CanniMed Poison Pill Cease Traded; Hard Lock-Ups Recognized as Legitimate Hostile Bid Tool

The Ontario Securities Commission (OSC) and the Financial and Consumer Affairs Authority of Saskatchewan (the FCAAS) have issued reasons for their decision to cease trade the shareholder rights plan (or poison pill) adopted by the board of CanniMed Therapeutics Inc. in response to Aurora Cannabis Inc.'s hostile bid. This is the first decision to consider the role of poison pills following the introduction of new takeover bid rules in 2016.

The regulators cease traded the poison pill on the grounds that it was an improper defensive tactic and did not serve any legitimate purpose for CanniMed in responding to Aurora's bid. The regulators also recognized the valid role of lock-up agreements in facilitating takeover bids, and confirmed that shareholders are not joint actors with a bidder merely as a result of their hard lock-up agreements.

What You Need To Know

• As a valid tool to facilitate a takeover bid, a hard lock-up arrangement may be entered into by bidders with target shareholders, committing shareholders to tender their shares to the bid and vote against alternative transactions.
• Under the new bid rules, a poison pill is unlikely to survive a cease trade application, including where the target's objective is to limit a bidder's ability to use lock-up agreements to attract further shareholder support for its bid and against alternative transactions.

Background

In November 2017, Saskatchewan-based CanniMed was negotiating an acquisition of Newstrike Resources Inc. pursuant to an all-share plan of arrangement transaction. CanniMed's board was in a position to approve the Newstrike arrangement when Aurora launched its hostile bid. The bid was supported by four CanniMed shareholders who opposed the Newstrike acquisition, favouring instead a sale of CanniMed. Those shareholders, holding approximately 38% of CanniMed, entered into hard lock-up agreements with Aurora before its bid was commenced. Two of the locked-up shareholders had nominees on the CanniMed board.

The proposed arrangement with Newstrike required approval by a simple majority of CanniMed shareholders under TSX rules. That vote was at risk since the locked-up shareholders had committed not only to tender to Aurora's bid, but also to vote against alternative transactions, including CanniMed's proposed arrangement with Newstrike.

In response to the Aurora bid, CanniMed's board adopted a poison pill that effectively restricted Aurora from acquiring CanniMed shares other than those tendered to its bid, and prevented Aurora from entering into any further lock-up agreements other than those already in place. The pill therefore not only frustrated Aurora's offer, it also protected CanniMed's proposed arrangement with Newstrike.

Aurora applied to the OSC and FCAAS for an order to cease trade CanniMed's poison pill. CanniMed separately sought an order that Aurora and the locked-up shareholders were joint actors on the basis of the terms of the lock-up agreements and the circumstances under which they were negotiated. If granted, this order would have meant that the Aurora offer was an insider bid because of the locked-up shareholders' representation on the CanniMed board, resulting in formal valuation and other requirements. Following a joint hearing, the OSC and FCAAS cease traded the poison pill adopted by CanniMed. The regulators did not find that Aurora and the locked-up shareholders were joint actors merely because of the lock-up agreements, although Aurora was ordered to provide additional disclosure of information relating to its interactions with the locked-up shareholders. Other relief sought by the parties was denied.

Analysis

The regulators' reasons acknowledge the important and valid role that lock-up agreements play in takeover bids. Among other things, lock-up agreements provide a degree of deal certainty to bidders, encouraging them to come forward and make a takeover bid, especially in unsolicited circumstances. That function is particularly important under the new bid rules, where an offer must remain outstanding for 105 days. Target shareholders may, in order to attract a bid and gain liquidity for their shares at a premium to market price, legitimately agree to tender to a bid and vote against alternative transactions. Entering into hard lock-up agreements with those related commitments does not thereby render target shareholders joint actors with a bidder.

CannniMed's poison pill engaged National Policy 62-202, which provides that securities regulators will take appropriate action where defensive measures will likely result in target shareholders being deprived of the ability to respond to a takeover bid or to a competing bid. National Policy 62-202 has largely been considered in the context of a target board's use of a poison pill to slow down a hostile bid. Under the old takeover bid regime, bids could expire in just 35 days, and target boards would typically implement tactical poison pills to buy more time to seek an alternative offer or create negotiating leverage. Under the new regime, tactical poison pills implemented to delay a hostile bid beyond the minimum bid period of 105 days are now largely redundant.

In contrast to the use of a poison pill to delay a hostile bid and find strategic alternatives, CanniMed sought to employ a pill for different purposes, namely to protect the proposed Newstrike acquisition and prevent shareholders from being able to consider the Aurora bid. The OSC and FCAAS concluded that CanniMed's poison pill constrained shareholder choice with respect to the proposed change-of-control transaction, contrary to the securities law principle that underpins National Policy 62-202. Acknowledging that shareholders have the right to decide to whom they wish to tender their shares, the regulators' decision signals that they will be reluctant to allow a target board to adopt a defensive measure that undermines a bidder's ability to secure support for its prospective bid, including through lock-up agreements.