Written by John Piasta, Justin Lambert, Michael Mysak and Manpreet Dhillon
On December 21, 2021, a panel of the Alberta Securities Commission (ASC) published its written decision in Re Bison Acquisition Corp., 2021 ABASC 107. The decision followed a July 2021 hearing and oral ruling on cross-applications from Bison Acquisition Corp. (Bison) together with Brookfield Infrastructure Corporation Exchange Partnership, both in connection with Brookfield Asset Management Inc., Inter Pipeline Ltd. (IPL) and Pembina Pipeline Corporation (Pembina). These applications were made in the context of competing offers from Pembina and Bison to acquire IPL.
The lengthy decision touches on a number of topics, however the most interesting discussions relate to Bison not previously disclosing its ownership of cash-settled total return swaps (IPL Swaps) prior to its unsolicited takeover bid, and a $350 million (or 2.3 percent of IPL's enterprise value) negotiated reciprocal break fee (the Break Fee), payable by IPL under the terms of the arrangement agreement entered into by IPL and Pembina (the Pembina Arrangement Agreement). In connection with its consideration of these matters, the ASC made a number of further important comments on the scope of its remedial jurisdiction.
In summary, the panel held that: (i) the Break Fee was commercially reasonable and not abusive of IPL shareholders and of the Alberta capital markets; (ii) Bison did not meet its disclosure obligations under National Instrument 62-104 – Take-Over Bids and Issuer Bids (NI 62-104) in respect of the IPL Swaps in the Bison Offer; and (iii) despite not having an early warning reporting obligation under National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (NI 62-103). Bison's decision to not publicly disclose its increased economic exposure to IPL through the IPL Swaps triggered the ASC's public interest jurisdiction.
In February 2021, Bison announced its intention to make an unsolicited takeover bid of IPL (the Bison Offer). Bison's announcement indicated it held 9.75 percent of the common shares of IPL (IPL Shares) and stated Bison further had "economic exposure" to an additional 9.9 percent of IPL Shares through IPL Swaps. Bison had reached this position in the preceding 10 months. Bison also stated that it had no right to vote, direct or influence voting on any swap shares. Since Bison did not beneficially own, control or direct more than 10 percent of the IPL Shares, it did not file an early reporting report under NI 62-103 (an EWR). Notwithstanding Bison's bid, in May 2021, IPL and Pembina entered into the Pembina Arrangement Agreement, which included the Break Fee payable in the event a superior offer was provided, and pursuant to which Pembina would acquire all of the outstanding IPL Shares under a plan of arrangement (the Pembina Arrangement). In subsequent press releases, Bison referred to its holdings of a nearly 20 percent economic interest in IPL as a combined "block."
Bison argued that the Break Fee was an inappropriate defensive tactic taken in response to the Bison Offer and it undermined the objectives of the take-over bid regime as discussed in National Policy 62-202 – Take-Over Bids – Defensive Tactics. Specifically, Bison questioned whether the board of directors of IPL (the IPL Board) failed in its duty to negotiate the lowest break fee that would still induce Pembina to make an offer better then Bison; that the Pembina Agreement did not represent better value for IPL shareholders; the size of the Break Fee was disproportionate to the likelihood that it would have been paid; and that the Break Fee was not an auction stimulator, but inhibitor.
The ASC relied on CW Shareholdings Inc. v WIC Western International Communications Ltd. (1998) 39 ORD 3d 755, 160 DLR (4th) 131 [CW Shareholdings] to set out the test for reviewing break fees. Note, there was dispute about the applicability of this case, but the panel found it applied. In that case, the Ontario Court (General Division) accepted that a break fee is appropriate where:
- it is needed to induce a competing bid;
- the bid represents better value for shareholders; and
- the fee reflects "a reasonable commercial balance between its potential negative effect as an auction inhibitor and its potential positive effect as an auction stimulator" (Ibid at para 51) CW Shareholding Test).
The ASC found that Pembina would not have made a competing bid without the Break Fee, there was no reason to dispute the IPL Board's assessment that the Pembina Arrangement was preferable, and the Break Fee reflected a reasonable commercial balance between the effects as an auction inhibitor and an auction stimulator.
The ASC also reviewed several previous cases which considered the size of a break fee relative to deal size to determine whether it was an improper defensive tactic. The panel noted that break fees under 5 percent of equity value had been frequently approved and, indeed, at 2.3 percent the Break Fee at issue before it was below average and well within an acceptable range (Ibid at para 52).
Of further interest, had it been successful, Bison had asked for an order that would eliminate or reduce the size of the Break Fee. However, the panel commented in obiter that it did not have jurisdiction to either reduce or eliminate the Break Fee. In its view, the only possible remedy for an improper break fee would be a cease-trade order under the ASC’s public interest jurisdiction.
Bison's IPL Swaps
In their applications, IPL and Pembina argued that Bison's conduct in connection with the IPL Swaps ought to trigger the ASC's public interest jurisdiction because:
- Bison used IPL swaps to avoid EWR obligations;
- Bison failed to make public disclosure on the IPL swaps under NI 62-104;
- Bison used the IPL Swaps “held by a captive and compliant [swap] counterparty … to try to defeat shareholder approval of the Pembina Arrangement”;
- Bison used the IPL Swaps to try to meet the minimum tender condition of over 50 percent under the Bison Offer; and
- Bison breached the take-over bid requirements in the Securities Act or the regulations thereto.
The test set out in Committee for the Equal Treatment of Asbestos Minority Shareholders v Ontario (Securities Commission), 2001 SCC 37 at para 52 is that the conduct was "clearly abusive" of investors and the integrity of the capital market
The ASC agreed with Bison's submissions that it was not strictly required to disclose its interest in the swaps under the EWR regime, but that did not end the inquiry. Rather, the panel gave careful consideration to the only prior known similar case, Re Sears Canada Inc., (2006) 35 OSCB 8781, in which the Ontario Superior Court of Justice did not make any findings of the type sought by Bison but cautioned that such a case could arise in the future where an acquiring party was using swaps to "park shares" and avoid its EWR obligations.
The ASC found that this was such a case. After first finding that Bison's economic interest in the IPL Swaps was a material fact which was not adequately disclosed, the ASC found that Bison used the IPL Swaps to avoid the EWR regime. In making that finding, the ASC relied heavily upon its determination that Bison's economic interest was in avoiding triggering its disclosure obligations as that would pique the market and thus likely increase the price Bison would have to pay to acquire IPL.
On its swap findings, the ASC was faced with a series of interesting remedies sought by Pembina and IPL. Specifically, they asked that the panel order:
- that the IPL Swaps be voted in proportion to other shares tendered respecting the Pembina Arrangement;
- that the Bison Offer be cease traded;
- alternatively, that Bison be directed to make further disclosure in respect of the IPL Swaps (including its relationship with the financial institution in which they were held, the terms and fees payable under them, etc); and
- that the minimum tender amount on the Bison Offer be increased to 50 percent of the IPL Shares not controlled by, or voted in concert with, Bison or represented by the IPL Swaps.
The ASC first concluded it did not have the jurisdiction to make a voting order of the type sought. In short, it could not compel any shareholder to vote a certain way.
While the panel found it could have cease traded the Bison Offer, they also found that remedy to be too blunt as it could have the effect of denying shareholders choices. Such an option was anathema to the purpose of the system in place.
As such, the ASC granted the alternative relief and: (i) directed Bison to disclose certain further material facts in connection with its IPL Swaps; and (ii) directed that the minimum tender under the Bison Offer be increased to 55 percent of the IPL Shares subject to the Bison Offer, excluding IPL Shares beneficially owned by Bison or any person acting jointly or in concert with Bison and the IPL Shares represented by the IPL Swaps.
This decision marks only the second known decision in relation to the use of share swaps in the context of a take-over bid, and the first in which that use was found to be improper. It provides helpful guidance to parties looking at acquisitions and gives some consideration of facts or factors that can be considered to avoid being accused of parking shares to avoid the EWR system. The decision also provides helpful commentary on the limits of the ASC's remedial powers under its public interest jurisdiction; the panel clearly indicated it would not have the power to intervene in a signed deal to alter a term such as the Break Fee and further that it could not direct shares to be voted in a particular manner. As such, parties seeking relief from the commission will have to carefully consider any remedies sought to ensure they are properly available, and parties negotiating break fees should be mindful that the ASC will not "read down" their break fee to a reasonable level.