Use of Shareholder Rights Plans in Take-over Bids
The use of shareholder rights plans as a defensive measure against undesirable takeover bids is a well-established practice in Canada. The Québec Bureau de décision et de revision en valeurs mobilières (Board of Review), a body of the Autorité des marchés financiers, was recently called upon to look at rights plans in an unusual fact situation. Invoking the principles of corporate democracy and public interest, the Board of Review issued a cease-trade order over a rights plan that was, unconventionally, adopted explicitly to prevent a shareholder from acquiring a ‘blocking position.’
Jaguar Nickel Inc. is a Québec mining exploration and development company with shares listed on the TSX. In January 2006, Jaguar sold all of its principal mining assets, leaving $30 million of cash on its balance sheet.
Shortly thereafter, Northern Financial Corporation began to buy Jaguar shares in the market. By September Northern and a partner had jointly acquired 14.6 per cent of Jaguar’s outstanding shares. Northern then requisitioned a special general meeting of shareholders with a view to replacing the directors of Jaguar with its own nominees, while declaring at the same time that it had no intention of making an offer to acquire all of the shares of Jaguar.
In the months leading up to that request, Jaguar had rejected Northern’s proposals that it combine its operations with a Northern-related entity. It informed Northern that it was seeking to enter into a transaction with a third party that the Jaguar board considered to be more beneficial to its shareholders.
Within hours of Northern’s requisition of the shareholder meeting, scheduled for December 2006, Jaguar announced the adoption of a rights plan. The dilutive effects of this plan would be triggered upon a shareholder acquiring a block of more than 15 per cent of Jaguar’s outstanding shares (as compared with the standard 20 per cent threshold). Jaguar justified this action on the basis that the acquisition of such a significant block of shares by Northern without an offer being made to all shareholders could have a prejudicial effect on its ongoing strategic alternative review and could deter other parties from proceeding with potential beneficial transactions involving the company.
Northern requested that the Board of Review exercise its power to prohibit the issuance of Jaguar shares in the context of the Jaguar plan.
The Board of Review effectively struck down the Jaguar plan on the basis of its ‘public interest’ jurisdiction. Although the Board acknowledged that it was "not a civil court that had been called upon to pronounce, as a matter of corporate law, on the legality" of the plan, it nonetheless proceeded to criticize the plan because of its discriminatory nature (to Northern), dilutive effect and improper purpose (namely, it was not for "capital raising"). The board also denounced the plan as an impediment to a "healthy corporate democratic process."
The board also pointed out that rights plans such as this, with a trigger at 15 per cent, could deter market accumulations that enhance liquidity to the benefit of all shareholders. It noted that of the 85 rights plans cited by the parties, only three had a 15 per cent threshold. Taken together, these amounted to an abuse of investors that warranted its intervention to protect the interest of shareholders and the integrity of the public markets.
The Board of Review did note that, by the time the requisitioned shareholder meeting would be held in December 2006, Jaguar would have had almost a year in which to realize an ‘alternative strategy.’ In other words, it could not be said that the plan was necessary to give the board of directors of Jaguar sufficient time to properly develop and pursue strategic alternatives for its shareholders.
McCarthy Tétrault Notes:
The judgment contains no suggestion that the Jaguar directors had not acted in the shareholders’ best interests in deciding to adopt the plan. What is unusual about the decision is that the Board of Review, while exercising its ‘public interest’ jurisdiction, effectively protected one shareholder, namely Northern.
It is interesting to note that, immediately following this decision, Northern acquired further Jaguar shares in the market, bringing its total to over 18 per cent of the outstanding common shares at the time of the requisitioned meeting. Not surprisingly, the Northern nominees were elected to the board to replace the incumbent ones at the meeting.