth is each situation is unique and one strategy doesn’t fit all. The development of a well-crafted strategy, with consideration of the facts and players at hand, is the best defense.

Now that I have given you some food for thought, let me know if you have additional thoughts on the subject. I look forward to hearing from you.