In the Matter of the Securities Act R.S.O. 1990, c. S.5, as amended, and In the Matter of Falconbridge Limited
Ontario Securities Commission, August 17, 2006
Falconbridge was the target of a take-over bid contest between an offer by Inco Limited supported by the Falconbridge board of directors and an unsolicited offer by Xstrata Canada Inc. – Xstrata had acquired a 19.8% stake in Falconbridge – Falconbridge board had adopted a shareholder rights plan – Xstrata applied for a cease-trade order under section 127 of the Securities Act in respect of securities issued, or to be issued, under the shareholder rights plan of Falconbridge – Falconbridge cross-applied for an order prohibiting Xstrata from acquiring any Falconbridge shares under the 5% exemption in section 94(3) of the Securities Act until the expiry of Xstrata’s offer – the shareholder rights plan of Falconbridge was permitted to stay in place and Xstrata was not permitted to acquire any Falconbridge shares under the 5% exemption in section 94(3) of the Act, in both instances until the earlier of a date that was four weeks after the date of the order or the date when Xstrata takes up at least a majority of the Falconbridge shares held by shareholders other than Xstrata.
Falconbridge Limited ("Falconbridge") resulted from the amalgamation of the old Falconbridge company with its parent Noranda Inc. on June 30, 2005. Xstrata plc and its subsidiary Xstrata Canada Inc. (together, "Xstrata") acquired a 19.9% stake in Falconbridge from Brascan Corporation, the former controlling shareholder of Noranda Inc., on August 15, 2005. Subsequently, Falconbridge had discussions with, first, Xstrata and, then, Inco Limited ("Inco") about a possible transaction.
On September 22, 2005 the Falconbridge Board adopted a shareholder rights plan (the "First Rights Plan") that required that a bid to acquire more than 20% of the Falconbridge shares must have, among other things, an irrevocable condition that a majority of the Falconbridge shares, other than those held by the bidder, be tendered under the bid in order for the bid to qualify as a "permitted bid", which would avoid the dilutive effect of the plan.
On October 10, 2005, Inco made a formal offer (the "Inco Offer") to acquire all Falconbridge shares in exchange for a combination of cash and Inco stock. The Inco Offer included an irrevocable condition that a majority of the Falconbridge shares held by shareholders independent of Inco be tendered under the offer. Inco and Falconbridge executed a support agreement in connection with the Inco Offer.
On March 21, 2006, the Falconbridge board adopted a second shareholder rights plan (the "Replacement Rights Plan"), which was substantially similar to the First Rights Plan that was about to terminate because Falconbridge had not sought the required shareholder approval within six months of its adoption.
On May 18, 2006, Xstrata made a formal offer (the "Xstrata Offer") to acquire all Falconbridge shares that it did not own for cash. The Xstrata Offer included a waivable condition, which, a majority of the Falconbridge shares held by shareholders independent of Xstrata be tendered under the offer.
Although both the Inco Offer and the Xstrata Offer included a majority of the minority minimum tender condition, only the Inco Offer was a permitted bid under the Replacement Rights Plan because its condition was irrevocable. Xstrata could waive its condition.
On May 18, 2006, Xstrata applied to the Ontario Securities Commission (the "Commission") for an order under section 127 of the Securities Act R.S.O. 1990, C.5.5, as amended (the "Act") that trading cease immediately in respect of any securities issued, or to be issued, under or in connection with the Replacement Rights Plan and that exemptions from the prospectus and registration requirements shall not apply to any trades in securities of Falconbridge pursuant to or in connection with that rights plan.
In its directors’ circular issued May 31, 2006, the Falconbridge board stated its conclusion that the Xstrata Offer was: highly conditional, with most conditions in Xstrata’s discretion to determine; not a permitted bid and could be coercive; and not a "Superior Proposal" as defined in the support agreement. The Falconbridge board determined not to make a recommendation to shareholders with respect to the Xstrata Offer, but continued to recommend that shareholders accept the Inco Offer.
On June 20, 2006, Falconbridge filed a cross-application for an order under section 127 of the Act prohibiting Xstrata from acquiring any Falconbridge shares under the exemption in section 94(3) of the Act until the expiry of the Xstrata Offer.
On June 25, 2006, Phelps Dodge Corporation ("Phelps Dodge"), Inco and Falconbridge jointly announced that they had agreed to combine, such that Phelps Dodge would offer to acquire all Inco shares in exchange for a combination of cash and Phelps Dodge shares and Inco, with Phelps Dodge assistance, would raise its offer price for Falconbridge shares and would extend the expiry date of the Inco Offer.
The applications by Xstrata and Falconbridge were heard by the Commission on June 27, 2006.
(A) Was it time for the Replacement Rights Plan to be cease traded?
(B) Should Xstrata be prohibited from making market acquisitions of up to 5% of Falconbridge shares pursuant to subsection 94(3) of the Act during the course of the Xstrata Offer?
Held: The Commission issued an order on June 30, 2006 that:
(1) pursuant to clause 2 of subsection 127(1) of the Act, trading in any securities issued, or to be issued, under or in connection with the Replacement Rights Plan shall cease on the earlier of:
(a) the date Xstrata takes up sufficient Falconbridge shares to meet its majority of the minority condition, or
(b) July 28, 2006; and
(2) pursuant to clause 3 of subsection 127(1) of the Act, the exemption created by subsection 94(3) to the restrictions on purchases during a take-over bid found in section 94(2) of the Act shall not apply to Xstrata until the earlier of the following dates:
(a) the date that Xstrata takes up sufficient Falconbridge shares to meet its majority of minority condition, or
(b) July 28, 2006.
In the reasons released by the Commission on August 21, 2006, the Commission observed that, in prior matters dealing with shareholder rights plans, it has balanced the public interest regarding the right of the shareholders of the target to tender their shares to the bidder of their choice against the duties of the target board to maximize shareholder value and has intervened to the extent necessary to protect the interest of target shareholders.
The Commission cited the decision of the Ontario, British Columbia and Alberta securities commissions in Re Royal Host Real Estate Investment Trust and Canadian Hotel Income Properties Real Estate Investment Trust (1999) 22 O.S.C.B. 7819 ("Royal Host"). The commissions in Royal Host had acknowledged that all shareholder rights plan proceedings are fact specific and had set forth a list of factors that might be relevant in such proceedings and which included the following eleven factors:
- 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 that would be better for the shareholders;
- the likelihood that, if given further time, the target company will be able to find a better bid or transaction;
- the nature of the bid, including whether it is coercive or unfair to the shareholders of 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.
The Commission indicated that the Royal Host approach provided a useful framework for reviewing and evaluating the relevant factors of the Falconbridge case. The Commission considered the evidence and the unique circumstances of the Falconbridge case in terms of the factors set forth in Royal Host.
The Commission concluded that it would be in the public interest for the Replacement Rights Plan to continue to operate for a brief additional period and, thereby, reduce the risk to the shareholders of Falconbridge that the current auction might be ended prematurely. The Commission concluded that the outside date of July 28, 2006, which had been proposed by Falconbridge, provided a reasonable period of time to allow the Replacement Rights Plan to continue before a cease-trade order came into effect.
The Commission considered the second issue in light of the unique circumstances of this case. The Commission found that market purchases made by Xstrata during the Xstrata Offer, in combination with Xstrata’s ability to waive its minimum tender condition, would have had the potential to end the take-over bid auction early. The majority of Falconbridge shareholders would thereby have been deprived of their right to respond to the then current and future take-over bids. The Commission concluded that it was in the public interest to order, pursuant to subsection 127(3) of the Act, that the 5% exemption in subsection 94(3) of the Act would not apply to Xstrata until the date Xstrata took up sufficient Falconbridge shares to meet its majority of the minority condition or July 28, 2006 – whichever date was earlier.
Before: Wigle, Q.C., Thakrar and Knight, FCA, Commissioners