Canada: Dissolving A Poison Pill: "When, Not If" Still The Standard In Canadian Take-Over Bids

When HudBay Minerals launched an unsolicited take-over bid for Augusta Resource Corporation, the British Columbia Securities Commission (BCSC) said the Augusta poison pill should go, but only after giving the board of Augusta considerable additional time. Reaffirming the current state of the law in Canada, the BCSC indicated that it is still a matter of "when, not if" a poison pill must go.

On June 27, 2014, the BCSC released the reasons for its decision of May 2, 2014, in which it declined to immediately cease-trade a poison pill implemented by Augusta, but determined that it would cease-trade the pill 74 days later, if, among other things, HudBay's hostile take-over bid for the shares of Augusta remained open for a further 75 days. The reasons were widely anticipated by the legal community for insight into whether the proposals of the Canadian Securities Administrators (CSA) to reform the poison pill regime had influenced the BCSC's decision – as the BCSC had allowed the pill to remain in place for an unusually long period of 156 days. As it turns out, notwithstanding that the BCSC was "mindful of these proposals and the issues raised by them", the BCSC "elected not to follow the changes in policy" reflected in such proposals.

The Facts

Between 2010 and early 2013, HudBay and Augusta engaged in a number of discussions regarding potential transactions between them. During this time, through a combination of open market transactions and private placements with Augusta HudBay acquired 15% of the outstanding common shares of Augusta.

In response to this accumulation of shares, on April 18, 2013, the board of directors of Augusta adopted the pill, with an unusually low triggering threshold of 15%. HudBay was grandfathered under the pill, but any further acquisition of shares by HudBay would trigger the pill. Augusta's shareholders ratified the pill on October 17, 2013.

On February 9, 2014, HudBay announced its bid for Augusta. The bid was conditional on, among other things, a minimum tender condition and the pill being cease-traded, waived or invalidated. The board of Augusta recommended that shareholders reject the bid, noting that a group of shareholders representing 33% of the outstanding shares would not tender to the bid.

HudBay extended the bid twice, resulting in a bid expiry date of May 5, 2014. On April 8, 2014, Augusta made the decision to advance the date of a shareholder meeting called to approve continuation of the pill from May 9, 2014 to May 2, 2014 (i.e., so that shareholder approval of the continuation of the pill could be sought before the bid expired). On April 14, 2014, HudBay applied to the BCSC to have the pill cease-traded. At the meeting held on May 2, 2014, shareholders of Augusta approved the continuation of the pill.

The Decision

On May 2, 2014, the BCSC decided that if HudBay extended the bid to expire no earlier than July 16, 2014, and provided a ten-day extension of the bid if HudBay took up any shares under the bid, the BCSC would issue an order cease-trading the pill on July 15, 2014, unless Augusta issued and filed with the BCSC a news release by July 14, 2014, confirming that it had terminated the pill.

In its analysis, the BCSC considered the principles established in the Icahn Partners LP decision with respect to the public interest in relation to the adoption of poison pills as a defensive take-over bid tactic, specifically that:

• each shareholder of a target should be allowed to decide whether or not to accept or reject a bid;
• the board of a target has a fiduciary duty to act in the best interest of the target;
• pills are not contrary to the public interest when used to buy time for a target to respond appropriately to the bid and they are acceptable only as a temporary defence; and
• take-over bids are fact-specific so the relevance of the factors will vary with each case.

The BCSC also took the opportunity to reconcile apparently diverging decisions to categorically affirm that poison pills are temporary – it is a question of when, not if, a pill must go. On this basis, the BCSC addressed the question of when the Augusta pill should be cease-traded by referring to the list of non-exhaustive factors set out in the decision of Royal Host Real Estate Investment Trust. Emphasizing that each case is fact-specific, the BCSC focused on the following five factors:

• the length of time that Augusta had already had to run a process aimed at identifying a superior transaction to the bid;
• the likelihood of the Augusta board being able to find a superior transaction;
• whether the bid was coercive, taking into account the waiver of the minimum tender condition;
• the vote by Augusta shareholders to approve continuation of the pill; and
• the likelihood that HudBay would extend its bid, if the pill were cease-traded immediately or at a specified date in the future.

The BCSC ultimately concluded that, while there were factors in support of issuing an immediate cease-trade of the pill, such factors were ultimately outweighed by the Augusta shareholder vote in favour of maintaining the pill (the context of which was carefully analyzed by the BCSC and given considerable weight in this circumstance), and the likelihood of extension of the bid by HudBay.

Epilogue

On June 23, 2014, prior to the release of the BCSC's reasons, Augusta and HudBay announced that they had entered into a support agreement in respect of a friendly transaction. The agreement was a result of an increase in consideration by HudBay.

The authors would like to thank Maria Valdivieso for her assistance in preparing this article.

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