In the Matter of the Securities Act, R.S.O. 1190, Chapter S.5, as amended (the Act) and In the Matter of Inco Limited and Teck Cominco Limited
November 30, 2006
In the Matter of the Securities Act, R.S.O. 1990, Chapter S.5, as amended (the Act) and In the Matter of Inco Limited and Teck Cominco Limited
Ontario Securities Commission, August 28, 2006
Teck made an unsolicited take-over bid for Inco – Inco had a shareholder rights plan - Teck’s bid did not qualify as a "permitted bid" under the rights plan – Inco subsequently entered into a combination agreement with Phelps Dodge and Falconbridge – Teck sought an order from the Commission to lift the shareholder rights plan – the evening prior to the hearing before the Commission, the parties agreed to lift the rights plan against Teck – the parties sought an order from the Commission to reflect this agreement – the Commission considered whether such an order was in the public interest – the Commission agreed that it was in the public interest to lift the rights plan against Teck – the Commission also held, contrary to Inco’s submissions, that it was in the public interest to lift the rights plan against all other potential bidders – Inco had been in play for over two months – Teck, Phelps Dodge and Inco should not be in a privileged position because of the rights plan – there was a real possibility that other bidders would emerge – Inco’s shareholders should not be constrained by the rights plan from accepting another bid – if another bid arose that was coercive or unfair, the Commission would not sit idly by.
Inco Limited ("Inco") had a typical shareholder rights plan. If a bidder acquired 20% or more of Inco’s shares pursuant to a transaction that did not qualify as a "permitted bid", the shares held by the bidder would be massively diluted.
On May 8, 2006, Teck Cominco Limited ("Teck") made an unsolicited take-over bid for Inco. Teck’s bid initially failed to meet the requirements of a "permitted bid" in one respect: in order to meet the requirements of United States securities law, the bid did not provide for the take-up of additional shares deposited after the first take-up of shares. Teck subsequently received approval from the United States Securities and Exchange Commission for the bid to include this feature, and announced that it would amend the bid accordingly. Nonetheless, Inco took the position that in order to qualify as a "permitted bid", all conditions must be met from the bid’s inception.
Inco was involved in a concurrent auction for Falconbridge Limited ("Falconbridge"). The auction for Falconbridge had begun in October, 2005 with a friendly take-over bid from Inco. Falconbridge was subsequently subject to another bid by Xstrata Canada Inc. ("Xstrata"), launched on May 17, 2006. On June 26, 2006, Inco, Falconbridge and Phelps Dodge Corporation ("Phelps Dodge") announced a number of agreements, which included a proposed combination of Inco and Phelps Dodge. The combination was scheduled to close in September 2006. It was subject to shareholder, regulatory, and court approval. Inco’s board agreed to recommend the combination to its shareholders, and to generally refrain from soliciting other proposals or entering into discussions or negotiations with other bidders.
On July 13, 2006, Teck applied to the Commission pursuant to section 127 of the Securities Act, R.S.O. 1990, c. S.5 (the "Act") for an order to cease trade any securities issued in connection with Inco’s shareholder rights plan.
The evening prior to the scheduled hearing date, Inco and Teck agreed upon a resolution of the matter. The parties presented the Commission with a draft form of an order to which they each consented. The parties agreed to lift the rights plan with regard to Teck’s bid, but not with regard to any other potential bids. While the agreement of the parties to the form of the order was significant, it ultimately fell to the Commission to determine whether such an order was in the public interest.
To facilitate its consideration of the matter, the Commission held an informal hearing by telephone conference. The Commission had before it the submissions that had been filed by the parties.
Issues: The issues were whether the rights plan should cease to apply, as of August 16, 2006, (i) to the Teck bid, and (ii) to all other potential bids.
Held: The Commission was satisfied that it was in the public interest to lift the rights plan against all bidders, including Teck, effective August 16, 2006. The Commission issued an order to this effect.
On the first issue, the Commission agreed with the parties that lifting the rights plan with respect to Teck’s bid was in the public interest. Xstrata’s bid for Falconbridge would expire on August 14, 2006, and it appeared that Teck’s bid would be extended to at least August 16, 2006.
On the second issue, Inco argued that the rights plan should be maintained against future bidders for two reasons. First, the Commission had authority in the hearing to deal only with the parties and the application before it. Second, future bids may be coercive or unfair to Inco’s shareholders, and the rights plan was necessary in order to protect the shareholders against such bids. The Commission disagreed with both of these arguments.
The Commission noted that there are two interrelated objectives of the takeover bid provisions in the Act. The first and foremost objective is the "protection of the bona fide interests of the shareholders of the target company". The second objective is "to provide a regulatory framework within which takeover bids may proceed in an open and even-handed environment".
The Commission noted that "[u]nrestricted auctions produce the most desirable results in take-over contests". Shareholder rights plans are "tolerated, not promoted". They are permitted only to the extent required to allow boards of directors to fulfill their fiduciary duty, e.g. by soliciting other bidders.
In this case, Inco had been in play for over two months. Inco’s board had already conducted an extensive solicitation for other bidders, which had resulted in its agreement with Phelps Dodge. The auction for Inco continued, and there "was a real and substantial possibility" that other bidders would emerge. Inco’s board, however, was generally prohibited from cooperating with potential bidders as a result of its agreement with Phelps Dodge. The continuation of the rights plan would unfairly put Phelps Dodge, Inco and Teck in a "privileged position".
In these circumstances, Inco’s shareholders, the "ultimate arbiters of value of the company", should not be constrained by the rights plan from accepting another potential bid. At this stage of the auction, the outcome would be best determined by market forces. Moreover, lifting the plan against all bidders was consistent with previous decisions of the Commission.
With regard to the potentiality of a coercive or unfair bid, the Commission noted that it would not "sit idly by in such a situation".
Before: Moore, Q.C., Vice-Chair; Thakrar and Knight, FCA, Commissioners.
Articles By This Author
Advisory Panel Recommends Modernization of Ontario’s Corporate and Commercial Laws
IIROC Releases Final Guidance on Underwriting Due Diligence
Fairness Opinions – Important Ontario Court Comment
Underwriting Due Diligence – IIROC Proposed Guidance
Price Reductions in Takeover Bids
D&O Indemnification for Legal Fees
Ability to Vote Shares Acquired in a Take-over Bid on a Resolution to Approve a Second-Step Amalgamation
Broker Liability for Losses Resulting from Breach of Duty of Care to Clients
Takeover Bids - Lock-up Penalty Fee Provisions Permitted
Shareholder rights plan cannot be attacked by a former bidder