Oct. 03, 2019 - Chapter 8 of Davies Governance Insights 2019
B.C. Securities Commission Issues Augusta Rights Plan Reasons
On June 24, 2014, the British Columbia Securities Commission released the reasons for its May 2, 2014 decision to cease trade the rights plan of Augusta Resource Corporation on July 15, 2014.
The central issue put to the BCSC was whether to respect the overwhelming vote of the shareholders of Augusta in the face of the hostile bid by HudBay Minerals Inc. to continue the Augusta rights plan until the Augusta AGM in 2015. At a shareholders’ meeting held on May 2, 2014, hours before the BCSC determined to cease trade the Augusta rights plan, over 78% of the outstanding shares of Augusta were voted on the rights plan resolution. Excluding the shares held by HudBay, 94% of those shares were voted in favour of the continuation of the rights plan.
In its reasons, the BCSC Panel expressly determined not to follow the policy changes reflected in the proposed rights plan rule (National Instrument 62-105) released by the Canadian Securities Administrators in March 2013. That rule proposes a shift away from the approach historically taken by Canadian securities regulators, to allow shareholders rather than regulators to determine whether a rights plan should continue in the face of a hostile bid. A fundamental premise of the proposed rule is that shareholders, by majority vote, would be empowered to continue a rights plan even if the effect of doing so would be to prevent those who wish to sell their shares to the hostile bidder from doing so. The proposed rule represents a reversal of the approach that underlies many of the Canadian rights plan decisions, which have treated the right of each individual shareholder to make their own decision whether to accept or reject a hostile bid as a bedrock principle of Canadian securities regulation. Our discussion of the cease trade order issued in Augusta can be found here.
In its reasons, the BCSC Panel reverts back to the long line of Canadian rights plan decisions as the basis for its determination to cease trade the Augusta rights plan, maintaining the traditional regulatory position that it is a question of when, not if, the rights plan of a target must go. The BCSC Panel then examines the various factors typically cited in Canadian rights plan decisions to determine when to cease trade the Augusta rights plan, including the likelihood that with more time the Board of Augusta could find a superior transaction, whether the HudBay bid should be considered coercive in the absence of a minimum tender condition, the likelihood of HudBay extending its bid, and the weight to be attached to the overwhelming approval of the Augusta shareholders for the continuation of the rights plan for the following year. After considering these factors, the Panel determined not to cease trade the rights plan immediately, but rather on July 15, 2014, if the HudBay bid was amended to satisfy certain issues raised by the Panel. That decision allowed the rights plan to remain in effect for 156 days following the commencement of the HudBay bid, significantly longer than the 45 to 70 days typically allowed by the Canadian securities regulators.
Somewhat surprisingly, in justifying its decision to not respect the vote of the Augusta shareholders, the BCSC Panel is highly critical of the Canadian shareholder voting system and expresses serious concerns about relying upon the shareholder vote when millions of shares have traded between the record date for the meeting and the meeting itself, thus raising a serious concern in the minds of the Panel members about relying on votes cast by shareholders who may no longer own shares, and effectively disregarding the views of those who purchased their shares after the record date for the meeting. Those comments strike at the heart of the CSA’s proposed rights plan rule, which is premised on respecting an informed shareholder vote given in the face of a hostile bid, thus raising doubt about the willingness of the BCSC to continue to support that proposed rule.
The voting issue the BCSC Panel members found troubling is an inherent part of the fabric of many transformational Canadian public company transactions completed through plans of arrangement, amalgamations and similar shareholder vote structures. Transactions of that nature proceed based upon a shareholder vote given many weeks after the record date for the applicable meeting, during a period when shareholder turnover typically is substantial. While there clearly are issues with the Canadian proxy system and the Canadian securities regulators are considering changes to improve it (see our white paper on the Canadian proxy system), Canadian courts and securities regulators implicitly have accepted that the ownership/voting disparity focused on by the Panel is an intrinsic reality of public company governance, akin to the famous Churchill dictum: “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” It will be interesting to see whether the Panel’s comments impact the approach taken by the BCSC and other Canadian securities regulators to future situations in which the vote of shareholders becomes a key factor in regulatory decision making.
The reasons released by the BCSC on June 24, 2014 can be found here.