Several hostile take-over bids making headlines across Canada have taken place this year. In the current market, where share prices may not accurately reflect the value of a company’s assets, junior and mid-tier mining companies may be more susceptible to an unfriendly take-over. So, what can a company do when it becomes the target of a hostile bid?
In Canada, a company’s board of directors cannot reject a bid without first giving shareholders their say. By contrast, in the United States, a board is permitted to reject a bid barring shareholders the opportunity to tender to the bid provided that, among other things, the board’s response is reasonable and the directors are not acting in their own self-interest. This approach is amusingly known as the “just say no defence” or the “Nancy Reagan defence,” crediting the former first lady for the catchphrase as part of America’s war on drugs.
While regulators in Canada slowly move closer to a U.S.-style approach, there is still no “just say no defence” in Canada. The most common defensive tactic used in Canada is the adoption of a shareholder rights plan (also known as a poison pill). While technically a shareholder rights plan will frustrate a take-over bid that does not meet the requirement of the plan by causing mass dilution to offeror, in reality, poison pills are typically cease traded before such dilution occurs. The poison pill, therefore, operates as a delay tactic, buying the target company time to negotiate a better deal. Generally, this is done by shopping for an alternative transaction from a friendly suitor called a “white knight.”
This is exactly what happened in Goldcorp Inc.’s recent hostile take-over bid for Osisko Mining Corporation. On receiving the bid, the Osisko board unanimously concluded that Goldcorp’s offer was inadequate from a financial point of view and not in the best interests of Osisko. They recommended that Osisko shareholders reject the offer. Osisko and its financial advisers immediately began contacting and receiving expressions of interest from potential strategic and financial counterparties. An electronic data room was assembled and made accessible to interested parties subject to the terms of confidentiality and standstill agreements. Osisko also began taking interested parties on site visits.
After extending the bid several times and increasing the initial consideration offered to Osisko shareholders, Goldcorp finally abandoned its bid for Osisko in April after Osisko negotiated an alternative transaction with Agnico Eagle Mines Limited and Yamana Gold Inc. The friendly agreement is said to be worth approximately $7.86 per Osisko share compared to Goldcorp’s offer, which was worth approximately $7.38 per Osisko share.
When shopping for a white knight, directors and officers should be aware of the fiduciary duty they owe the target company, which requires them to act honestly and in good faith with a view to best interests of the company. Boards and management cannot recommend that shareholders reject a bid out of self-interest or to entrench their position with the company.
Directors and officers should look to maximize shareholder value while balancing the interests and reasonable expectations of all stakeholders in the company. Directors and officers are also subject to a duty of care, which requires them to exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances. Canadian courts are reluctant to interfere with business decisions of boards and management who meet their fiduciary duty and duty of care. This principle is called the business judgment rule. If the board acts in good faith on the advice of its financial and legal advisers, on the advice of a special committee of independent directors formed to consider the bid, and has made an informed recommendation as to the best available transaction for shareholders, the business judgement rule should apply.
This article originally appeared in the Summer 2014 issue of Canadian Mining Magazine and is being republished with permission.