On June 22, 1999, the British Columbia Securities Commission, the AlbertaSecurities Commission and the Ontario Securities Commission jointly heard anapplication by Royal Host Real Estate Investment Trust ("Royal Host") in respect of atake-over bid it had made for the units of Canadian Hotel Income Properties RealEstate Investment Trust ("CHIP"). Royal Host applied for orders terminating theoperation of a unitholder rights plan adopted by CHIP against the Royal Host bid.
On June 22, 1999, the Chair of the British Columbia Securities Commissiondelivered a decision on behalf of the three commissions and advised that reasonswould follow in due course. The decision provided that, if Royal Host extended its bidfor a specified period of time, the commissions would issue orders terminating theoperation of the plan unless CHIP itself waived the plan against the Royal Host bid.
On November 24, 1999, the British Columbia Securities Commission issued itsreasons for the decision, a copy of which is attached as Appendix A. We concur withand adopt the reasons of the British Columbia Securities Commission.
Dated November 24, 1999."Morley P. Carscallen", F.C.A.
"G. Patrick H. Vernon", Q.C.
R.S.O. 1990,c. S.5, AS AMENDED (THE "OSA")
IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c.418
IN THE MATTER OF THE SECURITIES ACT
S.A. 1981, CHAPTER S-6.1, AS AMENDED (THE "ASA")
IN THE MATTER OF
ROYAL HOST REAL ESTATE INVESTMENT TRUST
IN THE MATTER OF
CANADIAN INCOME PROPERTIES
REAL ESTATE INVESTMENT TRUST
June 22, 1999
Date of Decision:
June 22, 1999
Date of Reasons:
November 24, 1999
ONTARIO SECURITIES COMMISSION
G. Patrick H. Vernon, Q.C. - Chair
Morley P. Carscallen - Commissioner
BRITISH COLUMBIA SECURITIES COMMISSION
Douglas M. Hyndman - Chair
Adrienne R. Wanstall - Commissioner
ALBERTA SECURITIES COMMISSION
William Hess, Q.C - Chair
James E. Allard - Commissioner
For the Staff of the Ontario Securities Commission
Janet A. Holmes
For Royal Host Real Estate Investment Trust
Daniel J. McDonald, Q.C.
For Canadian Hotel Income Properties Real Estate Investment Trust
J.L. McDougall, Q.C.
Jeffrey A. Read
Michael D. Schafler
For the Staff of the British Columbia Securities Commission
For the Staff of the Alberta Securities Commission
REASONS FOR DECISION OF THE COMMISSION
On June 22, 1999, the British Columbia Securities Commission, the AlbertaSecurities Commission and the Ontario Securities Commission jointly heard an applicationby Royal Host Real Estate Investment Trust ("Royal Host") in respect of a take over bidit had made for the units of Canadian Hotel Income Properties Real Estate InvestmentTrust ("CHIP").
Royal Host publicly announced on May 19, 1999, that it would make the bid forCHIP. On May 21, the trustees of CHIP adopted a unitholder rights plan, without theapproval of the holders. Royal Host made the bid on May 31 and, on June 15, amendedthe bid so that it would remain open until June 25.
In its application to the commissions, Royal Host sought orders terminating theoperation of the CHIP rights plan against its bid, specifically:
- orders cease trading the CHIP unit rights issued pursuant to the rights plan and anyCHIP units issued on exercise of the unit rights, and
- orders that certain exemptions not apply to any trades in securities issued by CHIPin connection with the distribution of the unit rights.
At the hearing on June 22, both Royal Host and CHIP called witnesses and madesubmissions. Staff of the British Columbia Commission made submissions on behalf ofstaff of all three commissions.
At the conclusion of the hearing, following a short adjournment, the Chair of theBritish Columbia Commission issued the following decision and advised that reasonswould follow in due course:
I am delivering this decision on behalf of the three Commissions thathave participated in today's hearing. We have carefully considered all of theevidence and submissions we have received. It is our decision that, if RoyalHost extends its take-over bid for the units of CHIP to expire no earlier than7:00 p.m. Pacific Daylight Time on July 6, 1999, we will issue orders ceasetrading the CHIP [rights plan] unless CHIP issues a news release by noon,Pacific Daylight Time, on July 2 confirming that it has waived the [rights plan]as against the Royal Host bid.
These are our reasons for the decision.
Royal Host is an unincorporated closed-end investment trust that acquires andoperates hotel properties. Its head office is in Calgary and it is governed by the laws ofAlberta. The trust units of Royal Host are traded on The Toronto Stock Exchange.
CHIP is also an unincorporated closed-end investment trust that acquires andoperates hotel properties. CHIP owns 35 hotels in Canada and one in Washington. Eachhotel, with a few exceptions, is held in a separate holding company. As of June 1999,CHIP had 66 wholly-owned subsidiaries, as well as an affiliated limited partnership thatmanaged the hotels.
CHIP's head office is in Vancouver and it is governed by the laws of BritishColumbia. The trust units of CHIP are traded on The Toronto Stock Exchange. Pursuantto CHIP's Declaration of Trust, the standard of care required of the CHIP trustees isessentially the same as that required of directors under corporate legislation.
Representatives of Royal Host and CHIP first met in April 1998 to discuss thepossibility of combining the two investment trusts. Over the course of the following year,several meetings were held, the last in March 1999.
On March 31, CHIP sent out a Management Information Circular in anticipation ofits annual general meeting on May 11. The CHIP trustees considered at that time adoptinga rights plan and putting it to the unitholders for approval at the meeting, but decided notto do so. One of the reasons for their decision was that they did not think such a planwould be favourably received by CHIP's institutional unitholders.
On May 11, 1999, a Special Committee of independent trustees of CHIP was formedto review a proposed transaction under negotiation by CHIP and a third party hotel entity.Pursuant to those negotiations, CHIP had entered into a non-solicitation agreement withthe third party, which prohibited CHIP from soliciting certain change of control transactions.Pursuant to the agreement, this prohibition would fall away if a formal bid was made forCHIP's shares.
On May 17, the chair of Royal Host wrote to the chair of CHIP requesting a meetingto present Royal Host's proposal for a combination of the two investment trusts. Later thatday, after consulting CHIP's legal advisors and a number of the trustees, the chair of CHIPdeclined the request.
On May 19, Royal Host issued a press release announcing its intention to make atake over bid for all of the units of CHIP.
On May 21, the trustees of CHIP met to discuss Royal Host's proposed bid. Theyauthorized the Special Committee to review the proposed bid, both on a stand-alone basisand relative to the proposed transaction that was already under negotiation. They alsoauthorized the Special Committee to review any other unsolicited proposals received byCHIP and to advise the trustees as to which proposal would be in the best interests of theunitholders.
Later on May 21, the Special Committee met and unanimously recommended theadoption of a unitholder rights plan. The Special Committee considered a number offactors, including:
- the 22-day period that the proposed bid would be open for acceptance;
- the limitation imposed on CHIP by the non-solicitation agreement, which requiredCHIP to await Royal Host's formal bid before seeking alternative transactions;
- the complexity of CHIP and REIT structures generally;
- the likelihood of the proposed transaction under negotiation or an alternativetransaction requiring a meeting of unitholders;
- the need to spend more time negotiating and developing the proposed transactionunder negotiation; and
- the desire of the Special Committee to have the time necessary to consider allalternative transactions available.
The trustees adopted the plan that day. The rights plan authorized the trustees toissue one right in respect of each outstanding unit. The right entitled the holder topurchase additional units of CHIP at a significant discount ten business days after thepublic announcement or commencement of a take over bid that was not a "permitted bid".A permitted bid had to meet several requirements, including one that the bid remain openfor acceptance for 60 days.
Also on May 21, the Special Committee appointed Ladner Downs as its legalcounsel. On May 31, it retained TD Securities Inc. as its financial advisor.
On May 31, Royal Host mailed its bid to the CHIP unitholders. The bid was for allthe outstanding CHIP units and was open for acceptance until June 24. The bid compliedwith all of the terms of a "permitted bid" under the CHIP rights plan, except the requirementthat it be open for acceptance for 60 days. The bid was conditional upon, among otherthings, the CHIP trustees having redeemed the unit rights or waived the application of therights plan, or a cease trade or court order having the same effect having been issued.
On June 1, the trustees of CHIP received a copy of Royal Host's bid, which releasedCHIP from the non-solicitation agreement connected with the proposed transactionnegotiations. Accordingly, the trustees expanded the mandate of the Special Committeeto authorize it to initiate discussions with other parties and to pursue alternativetransactions, with a view to maximizing value and benefits for CHIP and its unitholders.
Also on June 1, the Special Committee met with its legal and financial advisors toconsider Royal Host's offer. The Special Committee expanded the mandate of TDSecurities to authorize it to initiate discussions with third parties and advise on alternativetransactions. The Special Committee also initiated interviews with other investment firmsand, on June 6, retained Merrill Lynch & Co. to assist primarily in dealing with prospectivethird parties outside of Canada.
On June 2, Royal Host applied to the commissions for orders terminating theoperation of the CHIP rights plan against the Royal Host bid. On June 7, CHIP alsoapplied to the commissions for relief in connection with the bid, alleging that Royal Host'sOffering Circular and certain of its public disclosure contained materially incorrect,inadequate and misleading information, which prejudiced the unitholders of CHIP inassessing Royal Host's bid.
During the first week of June, the Special Committee met on several occasions.With its legal and financial advisors, the Special Committee reviewed Royal Host's bid,considered a number of alternatives to the bid and reviewed financial, legal, strategic andother considerations relating to the bid. In addition, the Special Committee set up datarooms in Vancouver, Toronto and New York, and determined the basis on whichconfidential information would be made available to third parties. At one of thesemeetings, on June 6, TD Securities delivered its opinion that Royal Host's bid wasinadequate, from a financial point of view, to unithholders of CHIP.
On June 7, the Special Committee delivered its report to the trustees. The reportadvised the trustees to recommend to the unitholders that they reject Royal Host's bid.
On June 9, the trustees issued their Trustees' Circular in which they recommendedrejection of Royal Host's bid. They gave the following reasons for their recommendation:
- The bid was inadequate from a financial point of view.
- The bid was inadequate and unfair for unitholders.
- The combination with Royal Host would result in a weaker balance sheet, exposeunit holders to significant refinancing risk and reduce financial flexibility.
- The combination with Royal Host might result in a downgrade of CHIP's creditrating.
- Royal Host's hotel portfolio was dominated by smaller, limited-service hotels, whichare more susceptible to new competition.
- Royal Host's claimed cost savings and synergies were significantly overstated.
- The exchange of CHIP units for units of Royal Host would result in tax beingpayable by some unitholders.
- The bid was coercive and highly conditional to the benefit of Royal Host.
- The Offering Circular contained defective and incorrect information.
- In response to the efforts of the Special Committee and its financial advisors, anumber of industry participants and other parties had expressed interest in pursuingan alternative transaction with CHIP.
On June 14, Royal Host issued a Notice of Change and Extension of its bid. TheNotice of Change corrected and updated the financial information contained in its OfferingCircular and extended the bid by one day, to June 25. On June 20, after reviewing theNotice of Change, CHIP withdrew its application to the commissions of June 7.
The hearing was held on June 22. CHIP called two witnesses: J. Thomas English,Q.C., a trustee of CHIP and chair of the Special Committee; and Joel A. Kazman,Managing Director and head of Mergers and Acquisitions Advisory Services at TDSecurities. Both testified that there was a "reasonable possibility" that a competing bid oran alternative transaction, offering terms superior to those of Royal Host's bid, would beforthcoming within the 60 days provided for in CHIP's rights plan. Kazman provided thefollowing reasons for this assertion:
- Twenty-three information packages concerning CHIP, together with confidentialityagreements, had been delivered to potential offerors or parties to alternativetransactions, and data rooms in New York, Vancouver and Toronto had beenestablished.
- Thirteen interested parties had entered into confidentiality agreements with CHIPand it was anticipated that additional parties would sign confidentiality agreements.
- Certain of these parties had attended in data rooms in New York, Vancouver andToronto, had conducted property tours and had engaged in general discussionswith CHIP's advisors regarding the type of transaction involving CHIP they wouldbe prepared to consider.
- The parties who had expressed an interest in CHIP were generally significantparticipants in the hotel and lodging industry with businesses similar to orcomplementary with that of CHIP, and had the financial resources to be able tomake a competing bid for or be party to an alternative transaction with CHIP,superior to Royal Host's bid.
- TD Securities, in conjunction with Merrill Lynch, continued to be actively engagedin bringing additional prospective parties into the process by executing furtherconfidentiality agreements, and assisting prospective parties who had signedconfidentiality agreements to complete their investigation of CHIP.
Kazman also testified that, although there was a reasonable possibility of a superiorcompeting bid or alternative transaction, more time was required than was available underthe Royal Host bid, for the following reasons:
- CHIP's structure is complicated and a prospective third party would require moretime than usual to familiarize itself with that structure.
- Each of CHIP's hotels can be viewed as a discrete business operating in a distinctmarket; as their hotels are spread across Canada, with one in Washington, a thirdparty would require significant time to conduct adequate due diligence.
- As the total market capitalization of publicly traded American hotel entities is morethan ten times higher than that of their Canadian counterparts, CHIP's financialadvisors had been soliciting extensively outside of Canada; typically, a foreign thirdparty would require more time to deal with the local business and legal issues.
- A transaction involving a foreign third party would have to be carefully structuredto ensure retention of CHIP's favourable status under the Income Tax Act, aprocess which would be extremely time consuming.
English testified that the third party with whom CHIP had been negotiating theproposed transaction was taking a "wait and see" approach. He also testified, however,that three parties had visited the data rooms and that one of these parties had toured 20of CHIP's 36 properties.
Also in his testimony, English alleged that Royal Host's bid was substantially unfairand coercive, for the following reasons:
- Royal Host's Offering Circular contained serious material deficiencies, which werenot corrected until Royal Host delivered its Notice of Change.
- Royal Host's Offering Circular threatened CHIP unitholders who did not tender tothe bid with adverse tax consequences.
- Royal Host's Offering Circular provided that if at least 66 2/3% of CHIP units weretendered, Royal Host would acquire the untendered units through either a"Compulsory Acquisition" or a "Subsequent Transaction Acquisition". However, theOffering Circular did not indicate which alternative was more likely or what theimpact of either alternative would be for unitholders who did not tender. Thiscreated a material element of uncertainty which made it virtually impossible for aunitholder to arrive at a fully informed decision as to whether to tender.
Finally, English testified that several institutional investors supported retention ofthe rights plan. He tendered letters from five such investors, holdings 22.6% of the units.
Royal Host called one witness: Darryl Squires, Vice-President of Nesbitt Burns Inc.Nesbitt Burns was retained by Royal Host as a financial advisor and soliciting dealer-manager in connection with the bid.
Squires testified that, having regard to all the circumstances, by the expiration ofRoyal Host's bid on June 25, CHIP would have had a considerable period of time withinwhich to evaluate the bid and to seek alternatives to it. He gave the following reasons forhis opinion:
- The Trustees' Circular disclosed that, at the time the bid was announced, CHIP,with the assistance of financial advisors, had been in discussions with a third partyrelating to a potential strategic transaction. A proper review of strategic alternativesshould have included an assessment of the value of CHIP and its assets, theorganization of data and the identification of potential transactions.
- The fact that CHIP had entered into a non-solicitation agreement indicates that theproposed transaction was significant and that the negotiations were relativelyadvanced.
- At the expiry date of Royal Host's bid, June 25, CHIP's process of review ornegotiation would have been ongoing for at least three months and the bid wouldhave been in the marketplace for 36 days.
- CHIP's value is almost entirely attributable to its real estate assets. Developed realestate assets and hotel properties in particular are not unusually complex to value.Their value is highly predictable based upon past performance and forward lookingassumptions respecting a relatively limited number of variables. The methodologyis relatively straightforward and generally accepted.
- CHIP's properties and its property manager were acquired within the last two years.Therefore, a reasonably up-to-date valuation and information file should exist foreach property.
- The timing of Royal Host's bid made CHIP easier to evaluate. The bid was madeshortly after the publication of CHIP's annual audited financial statements and itsquarterly financial statements for the first three months of 1999, and the filing of itsannual information form.
- CHIP, its advisors and other market participants would have benefited from theknowledge garnered by the marketplace from the recent sale of Unihost, a hotelcompany of similar size and with similar operations to CHIP. In particular, theUnihost experience would have helped to identify the universe of potentialpurchasers, both domestically and internationally.
- The number of potential purchasers for an enterprise like CHIP is relatively limitedand readily identifiable.
- Real estate investment trusts have been common in Canadian capital markets fora number of years and there have been a number of mergers and acquisitionsinvolving REITs. The REIT structure does not make CHIP more difficult to evaluate,nor does it make a transaction with CHIP more difficult to implement, than if CHIPwere a corporation.
Squires observed that it appeared to him that CHIP, TD Securities and Merrill Lynchhad canvassed a wide group of prospective buyers and had been able to get the seriousparties well advanced in their reviews. He expressed the view that, given a desire to movetowards a transaction, those parties would be able to negotiate the principles of atransaction with CHIP within ten days. (At the date of the hearing, Royal Host's bid wasscheduled to expire in three days.)
In response to English's allegations that the Royal Host bid was coercive, Squirestestified that uncertainties with respect to either adverse tax consequences or the form ofa subsequent acquisition transaction are generally not significant considerations for aninvestor in evaluating a bid.
Finally, Squires testified that if CHIP were to be permitted to keep the plan in placefor another ten days, he would not recommend that Royal Host withdraw the bid.
The starting point for our analysis of whether we should terminate the operation ofthe CHIP rights plan against the Royal Host bid is National Policy 62-202, Take-Over Bids- Defensive Tactics, which came into force on August 4, 1997. It replaced the substantiallyidentical national policy statement, National Policy 38, adopted in 1986. National Policy62-202 sets out our goal in regulating take over bids as follows:
The primary objective of the take-over bid provisions of Canadian securitieslegislation is the protection of the bona fide interests of the shareholders ofthe target company. A secondary objective is to provide a regulatoryframework within which take-over bids may proceed in an open and even-handed environment. The take-over bid provisions should favour neither theofferor nor the management of the target company, and should leave theshareholders of the target company free to make a fully informed decision.The Canadian securities regulatory authorities are concerned that certaindefensive measures taken by management of a target company may havethe effect of denying to shareholders the ability to make such a decision andof frustrating an open take-over bid process.
National Policy 62-202 summarizes our general position on these defensivemeasures as follows:
The Canadian securities regulatory authorities appreciate that defensivetactics . may be taken by a board of directors of a target company in agenuine attempt to obtain a better bid. Tactics that are likely to deny or limitseverely the ability of the shareholders to respond to a take-over bid or acompeting bid may result in action by the Canadian securities regulatoryauthorities.
Over the past decade, the four major Canadian securities commissions have issueda series of decisions respecting applications to terminate the operation of rights plans, or"poison pills", adopted as defensive tactics.
The first of these was Re Canadian Jorex Limited and Mannville Oil & Gas Ltd.(1992), 15 OSCB 257. Jorex adopted a rights plan, without shareholder approval, ninedays after Mannville made an offer to acquire all of Jorex's shares. A rival bid was madeshortly thereafter by Canadian Trans-Arctic & Southern International Corp. Jorexsubsequently waived its plan in respect of Trans-Arctic's bid, but not Mannville's.Mannville complained to staff of the Ontario Commission that the plan was contrary to thepublic interest and should be stopped. The hearing was the result of that complaint.
In the reasons for its decision, the Ontario Commission refused to consider whetherthe Jorex board had acted in good faith, whether the board should have adopted the rightsplan in the first place or whether the board should have taken steps to seek shareholderapproval of the plan before making it operative. The Commission identified the sole issuebefore it, at page 263, as follows:
That issue was quite simply whether, at the time of the hearing, it wasin the public interest for us to make an order that would have the effect ofputting an end to the operation of the Jorex rights plan as against theMannville bid, and thus of allowing the Mannville bid to proceed forconsideration by the shareholders of Jorex along with the rival bid fromTrans-Arctic. Put the other way around, the only question we really had todecide was whether the rights plan had served its purpose in facilitating anauction for Jorex, and so ought to be discontinued as against the Mannvillebid to let the shareholders decide which bid they preferred (if, indeed, theywished to accept either one). All seemed to agree, as Commissioner Blainput it early on in the hearing, that "there comes a time when the pill has gotto go". The only real issue before us, then (again, as succinctly framed byCommissioner Blain), was "when does the pill go".
After considering the facts of the case, the Commission concluded that the time hadcome for the pill to go. They observed at page 266:
Underlying our conclusion was our view of the public interest inmatters such as this. As is amply reflected in National Policy 38, the primaryconcern of the Commission in contested take-over bids is not whether it isappropriate for a target board to adopt defensive tactics, but whether thosetactics "are likely to deny or severely limit the ability of the shareholders torespond to a take-over bid or a competing bid" (paragraph 6) or "may havethe effect of denying to shareholders the ability to make a [fully informed]decision and of frustrating an open take-over bid process" (paragraph 2).If so, then as National Policy 38 clearly indicates, the Commission will bequite prepared to intervene to protect the public interest as we see it. Forus, the public interest lies in allowing shareholders of a target company toexercise one of the fundamental rights of share ownership -- the ability todispose of shares as one wishes -- without undue hindrance from, amongother things, defensive tactics that may have been adopted by the targetboard with the best of intentions, but that are either misguided from theoutset or, as here, have outlived their usefulness.
The Ontario Commission applied National Policy 38 and the principles set out inJorex in the reasons for its decision in Re Lac Minerals Ltd. and Royal Oak Mines Inc.(1994), 17 OSCB 4963, where it observed at page 4963 that: "All parties agreed that thecritical issue that the Commission had to decide was 'is it time for the poison pill to go?'"
The Lac shareholders had approved the adoption of a rights plan in May 1991. InJuly 1994, both Royal Oak and American Barrick Resources Corporation made offers forall of the shares of Lac. In considering the application by Royal Oak and American Barrick,the Commission characterized the issue before it, at page 4968, as follows:
The Commission will only make an order under section 127 of the Actto cease trade securities when in its opinion it is in the public interest to doso. In considering whether to make an order in this case, the real issue theCommission had to determine was whether, the extent to which, and whenthe Commission should interfere with the conduct of the Lac Board,professed to be directed at maximizing shareholder value, in the interests ofallowing the shareholders of Lac to respond to one of the two outstandingtake-over bids.
This issue involved interesting questions about the relationshipbetween securities law and corporate law. It raised the tension between (i)the board's duty to manage the corporation honestly and in good faith witha view to the best interests of the corporation; and (ii) the shareholders'"right" to decide whether to sell their shares in response to a take-over bid.
The Commission then referred to Jorex and continued at page 4969:
In a case such as this, the Commission's main concern is the interestsof the shareholders of the target company. Would the interests of the Lacshareholders be prejudiced by the continued operation of the Lac RightsPlan in the face of the outstanding bids by Royal Oak and American Barrick?
After reviewing the evidence, the Commission concluded at page 4970:
In our view, unless it was made clear to shareholders that the LacRights Plan would cease to operate in respect to each of the Revised RoyalOak Offer and the American Barrick Offer if the conditions of the subject bidwere met, the existence of the Lac Rights Plan could well have impeded theirdecision to tender to the bid. Accordingly, we decided that it was in thepublic interest to indicate that in those circumstances, should the Lac Boardnot do so, we would make an order cease trading any securities issued orto be issued in connection with the Lac Rights Plan in respect of that bid.
On the same day the Ontario Commission released the reasons for its decision inLac, it also released the reasons for its decision in Re MDC Corporation and RegalGreetings & Gifts Inc. (1994), 17 OSCB 4971.
As in Lac, Regal had adopted and obtained shareholder approval of its rights planbefore MDC publicly announced its intention to make a bid. However, in this case,shareholder approval was obtained only shortly before MDC's announcement.
Again as in Lac, the Commission applied National Policy 38 and the principles inJorex and identified the only real issue before it as "when does the pill go". At page 4979,the Commission set out a test to be applied in answering that question:
It is true that Jorex teaches that "there comes a time when the pill hasto go". However, this is not to say that, once a take-over bid has beenmade, a shareholder rights plan can have no effect, and that it mustautomatically be struck down by the Commission so as to allow the bid toproceed at the stated expiry date of the acceptance period of the bid. Ifthere appears to be a real and substantial possibility that, given areasonable period of further time, the board of the target corporation canincrease shareholder choice and maximize shareholder value, then, absentsome other compelling reason requiring the termination of the plan in theinterests of shareholders, it seems to us that the Commission should allowthe plan to function for such further period, so as to allow management andthe board to continue to fulfil their fiduciary duties.
In our view, our determination of where the public interest liesrequired us, in this case, to consider two principal questions.
1. If the Plan is permitted to remain in effect for a reasonable further period, isthere, on the evidence, a reasonable possibility that a better offer will comealong during the period so that, whether or not this results in MDC raising itsbid, the shareholders of Regal will be advantaged?
2. If the Plan is not terminated prior to the end of the current period for theacceptance of the bid, is it likely that [MDC] will not extend the period foracceptance for such "reasonable further period", and thus deprive the Regalshareholders of the opportunity to decide whether they wish to accept the[MDC] bid?
After reviewing the evidence, the Commission concluded that there was areasonable possibility that a better offer would come along if the rights plan was permittedto remain in effect for a further three weeks and that MDC was likely to extend its bid forsome reasonable period if it was likely that the operation of the plan would be terminatedby the end of that period.
After reaching these conclusions, the Commission continued at page 4980:
Having answered the two principal questions, there remained afurther fundamental question which we had to consider, namely, what werethe wishes of the Regal shareholders as regards the Plan? It is all very wellfor us to conclude that there is a real possibility that shareholder value willbe increased as a result of our deciding that the "time has not yet come", butwe would not have been prepared to do so if it was clear to us that theshareholders of Regal felt otherwise.
The Commission observed that Regal's shareholders had approved the plan. Theyalso observed that around 80% of Regal's shares were held by 15 or 16 institutionalshareholders, who were not unfamiliar with rights plans. Finally, they observed that noshareholders, other than MDC, were seeking termination of the plan. They concluded thatthey had no reason to believe that Regal's shareholders, other than MDC, wanted theCommission to terminate the plan as against MDC at the time of the hearing.
The Commission concluded at page 4981:
For the reasons above stated, we were not prepared at the conclusionof the hearing to interfere with the attempts being made by the Regal boardto maximize value for shareholders. We, like the majority in Lac, werereluctant to interfere with or usurp the responsibilities of the board.Accordingly, we were not then prepared to grant MDC the relief requestedin its application. In the circumstances, we concluded that the Lac "less ismore" approach was the appropriate one.
However, based on the evidence which had been presented to us atthe hearing, we would have been prepared to issue a cease trade order asrequested if the Regal board had not waived the Plan, as regards the MDCbid, or redeemed the rights issued thereunder, prior to September 30, 1994.In the interim, if any new evidence came to the attention of the parties thatwould have justified bringing the matter back on before then, we would havebeen prepared to hear it. In particular, this would have included evidencethat the holders of a majority of the outstanding Common Shares wished thePlan terminated as regards the [MDC] bid.
Approximately three years after Regal, National Policy 38 was replaced by NationalPolicy 62-202. Subsequently, each of the four commissions participated in one or both oftwo hearings respecting the validity of "tactical" rights plans, namely plans implementedby a target company without shareholder approval in the face of a hostile take over bid.Those two decisions have been interpreted as imposing a different test from thatestablished in Regal.
In Re CW Shareholdings Inc. and WIC Western International Communications Ltd.,(1998), 21 OSCB 2899, the Ontario, Alberta and British Columbia Commissionsconsidered a rights plan that had been adopted by WIC in the face of a take over bid byCW Shareholdings without shareholder approval. In that case, the bid was effectively foronly non-voting shares and would not have affected control. The controlling shareholderhad, shortly before the bid, disposed of control in a private transaction at a substantialpremium to the market. The commissions found that the bid was in no way coercive andthat there were only two other potential bidders, neither of whom would need much timeto make a bid. The commissions decided that they would issue cease trade orders if therights plan was not removed in respect of the bid within one week after the hearing.Reasons for the decision were issued by the Ontario Commission and concurred in by theothers. In its reasons, the Ontario Commission observed at page 2908:
The Rights Plan was put into place in the face of the Bid and without a voteof shareholders. In such circumstances, it is, at the very least, necessary forthe target company to demonstrate that it was necessary to do so becauseof the coercive nature of the Bid or some other very substantial unfairnessor impropriety. This was not done by WIC in this case.
In Re Ivanhoe III Inc. and Cambridge Shopping Centres Limited, (1999), 22 OSCB1327, the Ontario and Quebec Commissions let stand a rights plan adopted by Cambridgewithout shareholder approval in the face of a partial bid by Ivanhoe. The reasons issuedby the two commissions were, in substance, identical. In its reasons, the OntarioCommission referred to the above quoted paragraph from WIC and applied a two stepprocedure, as described at page 1329:
The two principal issues which had to be considered by theCommission were:
1. in view of the facts that the Plan had been adopted in the face of the Bid andhad not received shareholder approval, should it be permitted to stand; and
2. if the Plan was permitted to stand, had the time come for it to be terminatedby the Commission.
With respect to the first issue, the Commission found that the bid was coercive.They based this finding on their conclusions that the market for the shares was relativelyilliquid (given the large institutional shareholdings) and would become more so if the bidwere successful and that, in such circumstances, the effect of the partial bid would be toput pressure on shareholders to dispose of whatever shares they could before beinglocked into a minority position, there being no assurance that Ivanhoe would ever bid forthe remaining shares. In making this finding, the Commission observed at page 1329:
Had we not concluded that the Bid was coercive, we would haveimmediately cease traded the Plan, since we agree with the Commission'sdetermination in WIC that, if a rights plan is put into place in the face of a bidand without a vote of shareholders, it is, at the very least, necessary for thetarget company to demonstrate that it was necessary to do so because of thecoercive nature of the bid or some other very substantial unfairness orimpropriety.
The Commission then turned to the second issue and applied the Regal test indetermining whether the time had come to terminate the rights plan. It found that therewas a reasonable possibility that a better offer would come along and that there was everyreason to believe that Ivanhoe would extend its bid, if the plan was to remain in place untilits expiry. Accordingly, the Commission denied the application but stated that it wouldterminate the operation of the plan if the trustees amended it to remain in effect after itsoriginal expiry date.
Shortly after Cambridge, the Alberta Commission issued the reasons for its decisionin Re Samson Canada, Ltd. and Highridge Exploration Ltd. (1999) 8 ASCS 1791. Theshareholders of Highridge had approved a rights plan almost two years before Samsonpublicly announced its intention to make a bid for all of the Highridge shares.
In its decision, the Commission noted that both parties had agreed that the relevanttest was that set out in Regal. In applying the Regal test, the Commission observed atpage 1794:
The Highridge Plan was initially approved by shareholders two yearsago and effectively re-ratified during the currency of Samson's Offer.Samson presented no evidence to suggest that the shareholders' views hadchanged, or that 45 days was unreasonable. Shareholder approval of thePlan is powerful, but not necessarily conclusive, evidence of how theshareholders want their collective interests to be protected in a take-over bidsituation. Because all take-over bid situations are fact-specific, theCommission must consider all of the particular circumstances of each case,including shareholder approval or lack thereof, in determining whether eitherparty has met their burden under the Regal test. Here, the 45-day periodappeared to be reasonable under all the circumstances and not merelybecause it was approved by the shareholders.
The Commission concluded that Highridge had shown a real and substantialprobability that a better offer could be generated within the 45 days provided for in therights plan and that Samson had not suggested that it would withdraw its offer or allow itto lapse if the plan remained in place.
The Commission then considered Highridge's allegation that the Samson offer wascoercive because it was "opportunistic in timing" in that, although the offer price was at apremium to the current trading price, the shares were so undervalued that the offer wasstill a "low-ball bid". The Commission agreed that the offer was opportunistic but that that,in and of itself, did not make it coercive. The Commission continued at page 1795:
Whether an offer is coercive is only one factor to be considered inassessing a shareholder rights plan. Like prior shareholder approval,coerciveness is a powerful but not necessarily conclusive factor to beconsidered in applying the Regal test. The recent decisions of the OntarioSecurities Commission in Cambridge, and of the Ontario, Alberta and BritishColumbia Securities Commissions in Re CW Shareholdings Inc. and WICWestern International Communications Ltd. (1998), 21 O.S.C.B. 2988;(1998), 7 A.S.C.S. 1452 ("WIC") may appear to place a particular emphasison this factor in the context of so-called "tactical pills" -- shareholders' rightsplans that are put into place in the face of a take-over bid and without a voteof shareholders. Each of those cases involved unique facts and, in our view,each should be interpreted as consistent with the fundamental applicationof Regal test in the manner we have described.
The Commission decided that if Samson extended its bid to expire no earlier than45 days from the date of the offer, the Commission would cease trade the rights planunless it was waived by Highridge.
Within days of the release of Samson, the British Columbia Commission releasedthe reasons for its decision in Re BGC Acquisition Inc. and Argentina Gold Corp. 6 B.C.S.C. Weekly Summary 23. In that case, Argentina Gold had implemented a rightsplan without shareholder approval during a take over bid by Barrick Gold Corporationthrough BGC. In the reasons for the decision, the Commission reviewed Jorex, Regal andWIC; it did not consider Cambridge as the reasons for that decision had not been releasedat the time of the Argentina Gold hearing. The Commission observed at page 54:
In determining whether a poison pill should stay or go, there is anatural tension between the objectives of letting the shareholders decide forthemselves, as described in Jorex, and of letting management and the boardfulfill what they see as their fiduciary duties, as set out in Regal. Striking abalance between these objectives in any particular case is highly dependenton the specific facts. Relevant factors include: whether shareholderapproval was obtained; whether broad shareholder support is evident; whenthe poison pill was adopted; the nature of the bid, including whether it iscoercive or unfair to the target company shareholders; the size andcomplexity of the target company and the number of potential, viableofferors; the likelihood of the existing bid or bids falling away if the pill is notremoved; and the likelihood that, if given further time, the target companycan find a better offer.
The Commission then applied these factors to the case at hand, noting at page 54:
In the hearing, Barrick focused considerable attention on the fact thatthe pill was adopted long after the bid was announced. While it wasunusual, we did not place much weight on that fact. What was relevant tous was the situation at the date of the hearing. Argentina Gold had, forseven weeks, been strenuously fighting the Barrick bid and seeking otheroffers. It was a relatively straightforward company, with some mineralproperties, albeit in a remote part of the world, one of which was showingsome very promising exploration results. The other potential offerors werea handful of international mining companies, that are in the business ofassessing and acquiring successful junior exploration companies, often onshort notice and in an auction environment. Newmont had looked closely atthe property and had apparently forgone the opportunity to make a bid.Another major company had visited the property in mid December and hadyet to launch a bid. Scotia McLeod had recently been brought in to seekother bidders but most had already been contacted by Argentina Gold'smanagement and, although some site visits were in the offing, there wasnothing that could be described as real and substantial interest. Barrick heldother properties close by and, as the joint venture partner, was a naturalofferor for Argentina Gold. Despite Argentina Gold's efforts to solicit a showof shareholder support for the pill, the support provided in evidence wasextremely meagre. Barrick's bid was simple -- a cash bid for all the shares --and, despite the assertions made by Argentina Gold, there was nothingcoercive or unfair about the bid. Similarly, there was no evidence or analysisto support Argentina Gold's claim that Barrick's was an insider bid.
In the final analysis, Argentina Gold's directors opposed the bidbecause they thought it was too low and that, if given further time, ArgentinaGold could produce more positive exploration results and generate anauction in order to obtain a higher bid, from Barrick or someone else. Ineffect, Argentina's Gold's directors wanted the shareholders to reject acurrent cash offer and speculate that future developments would bring ahigher price. They emphasized their view that Barrick would not go away,given its natural interest in the property. That, in our view, was not a decisionfor the directors to make on behalf of the shareholders.
The Commission applied the test in Regal and decided to immediately terminate theoperation of the rights plan on the basis that the only bid on the table was about to expireand that there was no evidence of a real and substantial possibility of another bid withina reasonable period of time.
We now turn to the issue raised by Royal Host's application. That issue waswhether it was in the public interest for us to make orders that would terminate theoperation of the CHIP rights plan against the Royal Host bid and thus allow the bid toproceed for consideration by the unitholders of CHIP. In other words, was it time for theCHIP pill to go?
The general principles we applied in making that determination are set out inNational Policy 62-202 and have been interpreted in the series of decisions reviewedabove. In the policy, we emphasize that the primary objective of the regulatory schemegoverning take over bids is the protection of the bona fide interests of the shareholders ofthe target company. We recognize that the board of a target company facing a hostile bidmay adopt defensive tactics in a genuine attempt to increase shareholder value. However,we also confirm that we will step in if their tactics appear likely to deny or severely limit theopportunity of the shareholders to respond to the bid.
In applying these principles to the determination of the public interest in a particularcase, the challenge we face is finding the appropriate balance between permitting thedirectors to fulfill their duty to maximize shareholder value in the manner they see fit andprotecting the right of the shareholders to decide whether to tender their shares to the bid.We can make this determination only after considering all of the relevant factors in thatparticular case. While it would be impossible to set out a list of all of the factors that mightbe relevant in cases of this kind, they frequently include:
- whether shareholder approval of the rights plan was obtained;
- when the plan was adopted;
- whether there is broad shareholder support for the continued operation of the plan;
- the size and complexity of the target company;
- the other defensive tactics, if any, implemented by the target company;
- the number of potential, viable offerors;
- the steps taken by the target company to find an alternative bid or transaction thatwould be better for the shareholders;
- the likelihood that, if given further time, the target company will be able to find abetter bid or transaction;
- the nature of the bid, including whether it is coercive or unfair to the shareholdersof the target company;
- the length of time since the bid was announced and made;
- the likelihood that the bid will not be extended if the rights plan is not terminated.
This is the approach that was taken in Jorex and that served as the starting pointfor the analysis in the subsequent decisions. However, a number of those decisions -Regal, WIC and Cambridge - have attempted to refine this approach by focusing on certainof these factors and using them as the basis for specific tests to be applied in determiningwhether it is time for the pill to go.
After reviewing these decisions and the fact patterns on which they were based, wehave come to the conclusion that it is fruitless to search for the "holy grail" of a specifictest, or series of tests, that can be applied in all circumstances. Take over bids are factspecific; the relevant factors, and the relative importance to be attached to each, will varyfrom case to case. As a result, a test that focuses on certain factors to the exclusion ofothers will almost certainly be inappropriate in some of the cases to which we attempt toapply it.
Therefore, in determining whether it was time for the CHIP pill to go, we simplyconsidered all of the relevant factors rather than attempting to establish and apply acomprehensive and conclusive test.
The first of these factors was that CHIP had had an opportunity to put a rights planto its unitholders for approval last May, but chose not to do so. One of the reasons for thisdecision was that the trustees did not think that a plan would be favourably received by theinstitutional unitholders. In other words, it appears that there would not have been a greatdeal of unitholder support for the implementation of the plan.
Second, CHIP was able to provide little evidence of unitholder support for thecontinued operation of the plan. By the time of the hearing, institutions holding only 22.6%of the units had provided letters in support.
Third, on the basis of the evidence and the submissions, we concluded that if CHIPwas allowed some additional time, there was a reasonable possibility that it could bringforward an alternative bid or transaction superior to the Royal Host bid. The question was,how much additional time would be reasonable in the circumstances? CHIP argued thatit needed the 60 days provided for in the rights plan (which would give it 38 days from thedate of the hearing) because it had been unable to solicit alternative offers or transactionsuntil June 1, due to the non-solicitation agreement, because its structure is complicated,which would increase the time required for a third party to do due diligence, and becausemost of the potential third parties were outside of Canada, making them more difficult tolocate and any resulting transaction more difficult to structure. Royal Host, on the otherhand, argued that CHIP should be given only an additional ten days from the date of thehearing. In support of this, Squires had testified that CHIP had been negotiating aproposed transaction or reviewing strategic alternatives for at least three months, thatCHIP was not unusually complex to value, that reasonably up-to-date valuation andinformation files should have been available, that it is no more difficult to implement atransaction with a REIT than with a corporation, and that the potential purchasers for anenterprise like CHIP are limited in number and readily identifiable. Ultimately, we were ofthe view that the additional time should be much closer to the ten days suggested by RoyalHost than the 38 days requested by CHIP.
Fourth, by the June 25 expiry date of the bid, it would have been open foracceptance for 25 days. This exceeded the minimum deposit period of 21 days currentlyrequired under the securities legislation administered by the four major commissions.However, all four commissions have taken steps to implement the recommendations of theJuly 30, 1996 Report of the IDA Committee on Take-over Bid Time Limits (chaired byAdam Zimmerman), which proposed that this minimum deposit period be extended from21 to 35 days from the date the bid was commenced, and that an offeror be able tocommence a bid by placing an advertisement, containing prescribed information, in thenewspaper and subsequently mailing the bid. Although the legislative amendmentsnecessary to implement these recommendations have not been brought into force in anyof the jurisdictions, all four commissions have clearly indicated support for the 35 dayperiod. Had these amendments been in force when Royal Host announced its bid on May19, and had Royal Host taken out an advertisement containing the prescribed informationon that date, CHIP presumably would have been released from the non-solicitationagreement at that time. In fact, CHIP was not released from the agreement until it receivedthe Royal Host bid on June 1. Under the circumstances, we considered it appropriate thatthe CHIP trustees have at least 35 days from that date to seek alternatives to the bid.
Fifth, Royal Host's financial advisor, Squires, testified that, if CHIP was permittedto keep the rights plan in place for a further ten days, he would not recommend that RoyalHost withdraw the bid.
Finally, despite CHIP's argument that the Royal Host bid was coercive and unfair,we were satisfied that there was nothing coercive, unfair or improper about it. Thedeficiencies in Royal Host's Offering Circular were corrected by Royal Host's Notice ofChange; the potential adverse tax consequences and the uncertainty with regard to theform of a subsequent acquisition transaction were fully disclosed in the Circular; and thebid complied with all of the terms of a "permitted bid" under the CHIP rights plan, exceptthe requirement that it be open for acceptance for 60 days.
After considering all of these factors, we were of the view that it would not be in thepublic interest to make orders terminating the operation of CHIP's rights plan against theRoyal Host bid at the conclusion of the hearing. However, we were also of the view thatthe plan should cease to operate against the bid in the event that Royal Host kept the bidopen for at least 35 days, which would be an additional 13 days from the date of thehearing. Therefore, we decided that, if Royal Host extended its bid for the units of CHIPto expire no earlier than 7:00 P.M. Pacific Daylight Time on July 6, we would issue ordersterminating the operation of the CHIP rights plan unless CHIP issued a news release bynoon Pacific Daylight Time on July 2, confirming that it had waived the rights plan againstthe Royal Host bid.
Following the hearing, Royal Host extended its bid until July 6. On July 2, CHIPannounced that it had waived the application of the rights plan to the Royal Host bid.Royal Host later extended the bid several times and increased its offer. On July 20, CHIPannounced that it had agreed to a $100 million, two part transaction with BII AcquisitionLimited Partnership, an affiliate of Belkorp Industries Inc. Under the transaction, CHIP wasto issue 5,000,000 units at $10 per unit to BII Acquisition and BII Acquisition proposed toacquire a further 5,000,000 units pursuant to a cash take over bid at $10 per unit. Thistransaction was later approved by CHIP unitholders and closed on September 3. Later onSeptember 3, Royal Host announced the withdrawal of its bid.
DATED at Vancouver, British Columbia, on November 24, 1999.
FOR THE COMMISSION"Douglas M. Hyndman"
"Adrienne R. Wanstall"