Written by Brent Kraus, Paul Barbeau, Katie Miller and Alan Rankine
On December 14, 2015, the Alberta Securities Commission (ASC) released its much anticipated decision (the Decision, Re Suncor Energy Inc., 2015 ABASC 984) concerning the 120-day shareholder rights plan adopted by Canadian Oil Sands Limited (COSL) in response to the unsolicited take-over bid for COSL commenced by Suncor Energy Inc. (Suncor) on October 5, 2015.
The ASC permitted the COSL tactical shareholder rights plan (the New Rights Plan) to remain effective until January 4, 2016, resulting in a 90-day bid period. In so doing, the ASC embraced the contextual approach that has historically guided commission decisions on the merits of a shareholder rights plan and placed little emphasis on the proposed amendments to Canadian take-over legislation that would implement a 120-day period for unsolicited offers that do not have the support of the target issuer's board of directors.
The Decision raises a number of practical and strategic considerations for both potential offerors and target issuers in the context of the current Canadian take-over regime and the proposed amended regime that has been advanced by the Canadian Securities Administrators (CSA).
The Suncor Offer for Canadian Oil Sands
On October 5, 2015, Suncor commenced an unsolicited offer (the Offer) to acquire all of the outstanding common shares of COSL, on the basis of 0.25 of a Suncor common share for each COSL common share. The Offer was structured as a "permitted bid" under the terms of COSL's existing shareholder rights plan (the Existing Rights Plan) by remaining open for acceptance by the COSL shareholders for a minimum of 60 days after the take-over bid was announced, being an expiry date of December 4, 2015. As required by Toronto Stock Exchange rules, the Existing Rights Plan was last approved by COSL shareholders at COSL's 2013 annual shareholder meeting.
On October 7, 2015, COSL implemented the New Rights Plan in response to the Offer. The New Rights Plan required that a "permitted bid" must, among other things, remain open for acceptance for a minimum of 120 days. As a result, the Offer did not constitute a permitted bid under the terms of the New Rights Plan. As stated by COSL, the New Rights Plan was designed to ensure that COSL shareholders and its board of directors would have adequate time to consider the Offer, any other unsolicited offers from third parties, or other strategic alternatives. While COSL submitted evidence that the New Rights Plan and a 120-day bid period had broad and significant shareholder support, evidence in writing of such support was only submitted in respect of approximately 12 percent of the outstanding COSL shares. The New Rights Plan was not submitted to COSL shareholders for ratification.
Of note, the 120-day permitted bid requirement aligned with the CSA's proposed amendments to the Canadian take-over regime (the Proposed Amendments), which proposes to replace the existing 35-day minimum bid period with a 120-day bid period for unsolicited offers that do not have the support of the target issuer's board of directors (see our April 2015 update The CSA Announces Proposed Amendments to the Take-Over Bid Regime).
Suncor subsequently brought an application before the ASC seeking to strike down the New Rights Plan, and as a result, subject to the conditions of the Offer, permit Suncor to acquire COSL shares tendered to the Offer by the December 4 expiry date. The ASC held a hearing on the application on November 26 and 27, 2015.
Why does the Decision matter?
Given the Suncor/COSL case arose while the Canadian take-over regime is in flux, the Decision may be viewed as providing guidance on a number of issues:
- Will the securities commissions uphold a 120-day tactical shareholder rights plan on the basis of the policy rationale underlying the 120-day bid period advanced in the Proposed Amendments?
- Do the traditional factors considered by the securities commissions in evaluating when to cease trade a shareholder rights plan still matter?
- Are traditional take-over defense strategies still relevant pending the implementation of the Proposed Amendments?
- Does a perceived informational advantage in favour of the hostile offeror (for example, Suncor's existing participation in, and familiarity with, the Syncrude joint venture) affect the time when the right plan should be cease traded?
- Is a one-size-fits all approach appropriate for Canada's take-over regime?
Implications of the Decision
1. The 120-day tactical rights plan is not a silver bullet
While the ASC could have swept aside existing case law in favour of acknowledging the policy rationale behind the 120-day bid period contained in the Proposed Amendments, to the contrary the Decision expressly acknowledged that the Proposed Amendments are not yet law. In this respect, the Decision is consistent with the recent decision of the British Columbia Securities Commission in Re Red Eagle, where the BCSC did not consider itself bound by the Proposed Amendments.
As a result, target issuers must consider strategies in addition to the implementation of a 120-day tactical rights plan when defending against a hostile offer.
2. Context continues to matter, for now
Although shareholder rights plans have been a useful tool for target issuers seeking additional time to identify strategic alternatives, the Canadian securities commissions have been clear in their position that ultimately the target shareholders must have an opportunity to choose whether or not to tender to the offer. In essence, at some time the rights plan "must go".
Canadian securities commissions have developed a non-exhaustive list of factors to be considered when determining at which point the rights plan must be struck down, including:
- When was the rights plan adopted?
- Was shareholder approval of the rights plan obtained?
- Is there broad shareholder support for the continued operation of the rights plan?
- Does the size and complexity of the target issuer warrant a longer bid period?
- Has the target issuer implemented additional defensive tactics?
- What is the number of potential, viable offerors?
- What steps has the target issuer taken to find alternative offers or transactions?
- Is a longer offer period likely to result in a better offer or transaction?
- Is the unsolicited offer coercive or unfair to the shareholders?
- How much time has passed since the unsolicited offer was announced and made?
- Is the offer likely to be terminated if the rights plan is not terminated?
It is notable that even in the context of the Proposed Amendments, the ASC chose to work within the existing regulatory landscape and consider the traditional factors to arrive at a result tailored for the case before it. In respect of many of the factors, the ASC considered the facts at hand to have a neutral impact on its decision whether to cease trade the New Rights Plan, or to permit it to continue. Factors which argued in favour of allowing some additional time for the COSL process to continue were:
- the fact the COSL process for seeking alternative transactions appeared to be continuing as expected given the limited universe of likely counterparties;
- the fact that COSL was progressing a real and active value-maximization process;
- continuation of the process beyond the initial expiry of the Offer offered a real and substantial or reasonable possibility of a viable alternative to the Offer; and
- the relative complexity of the Syncrude project and its joint venture structure to an uninitiated bidder.
Applying these considerations, the ASC was persuaded that it was not in the public interest to cease trade the New Rights Plan immediately, and that an extension of approximately 20 days was warranted. However, in considering COSL's large retail shareholder base, the ASC determined it appropriate to permit the New Rights Plan to continue until the close of business on January 4, 2016, and thereby not position COSL shareholders into having to respond to any potential new information over the holiday season.
3. The current take-over defense rule book remains relevant, for now
The Decision clearly dictates that, pending the implementation of the Proposed Amendments, target issuers should not rely on a 120-day tactical rights plan as a panacea to unsolicited take-over bids. The implementation of a more lengthy tactical shareholder rights plan does not in any way negate the responsibility of the target issuer's board to discharge its fiduciary duty. Instead, the board should be prepared to consider all possible defensive tactics, within the scope of its fiduciary duties, including:
- Seeking shareholder approval for a lengthy (up to 120 days) tactical shareholder rights plan.
- Actively pursuing alternative transactions (e.g., identifying a "white knight" or "white squire", undertaking an issuer bid, declaring a special dividend, recapitalizing itself, or pursuing the purchase or sale of significant assets).
- Issuing securities (to the extent a legitimate business purpose exists).
- Seeking regulatory intervention, whether on competition, foreign investment or other relevant grounds.
- Initiating litigation against the Offeror.
4. An offeror's informational advantage may be relevant to when a rights plan must go
A central question in the ASC hearing was the effect, if any, of the pending release on November 30, 2015, of the updated 2016 Syncrude Joint Venture budget, to be followed by an updated COSL 2016 budget to be released December 1, 2015. COSL argued that anticipated positive information contained in the budget would be relevant to COSL shareholders, and would warrant that additional time be afforded for COSL shareholders to consider the Offer and for potential third-party bidders to evaluate. Additionally, COSL argued that this fact placed Suncor at an informational advantage by having advance knowledge of the information by virtue of its 12-percent interest in the Syncrude Joint Venture.
It is noteworthy that Suncor challenged COSL's position, arguing that the pending Syncrude Joint Venture budget would be largely consistent with the prior budget presented to the joint venture participants in June 2015, and with the current outlook of the oil and gas industry.
The ASC was sympathetic to COSL's position and acknowledged that anything short of an approved final budget could reasonably be regarded as a significant uncertainty to any third-party offeror that is not currently a Syncrude joint venturer.
Suncor's existing participation in the Syncrude Joint Venture makes the factual context of the Offer somewhat unique. However, the Decision reaffirms the proposition that the securities commissions will give weight to any informational advantage in favour of the offeror when determining the appropriate time to cease trade a rights plan, and that shareholders should have an opportunity to consider legitimately timed pending material information.
5. Is a one-size-fits-all approach appropriate for the Canadian take-over regime?
The ASC's reluctance to apply the rationale underlying the Proposed Amendments may represent nothing more than a desire to apply current law to current situations. However, it is notable that applying the current contextual approach to shareholder rights plan review resulted in a period significantly less than 120 days being determined as an appropriate bid period for the Suncor/COSL case.
Although much consideration has been given to the current formulation of the Proposed Amendments, the characteristics of the current Canadian take-over regime, including its flexibility and adaptability to the unique circumstances of each transaction, may warrant a reconsideration of the Proposed Amendments and the adoption of a fixed 120-day bid period.
In the meantime, target issuers must be prepared to employ a broad range of defensive tactics and to deal with shorter and less predictable bid periods.