Shareholder Support of Poison Pill Allows Target Board to "Just Say Slow" to Hostile Bid

The British Columbia Securities Commission (BCSC) recently released reasons for its May 5, 2014 order allowing Augusta Resource Corporation to keep its shareholder rights plan (also known as a poison pill) in place for an extended period—155 days after HudBay Minerals Inc. commenced its hostile bid. The Augusta decision confirms the importance of a shareholder vote on the continuation of a poison pill in the face of an unsolicited takeover bid. Shareholder support for a pill in the face of a hostile bid allows a target board to "just say slow".

The Augusta decision is the first significant poison pill case since the Canadian Securities Administrators (CSA) and Québec's securities regulator (AMF) announced competing proposals on changing how poison pills are regulated (see our bulletin, Canadian Companies Will Be Harder to Acquire Under New Poison Pill Proposals). Although the BCSC said that it did not apply the policy changes included in these proposals, the Augusta decision is consistent, in part, with the proposed CSA rules that place an increased emphasis on shareholder voting.

The status of the CSA and AMF proposals remains unknown, leaving provincial securities commissions to continue to regulate poison pills on a case-by-case basis. However, the Augusta decision indicates progress toward a more harmonized approach to the treatment of poison pills by provincial securities commissions; the decision is consistent with earlier poison pill cases in which securities commissions in Ontario and Alberta, in determining how long a poison pill should be allowed to stand, attached significant weight to shareholder approval of a poison pill.

Background: The Bid for Augusta

HudBay had initially attempted a negotiated transaction with Augusta and failed. HudBay announced in April 2013 that it had accumulated a 15% position in Augusta shares, prompting Augusta's board to adopt a poison pill. The pill was approved by Augusta shareholders in October 2013.

On February 10, 2014, HudBay commenced its bid, and then later sought to have Augusta's poison pill cease-traded by the BCSC. Augusta called a meeting of shareholders at which the poison pill was again put to shareholders for approval. Both the second shareholders meeting and the conclusion of the BCSC's poison pill hearing occurred on May 2, 2014. By that time, it had been 81 days since HudBay had commenced its takeover bid—significantly longer than the average time that securities commissions had previously allowed poison pills to remain in place. The evidence at the pill hearing showed that despite the time that Augusta's board had to use the pill, there was no real and substantial possibility that Augusta would find a superior transaction to HudBay's bid.

At the shareholders meeting, of the shares voted (78%), and excluding the shares held by HudBay and directors and officers of Augusta, over 90% were voted in favour of the continuation of the pill.

On May 5, 2014, the BCSC made its order allowing the pill to remain in place until July 15, 2014. On June 23, 2014, HudBay and Augusta announced a friendly transaction. The BCSC subsequently released its reasons.

The BCSC Decision

The BCSC ordered that Augusta's poison pill could stay in place until July 15, 2014, provided that HudBay extended its bid to July 16, 2014 and agreed to a further 10-day extension if HudBay took up any shares on that date. As a result of the order, the pill was allowed to remain in place for 155 days from the commencement of HudBay's bid, more than double the 60-day permitted bid period and well in excess of the average time of 45 - 60 days that securities commissions had previously allowed pills to remain in place. The time that Augusta's board was given to use the pill is particularly surprising in light of the fact that the BCSC concluded that it was unlikely that the board would be able to identify a better transaction. Under the earlier jurisprudence of the BCSC, and applying the well-known test for cease-trading poison pills, HudBay could reasonably have expected that the BCSC would have found that it was "time for the pill to go" (see Canadian Securities Regulators' Decisions on Poison Pills Diverge).

The BCSC stated in its reasons for allowing the continuation of Augusta's pill that it was mindful of, but did not apply, the CSA and AMF proposals. Under the CSA proposal, a poison pill can be adopted by a target board and remain effective as a defensive measure as long as it has been approved by disinterested shareholders. In the Augusta decision, the BCSC stated that it was not prepared to conclude that shareholder approval should be definitive with respect to the continuation of a poison pill. Making a shareholder vote definitive in the regulation of poison pills would not, according to the BCSC, strike the right balance between the interests of the majority of shareholders, who vote to continue a pill, and the rights of all shareholders to have the opportunity to tender to a bid. While a shareholder vote will be a very significant factor in favour of continuing a poison pill, the BCSC stated it would be contrary to the current national policy governing defensive measures to make that factor determinative.

The BCSC raised additional concerns about an approach to regulating pills that would make a shareholder vote determinative, including concerns about the shareholder voting system in Canada generally, which is currently under review (see our bulletin, Review of Canada's Proxy Voting System). In this case, the vote on Augusta's pill occurred in the face of HudBay's offer. The vote was informed and was overwhelmingly in favour of the pill, even taking into account trading that occurred before the shareholders meeting. The strength of the shareholder vote was the factor that ultimately drove the BCSC to allow Augusta's poison pill to remain in place for additional time. Of particular significance to the BCSC was that the numbers were so high that the votes by disinterested shareholders in favour of continuation of the pill represented an absolute majority of the Augusta shares, even assuming that every share that was not voted at the meeting would have been voted against the pill's continuation. The importance of this finding is consistent with the AMF proposal which requires a bid to include an irrevocable minimum tender condition that more than 50% of the target's shares held by independent shareholders must be tendered to the bid.

Implications

The Augusta decision shows an alignment by the BCSC with the earlier decisions in Neo Materials and Pulse Data, where the Ontario and Alberta securities commissions placed significant weight on shareholder ratification of a target board's adoption of a poison pill. It also reflects an extension of the OSC's decision in MOSAID where the shareholder vote to renew a poison pill during a hostile bid gave the target board an additional 70 days after the commencement of the bid to pursue strategic alternatives.

The Augusta decision reinforces the significance of a shareholder vote approving a target board's adoption of a poison pill in the face of a hostile bid as a shield to give a target board more time to pursue strategic alternatives. To the extent that seeking shareholder ratification of a poison pill becomes a part of a target board's strategy in response to a hostile bid, we may see shareholder meetings becoming an increased focus for disputes before the regulators and the courts.