A principles-based and practical application of the takeover bid rules

On January 28, 2021, the Alberta Securities Commission (ASC) made an order dismissing the multi-pronged challenge of Osum Oil Sands Corp. to the hostile partial insider bid made by an acquisition vehicle of Waterous Energy Fund (WEF). The ASC released its reasons for that order on May 27. WEF was ultimately successful in its partial bid for the privately-held Osum, and completed its acquisition of the remaining target shares by way of a second-step amalgamation transaction on April 30.

What you need to know

• The technical approach of the target was rejected, and the use of regulatory proceedings as a bid-defence failed.
• The reasons of the ASC reflect an approach to the bid rules, including those applicable to insider bids, that is both principles-based and practical, focusing on the protection of investors and a set of clear rules for market participants in the bid context.

Background

In the litigation, Osum complained about the bid-financing rule and the application under Multilateral Instrument 61-101 of the valuation requirement and the requirement to disclose prior valuations in the context of insider bids. Osum made the complaints in an effort to have the bid cease-traded by the ASC and to obtain an order requiring compliance by WEF with MI 61-101 for any subsequent bid. The ASC found WEF’s insider bid complied with the bid rules and MI 61-101. Further, while the ASC dismissed certain complaints relating to compliance with MI 61-101’s prior valuation disclosure requirements, it determined that even had there been merit to such complaints, such technical non-compliance in the circumstances did not create any risk of harm to Osum shareholders justifying a remedy to protect them.

Bid financing

Based on a technical and outdated interpretation of the bid rules, Osum unsuccessfully complained to the ASC that WEF did not have unconditional financing for its bid when it was commenced. Osum argued that WEF’s financing plan was deficient because it included royalty financing that was subject to certain rights of first refusal (ROFR) of which WEF was unaware at the commencement of its bid. WEF subsequently amended its financing plan to address the ROFR requirements.

NI 62-104 requires that a bidder make “adequate arrangements” before the bid is commenced to ensure it will have the funds required to complete the acquisition of target shares, but also permits some conditionality to such arrangements provided that the bidder reasonably believes when it commences its bid that the likelihood that it won’t be able to complete the transaction due to a financing condition is remote. The appropriateness of some bid financing conditionality based on such reasonable belief was expressed as the securities regulatory staff position following a court ruling in a 2005 contested bid that imposed a very strict interpretation of the bid financing requirement. The ASC’s reasons in dismissing the Osum complaint relating to WEF’s financing plan confirm that the bid rules reflected in NI 62-104 continue to permit financing conditionality: it is unnecessary, as the old case stated, that bid financing must be “clear and unequivocal” provided that the bidder reasonably believes the possibility to be remote that it will not be able to pay for tendered shares.

Further, in the context of WEF’s bid, the ASC ruled that a condition to an offer must be distinguished from bid financing conditionality; the former may prevent an offer from being completed, but if bid conditions are satisfied, the bidder then must, at the commencement of the bid, reasonably believe that there is only a remote possibility that it will not be able to finance the bid. In this case, the bid was conditional on WEF obtaining all necessary or advisable third-party consents, approvals and waivers, and therefore addressing any ROFR requirements was a bid condition requiring cooperation from applicable third parties—if the bid condition could be satisfied, the bidder’s financing would be available. The ASC further concluded that, even if the potential ROFR consequences were viewed as a financing condition that could cause the bidder’s financing arrangements to fail, in the circumstances WEF could not reasonably have known about them when it commenced its offer which was the relevant time for assessing its belief that it would be able to satisfy the requirements of its financing plan. This is a practical approach to the bid financing requirement and not an over-technical one that, if applied, could lead to target shareholders being deprived of the opportunity to respond to bids.

Valuation and the arm’s length negotiation exemption

Prior to commencing its bid, WEF had acquired approximately 45% of the outstanding Osum shares in a private purchase from certain institutional shareholders. As a result, WEF’s subsequent bid for Osum shares was an insider bid triggering compliance with the formal valuation requirement under MI 61-101. WEF relied on an exemption to the valuation requirement that is available where (i) the bid followed arm’s length negotiations and (ii) the bidder did not have any material non-pubic information (MNPI) about the target. Where these criteria are satisfied, the information asymmetry concerns underpinning the valuation requirement are not present: minority target shareholders can be assured from the negotiations and the absence of MNPI that the proposed price is a fair market price and the bidder has had no advantage in setting the bid price. Osum unsuccessfully challenged WEF’s reliance on the exemption, arguing that through due diligence and board representation, WEF had more Osum information than target shareholders, including minority shareholders.

WEF negotiated the bid price (later increased) with two groups of shareholders before commencing the bid: the selling shareholders under the private purchase and certain additional shareholders who signed lock-up agreements in connection with the bid. In agreeing to the bid price, those shareholders shared the same financial interests as the minority target shareholders in obtaining the highest price available from the bidder. Moreover, those shareholders were sophisticated institutional shareholders, held target board nomination and/or observer rights at the time of their agreements with WEF, and had special access to information about the target and were therefore on a level playing field with the bidder, further evidencing that the arm’s length negotiations involved informed sellers whose judgment as to value could serve as a proxy for a formal valuation, even if all such shareholders did not have the same information as WEF. WEF also refuted Osum’s allegations that it possessed certain MNPI; the ASC concluded the information at issue was not material separately or cumulatively using a materiality standard comparable to that used in the disclosure and misrepresentation context.

With respect to target information, Osum’s directors had an obligation to make disclosure to target shareholders and that process has the practical effect of fixing any information asymmetry. However, with respect to information asymmetry and the arm’s length negotiation exemption, the ASC made the principled and practical observation that the purpose of the exemption is not to ensure all shareholders have identical information; the exemption allows a bidder and target to avoid the need for a valuation where arm’s length negotiations provide a proxy for the interests of minority shareholders—a reliable indicator that a fair market price has been negotiated.

Disclosure of prior valuations

Osum’s final attack on WEF was a complaint that WEF had not disclosed a prior valuation of Osum shares as required by MI 61-101. The purpose of such disclosure, as with obtaining and disclosing a new valuation, is to inform minority shareholders and address information asymmetry. However, consistent with this principle, there is no requirement to disclose a valuation not known or reasonably obtainable by the bidder.

Osum had obtained two prior valuations in connection with internal compensation matters, but they were not known to WEF nor, the ASC concluded, were they reasonably obtainable. But in any event, taking a principles-based and practical approach to this requirement, the ASC held that information about those valuations was disclosed by Osum as part of its response to the hostile bid, and therefore any harm that may have been caused by non-compliance by WEF in its bid disclosure was fully addressed by Osum’s disclosure.