OSC Provides Guidance on Hostile Take-Over Bids No Reduction of Minimum Bid Periods, Hard Lock-up Agreements are OK and Shareholder Rights Plans are Useless
On March 15, 2018, the Ontario Securities Commission released the rationale behind its decisions on various applications submitted to it as a result of the hostile bid by Aurora Cannabis Inc. for CanniMed Therapeutics Inc. This decision provides important guidance to market participants and the legal community on the application of the new take-over bid regime to the 105 day minimum deposit period, hard lock-up agreements and the joint actor test, and shareholder rights plans.
1. Minimum 105 Day Deposit Period: Securities commissions will be reluctant to shorten the minimum 105 day offer bid for hostile bids.
2. Shareholder Rights Plans: It will be a rare case in which a tactical plan will be permitted to interfere with established features of the take-over bid regime. As a general matter, shareholder rights plans generate confusion and serve no useful purpose.
3. Hard Lock-up Agreements / Joint Actor Test: Generally speaking, none of the following actions will, in and of themselves, make a person a joint actor with the offeror under a take-over bid:
- Entering into a hard lock-up agreement with the offeror;
- Agreeing to vote or against a particular transaction; and
- Sharing information with an offeror.
1. Aurora’s Hostile Bid for CanniMed: Aurora made a hostile offer to acquire CanniMed. As a hostile bid, the take-over bid regime in Canada required a minimum 105 day deposit period for CanniMed’s shareholders to tender their shares to that bid before Aurora could take up and pay for any shares deposited under the bid.
2. CanniMed’s Proposed Newstrike Acquisition: At the same time, CanniMed entered into an agreement to acquire Newstrike Resources Ltd. This acquisition would not have resulted in a change of control for CanniMed or the extinguishment of any shareholder rights in CanniMed but it was nonetheless subject to the approval of the CanniMed shareholders. Aurora did not want CanniMed to complete the Newstrike acquisition and made its offer conditional on the cancellation of CanniMed’s proposed Newstrike arrangement. But, given the relatively short period of time that it would take for CanniMed to call and hold a shareholder meeting, CanniMed’s shareholders would have the opportunity to vote on the Newstrike acquisition, and CanniMed would have the opportunity to complete the Newstrike acquisition, well in advance of the time period in which Aurora could complete its hostile bid for CanniMed (i.e. prior to the expiry of the minimum 105 day deposit period for the Aurora bid).
3. “Hard” Lock-up Agreements: Aurora entered into “hard” lock-up agreements with four of CanniMed’s largest shareholders to:
- Tender their shares to the Aurora bid; and
- Vote against the acquisition of Newstrike.
4. CanniMed’s Shareholder Rights Plan: In order to defend against Aurora’s hostile take-over bid and protect the Newstrike transaction, CanniMed’s Board adopted a shareholder rights plan for CanniMed that prevented Aurora from:
- Acquiring any CanniMed shares other than those tendered to its bit; and
- From entering into any further lock-up agreements with CanniMed shareholders.
5. Relief Sought by Aurora:
- A Reduction of the Minimum 105 Day Deposit Period: Aurora sought an order from the OSC for exemptive relief from the requirement that its offer have a minimum 105 day deposit period before it could take and pay for any CanniMed shares deposited under the bid. Aurora sought to shorten the initial deposit period to 35 days, expiring in advance of the scheduled shareholders’ meeting for approval of the Newstrike transaction.
- Cease Trading of the CanniMed Shareholder Rights Plan: It also sought an order to cease trade CanniMed’s rights plan.
6. Relief Sought by CanniMed (Joint Actors Declaration): CanniMed sought an order from the OSC that Aurora and the locked-up shareholders should be deemed “joint actors” and that the shares of the locked-up shareholders should be excluded from the 50% minimum tender condition under the take-over bid rules.
In December 2017, the OSC made the following decisions, and in March 15, 2018 provided the written reasons for its decisions:
1. There was no reduction of the minimum 105 day deposit period for Aurora’s offer:
In its reasons, the OSC stated:
- Preserving the 105 day deposit period holds out the possibility of superior offers, which we find not to have been precluded by the Newstrike transaction, even if CanniMed is not currently conducting an auction for the sale of the company.
- Given the rebalancing that has occurred as a result of the amendments to the Canadian take-over bid regime, we are reluctant to make piecemeal changes to timing requirements that affect planning by bidders and target companies and that would make bid pricing and secondary market price determinations less predictable.
- On the facts of this case, our reluctance is not seriously tested by the evidence Aurora presented, because the Newstrike transaction does not extinguish the interests of CanniMed’s shareholders, CanniMed is not undergoing a change of control by virtue of the Newstrike transaction, and higher bids for CanniMed are not foreclosed.
2. The OSC cease traded CanniMed’s Shareholder Rights Plan:
a. In its reasons, the OSC first summarized the rationale behind Canada’s take-over bid regime as follows:
- The primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fide interests of the shareholders of the target company. A secondary objective is to provide a regulatory framework within which take-over bids may proceed in an open and even-handed environment. The take-over bid provisions should favour neither the offeror nor the management of the target company, and should leave the shareholders of the target company free to make a fully informed decision.
- The Canadian securities regulatory authorities consider that unrestricted auctions produce the most desirable results in take-over bids and they are reluctant to intervene in contested bids. However, they will take appropriate action if they become aware of defensive tactics that will likely result in shareholders being deprived of the ability to respond to a take-over bid or to a competing bid.
b. In applying that rationale to the facts in this case, the OSC stated:
- Implementation of the Shareholder Rights Plan by CanniMed was clearly a defensive tactic designed by CanniMed to protect the Newstrike proposal in the face of a bid conditional on that transaction being abandoned. The Shareholder Rights Plan is designed to prevent additional lock-ups that, together with permitted market acquisitions, could lead to Aurora's success.
- Since the Shareholders Rights Plan had primarily a tactical motivation in simultaneously protecting the Newstrike arrangement and resisting the Aurora Offer, its function could not primarily be said to be giving the Board time to conduct an auction or to allow time for higher bids to emerge. Such a function was a possibility as a secondary matter, but there was no evidence that the ability to seek other transactions was being utilized by CanniMed.
- The rebalancing of the take-over bid regime by mandating the minimum 105 day deposit period, the minimum tender condition and the mandatory 10 day extension following satisfaction of that condition, provides sufficient protections in this case for shareholder choice to occur while allowing bids to be made and management to respond to such bids in an appropriately predictable and even-handed manner
- Lock-up agreements are a lawful and established feature of the planning for M&A transactions in Canada, and are even more important in a bidder's planning after the adoption of the take-over bid amendments since the risks to the completion of a transaction have been increased by virtue of the lengthening of the period that a bid must remain open and since the minimum tender condition cannot be waived by the bidder. If tactical shareholder rights plans could, as a general matter, operate to prevent lock-ups and permitted market purchases, the take-over regime would be made far less predictable and the planning and implementation of shareholder value-enhancing transactions made more difficult or inappropriately discouraged by such intervention.
- As a general matter, tactical plans that reproduce the features of the take-over regime, e.g. the 105 day period, the minimum tender condition and the 10-day extension, can be confusing to investors and market participants. Reproducing these features, with variations in how the requirements are to be satisfied, would generate confusion and in this case serve no useful purpose. Similarly, such plans should not generally be utilized to deem a bidder to beneficially own locked-up shares in circumstances where they would not be deemed to be joint actors under the applicable rules.
- It will be a rare case in which a tactical plan will be permitted to interfere with established features of the take-over bid regime such as the opportunity for bidders and shareholders to make decisions in their own interests regarding whether to tender to a bid by entering into lock-up agreements of the kind under consideration in this case. In this case, the Shareholder Rights Plan constitutes an impermissible defensive tactic.
3. The locked-up shareholders were not “joint actors” with Aurora:
a. In its reasons, the OSC summarized the law as follows:
- Question of Fact: It is a question of fact as to whether a person is acting jointly or in concert with an offeror or an acquirer.
- Agreements to Acquire Shares: A person is deemed to be acting jointly or in concert with an offeror if, as a result of any agreement, commitment or understanding with the offeror or another person acting jointly or in concert with the offeror, that person acquires or offers to acquire securities of the same class as those subject to the offer. This prong of the test involves parties on the same side of the transaction – those aiming to acquire the securities on a group basis.
- Agreements to Vote Together: A person is also deemed to be acting as part of such a group if they intend to exercise voting power together.
- But Not Agreements to Tender: On the other hand, a person is specifcally not deemed to be a joint actor with an offeror solely because they have committed themselves to tender to an offeror's bid.
- Formal Agreements Not Necessary: As set out in the OSC's decision in Sterling CentreCorp Inc. (Re) (2007), evidence of a formal agreement between persons is helpful, but not necessary to find "joint actor" status. The question is whether the parties are acting together "to bring about a planned result".
b. In applying the law to the facts in this case, the OSC in its findings then said:
- The law does not distinguish so-called “hard” lock-up agreements, as were entered into in this case, in which a shareholder is committed to tender to a bid as long as a threshold price is achieved, from “soft” lock-up agreements where the shareholder is permitted to tender to a superior offer.
- The law does not allow us to conclude that the Locked-up Shareholders are acting jointly or in concert solely on the basis of the strong commitments to tender set out in the lock-up agreements.
- Entering into such agreements is consistent with the Locked-up Shareholders seeking enhanced liquidity and a higher price for their securities in their own and their investors’ interests. Lock-up agreements are an established practice in M&A transactions that allow investors to pursue their financial interests. Such agreements can also help facilitate transactions by providing a degree of deal certainty to a bidder, who might otherwise be deterred from making a bid that is advantageous to all shareholders. This is especially true now that a bid is at risk to be countered during the extended minimum 105 day deposit period and in light of the minimum tender condition, which promotes a tactical drive to have certainty that the condition will be satisfied at the earliest possible time.
- Voting Commitment:
- In law, there is also a presumption that a person who enters into an agreement, commitment or understanding to vote jointly or in concert with a bidder will be found to be acting jointly or in concert in relation to the bid.
- In this case, the Locked-up Shareholders agreed to vote against the Newstrike transaction and to vote for the Aurora transaction if it were reformulated into a transaction requiring a shareholder vote. The Aurora Offer was conditioned on the Newstrike transaction not proceeding.
- Subject to these restrictions, the Locked-up Shareholders did not agree to vote in accordance with Aurora’s instructions, and they did not agree to give Aurora their proxies to vote their securities. Aurora did not take steps to transfer voting rights or entitlements to Aurora generally or in respect of all significant matters requiring a vote of shareholders in a manner similar to what would prevail if the shares had already been transferred to Aurora or the Aurora Offer had been successful and the shares taken up by Aurora.
- We conclude that the voting provisions in the lock-up agreements are consistent with the permissible objectives of the tender commitments made by the Locked-up Shareholders to Aurora, and do not result in these shareholders acting jointly or in concert with Aurora. The presumption that an agreement to exercise voting rights leads to joint actor status can be rebutted, where, as here, the voting rights are tailored to be consistent with and to support otherwise permissible commitments to tender securities to a bid.
- Sharing of Information:
- In some cases, the improper transfer of information may also warrant remedies fashioned to level the playing field to avoid the timing advantage a bidder has obtained through the receipt of such information. This would be the case, for example, if the transfer of information was clear and extensive enough that it prevented an auction process from being feasible or otherwise denying the other shareholders a choice of transactions.
- Notwithstanding the information received by Aurora in this case, which afforded Aurora a timing advantage, the fact remains that the Locked-up Shareholders were all sellers and were demonstrably acting in their own financial interests to maximize their returns, while Aurora is the only buyer in this transaction. The Locked-up Shareholders wanted an attractive exit and Aurora was pursuing a long-term business combination. These are not circumstances in which their share positions should be aggregated since Aurora and these shareholders are fundamentally on different sides of the transaction. The disclosure of information to Aurora, while raising other issues, is not inconsistent with the Locked-up Shareholders seeking to have the Aurora Offer succeed based upon their self-interest as sellers.
- Evidence of any benefits to the Locked-up Shareholders beyond an increased price and liquidity would potentially have been relevant, but there was no such evidence in this case.
Invitation for Discussion:
If you would like to discuss any aspect of Canadian privacy legislation in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Business Law group at Nerland Lindsey LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.