On March 15, 2018, the Ontario Securities Commission (OSC) and the Financial and Consumer Affairs Authority of Saskatchewan (FCAAS) released highly anticipated reasons for a combined decision relating to Aurora Cannabis Inc.’s (Aurora) unsolicited take-over bid to acquire CanniMed Therapeutics Inc. (CanniMed). The reasons followed a December 21, 2017 decision in which the OSC and FCAAS, among other things:
- Permitted Aurora’s use of “hard” lock-up agreements with other CanniMed shareholders to build support for its bid (finding that the locked-up shareholders were not “acting jointly or in concert” with Aurora).
- Cease traded a tactical shareholder rights plan (poison pill) implemented by the CanniMed board in the face of the Aurora bid.
- Declined to grant Aurora exemptive relief from the 105-day minimum deposit period.
- Declined to restrict Aurora’s ability to rely on the exemption from the general restriction on purchases by a bidder to purchase up to 5% of the target company’s shares during the currency of its bid.
The decision confirms the limited role for poison pills following the June 2016 amendments to NI 62-104 Take-Over Bids and Issuer Bids (NI 62-104). Perhaps more significantly, the decision confirms the importance of lock-up agreements under the new take-over bid regime and, going forward, may provide greater confidence to bidders as they gather support for a takeover bid. The reasons also suggest that securities regulators will be reluctant to depart from the ground rules set out in NI 62-104.
Background and Issues
During the fall of 2017, the CanniMed board was investigating strategic alternatives, including a potential sale of the company or whether to pursue an acquisition of Newstrike Resources Ltd. (Newstrike). CanniMed’s CEO favoured the latter approach, while certain members of the board and a significant shareholder favoured a strategic sale of the company.
Over the vocal objections of certain board members, who represented certain large shareholders, the majority of the CanniMed board authorized management to enter into formal negotiations with Newstrike for a potential acquisition of Newstrike.
One of the CanniMed shareholders opposed to the Newstrike transaction contacted Aurora to suggest a possible transaction between Aurora and CanniMed. Upon learning that CanniMed was considering an imminent transaction, Aurora expedited its decision to make a bid for CanniMed and began building support for the bid. To that end, Aurora solicited interested shareholders to sign “hard” lock-up agreements to tender their shares to an Aurora bid. Aurora entered into lock-up agreements with CanniMed shareholders holding approximately 38% of the outstanding shares of CanniMed. This was disclosed in Aurora’s proposal to the CanniMed board.
A special committee of the CanniMed board recommended against negotiations with Aurora. Shortly thereafter, CanniMed and Newstrike signed an arrangement agreement providing for the acquisition of Newstrike. Following announcement of that transaction, Aurora launched its bid.
In response, CanniMed adopted a shareholder rights plan (or poison pill) to prevent Aurora from acquiring any shares other than those tendered to its bid or from entering into additional lock-up agreements.
Consequently, Aurora commenced applications to the OSC and the FCAAS for an order cease trading the rights plan. In turn, CanniMed and its special committee filed their own applications in respect of Aurora’s bid seeking, among other relief, a declaration that Aurora and the locked-up shareholders were joint actors for the purpose of NI 62-104 and to prohibit Aurora from relying on the exception permitting it to acquire up to 5% of CanniMed’s shares during the currency of the bid.
Analysis and Conclusion
Locked-Up Shareholders Not Acting Jointly or In Concert with Aurora
The OSC and FCAAS found that Aurora and the locked-up shareholders were not joint actors for the purposes of NI 62-104.
First, the regulators confirmed that the shareholders could not be considered acting jointly or in concert with Aurora solely because they signed hard lock-up agreements. Further, the regulators found the terms of the lock-up agreements did not give rise to joint actor status on the basis that such terms were customary for transactions of this nature and did not provide for the locked-up shareholders to transfer voting rights to Aurora or give Aurora their proxies. As helpful guidance to drafters of lock-up agreements, the OSC and FCAAS stated:
- … The presumption that an agreement to exercise voting rights leads to joint actor status can be rebutted, where, as here, the voting rights are tailored to be consistent with and to support otherwise permissible commitments to tender securities to a bid.
Second, the OSC and FCAAS declined to recognize the locked-up shareholders as acting jointly or in concert with Aurora notwithstanding that one of the locked-up shareholders shared information with Aurora with the effect of providing Aurora with a timing advantage in the making of its bid. The regulators concluded that the locked-up shareholders were acting in their own self-interest to maximize their returns as sellers of CanniMed shares and, as a result, remained “on fundamentally different sides of the transaction”. Notwithstanding this conclusion, the regulators recognized that a transfer of material non-public information could, depending on the circumstance, influence a finding of joint actor status if the transfer were “clear and extensive” and suggestive of a level of cooperation on the part of shareholders beyond merely seeking to “maximize the price and liquidity of their shares.”
Additionally, and perhaps as a signal to target companies who may seek a similar order in the future, the regulators suggested that the evidentiary record necessary to conclude that Aurora and the locked-up shareholders were joint actors (which is a question of fact) may have been undermined since the locked-up shareholders were neither parties to the proceeding nor called as witnesses.
CanniMed Rights Plan Cease Traded
The OSC and FCAAS concluded that the CanniMed shareholders rights plan was a defensive tactic designed to protect the Newstrike proposal and thwart Aurora’s bid, thereby impeding shareholder choice. The regulators noted that securing time for alternative bids was only a secondary motivator underlying the rights plan and that Cannimed led no evidence of efforts to seek other transactions. It is unclear whether the regulators’ views on the rights plan would have been different had CanniMed been actively pursuing alternative transactions.
In reaching their decision to cease-trade the rights plan, the regulators confirmed that the June 2016 amendments rendered prior regulatory decisions of limited use in this case since “the amendments have introduced features designed to provide sufficient time for other bids to surface without the need for Commission intervention to determine how long before a poison pill must be terminated.”
Importantly, the OSC and FCASS confirmed the increased importance of lock-up agreements following the June 2016 amendments since:
- … the risks to the completion of a transaction have been increased by virtue of the lengthening of the period that a bid must remain open and since the minimum tender condition cannot be waived by the bidder. If tactical shareholder rights plans could, as a general matter, operate to prevent lock-ups and permitted market purchases, the take-over regime would be made far less predictable and the planning and implementation of shareholder value enhancing transactions made more difficult or inappropriately discouraged by such intervention.
Exemptive Relief from NI 62-104 Denied
In their combined reasons, the OSC and the FCAAS also demonstrated that they would not stray from the intended rebalancing created by the new take-over bid regime. By way of example, the regulators refused Aurora’s request to truncate the 105-day minimum deposit period. The regulators explained their general reluctance to do so on the basis that such a move would impact planning on the part of bidders and targets and introduce greater unpredictability to bid and secondary market pricing.
The regulators also refused CanniMed’s request to deny Aurora’s ability to rely on the 5% exemption from the general restriction on purchases by a bidder during the currency of its bid. The regulators, however, reserved the discretion to deny bidders the ability to avail themselves of this exemption in cases where the public interest would be undermined by its use. Although not the case here since the record date to vote on the Newstrike transaction had passed, query whether the regulators would have exercised this discretion (or might in future cases) if acquiring 5% of the target’s shares, when taken together with the locked-up shareholders’ shares, would have amounted to a de facto block of the Newstrike transaction.
The stated purpose of the new bid regime was to rebalance the dynamics between bidders and targets and to introduce greater certainty in the treatment of hostile bids. By cease trading the rights plan and denying all other relief requested, the securities regulators have signalled that, at least in this case, they remain comfortable with the current framework.