Alberta Securities Commission permits shareholder rights plan for first time under new takeover bid regime
By Paul Chiswell
In its July 12, 2021 precedent-setting decision in Re Inter Pipeline Ltd., the Alberta Securities Commission allowed Inter Pipeline to maintain its tactical shareholder rights plan in place. It also found the conduct of an unsolicited bidder, Brookfield Infrastructure Partners L.P., was clearly abusive to Inter Pipeline's shareholders and the capital market, and therefore contrary to the public interest.
Brookfield made an unsolicited takeover bid for Inter Pipeline. In response, a special committee of Inter Pipeline's independent directors launched a strategic review to maximize shareholder value. The process culminated in Inter Pipeline entering into an arrangement agreement with a white knight, Pembina Pipeline Corporation. The Pembina Arrangement included a break fee of $350 million payable by Inter Pipeline to Pembina in certain circumstances.
Brookfield's unsolicited bid was novel in Canada. Prior to launching its bid, Brookfield had acquired 9.75% of Inter Pipeline's common shares, and additional economic exposure to 9.9% of Inter Pipeline's common shares through the use of a derivative, specifically, cash-settled total return swaps. Brookfield did not publicly disclose its near 10% shareholding or its near 20% aggregate economic interest in Inter Pipeline until after it announced its bid. In response, Inter Pipeline adopted a supplemental shareholder rights plan that was substantially the same as its existing shareholder approved and Institutional Shareholder Services recommended rights plan, including a 20% triggering threshold, except that it treats certain financial derivatives, including total return swaps, as equivalent to beneficial share ownership. The intent of the supplemental rights plan was to prevent Brookfield from increasing its economic interest to 20% or greater through additional common share purchases or derivative transactions outside of the Brookfield bid, which was deemed to be a "permitted bid" under the plan.
Brookfield applied to the Commission for an order to cease trade Inter Pipeline's supplemental rights plan and challenged the break fee by seeking to cease trade the securities that would be exchanged as part of the Pembina Arrangement. Inter Pipeline and Pembina cross-applied to the Commission for various orders against Brookfield related its use of the total return swaps.
On July 12, 2021, the Commission issued its decision, with written reasons to follow (and which remain unpublished as of the date of this article).
Brookfield's use of derivatives was "clearly abusive" to the capital market
The Commission allowed Inter Pipeline's cross-application in certain respects, finding that Brookfield's use of and disclosure relating to the total return swaps was clearly abusive to Inter Pipeline's shareholders and the capital market, and as such contrary to the public interest. It also found that Brookfield's disclosure relating to the swaps did not comply with the requirements of securities regulations (specifically National Instrument 62-104), which had adversely affected Inter Pipeline's shareholders.
The Commission ordered:
- a 5% increase to the statutory 50% minimum tender condition for Brookfield's unsolicited bid, such that Brookfield needs to obtain tenders of 55% of the Inter Pipeline shares held by shareholders other than Brookfield and persons acting jointly or in concert with it;
- Brookfield to publicly disclose the modified minimum tender condition; and
- Brookfield to publicly disclose information relating to its swaps in a notice of variation of its offer circular, including the name of the swap counterparties, the dates of the swap transactions under which Brookfield acquired its economic interest in Inter Pipeline shares, and material information concerning Brookfield's commercial relationship with the swap counterparties, including the existence and amount of the completion fee that Brookfield agreed to pay to its financial advisor (who is also its swap counterparty).
Tactical shareholder rights plan allowed to remain in place—a first under Canada's new takeover bid regime
The Commission dismissed Brookfield's application, finding that Inter Pipeline had not engaged in any improper defensive tactics to justify the Commission using its public interest jurisdiction to make any orders regarding the Inter Pipeline supplemental rights plan or the Pembina Arrangement.
In implementing the rights plan, Inter Pipeline was motivated in protecting shareholders, and specifically in protecting shareholder choice. There was a concern that Brookfield had used, and could continue to use, swaps to obtain a negative control block to undermine shareholders' ability to vote on the Pembina Arrangement. The rights plan therefore prevented Brookfield from increasing its economic interest in Inter Pipeline above 20%. Consequently, Brookfield could not increase its economic interest through swaps, nor use the 5% market purchase statutory exemption to acquire further shares without first relinquishing an equivalent holding of swaps.
In a classic rights plan case, the rights plan prevents the unsolicited bid from succeeding until the target board has sufficient time to complete the auction process. Canadian Securities Commissions therefore typically find that there is a time after which the rights plan has served its purpose and must go because it is up to shareholders to decide whether to tender their shares to a bid.
In this case, the Inter Pipeline supplemental rights plan has a narrower purpose: it permits the Brookfield bid, is not intended to buy the board time to find an alternative transaction, and does not prevent shareholders from making a choice to tender their shares to the Brookfield bid. While the Commission has yet to issue reasons, it stated in issuing its decision that the expiry of the rights plan after the shareholder vote on the Pembina Arrangement was a factor in it not intervening.
The Commission's decision is important because it is only the second case involving a shareholder rights plan after the 2016 changes to the Canadian takeover bid regime in National Instruments 62-104 and 62-103 and the first after those amendments to uphold a rights plan.
The first rights plan case under the new takeover bid regime was the 2017 Ontario Securities Commission decision involving the unsolicited takeover bid by Aurora Cannabis Inc. for CanniMed Therapeutics Inc. In that case, the Ontario Securities Commission cease traded the CanniMed shareholder rights plan as an impermissible defensive tactic. It held that the careful rebalancing of the takeover bid regime in 2016 provided sufficient protections for shareholder choice to occur while allowing bids to be made and management to respond to such bids in an appropriately predictable and even-handed manner.
Therefore, the Alberta Securities Commission's decision is an important reminder that there remains a place even under Canada's new takeover bid regime for directors to play a meaningful role when faced with an unsolicited bid. As Ontario Justice Farley concluded in Rogers Communications almost three decades ago, "a target board [need] not roll over and play dead." In fact, if a target board is passive, it could be criticized for not performing its fiduciary duty.
It is also a good reminder that defensive tactics are not necessarily dirty words, and can legitimately be used to protect shareholders and maximize shareholder value. In contested bids, the job of a target board is to (i) maximize shareholder value, and (ii) protect the integrity of the process, as necessary, to ensure shareholders are given their right to choose on an informed basis.
Inter Pipeline avoided criticism from the Commission because it engaged in best practices: it formed a special committee of independent directors, retained independent legal and financial advisors and relied on their advice, and acted in good faith and in the best interests of the corporation and its shareholders.