Canadian Update: B.C. Securities Commission Takes Hybrid Approach to Cease Trading Augusta’s Rights Plan

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On May 2, 2014, the British Columbia Securities Commission (the “BCSC“) determined to allow the shareholder rights plan of Augusta Resource Corporation (“Augusta“) to remain in effect for at least 156 days after the announcement of the unsolicited offer by HudBay Minerals Inc. (“HudBay“) to acquire the shares of Augusta. The BCSC order was issued at a hearing held shortly after the continuance of the rights plan was approved by the shareholders of Augusta.

HudBay, which holds approximately 16% of the Augusta shares, waived the minimum tender condition under its offer during the initial bid period. The board of directors of Augusta is utilizing the rights plan to prevent HudBay from acquiring a minority blocking position while Augusta is completing permitting for its Rosemont copper project and pursuing a strategic alternatives process. Augusta has committed to waiving or terminating its rights plan to permit any bid to proceed if at least a majority of the Augusta shares, excluding shares held by the bidder, are tendered to the bid, provided that the bidder publicly announces that fact and extends its bid for at least 10 business days.

Augusta’s shareholders were provided with the opportunity to vote on the continuance of the rights plan in the face of HudBay’s offer at a shareholders’ meeting held on May 2, 2014, three days prior to what was stated to be the “final” expiry of HudBay’s offer. At that meeting, 94.0% of the votes cast were in favour of a resolution to approve the continuance of the rights plan until the next annual meeting of shareholders in 2015, with 73.8% of the outstanding shares voted on the resolution, in each case excluding the shares held by HudBay.

The BCSC ordered that Augusta’s rights plan not be cease traded unless HudBay extends its offer to July 16, 2014, and HudBay provides a 10-day extension of its offer if it takes up any shares thereunder. If these conditions are satisfied by HudBay, Augusta’s rights plan will be cease traded on July 15, 2014.

On May 5, 2014, HudBay amended its offer to extend the expiry date until May 16, 2014. HudBay will have to extend its offer for two additional months in order to satisfy the conditions imposed by the BCSC.

The reasons for the BCSC’s decision have not yet been released, and will be highly anticipated in light of the divergent approaches taken in the past by the securities regulators in Ontario and Alberta, on the one hand, and British Columbia, on the other hand, regarding the impact of shareholder support for a rights plan obtained in the face of a hostile bid, and the subsequent proposal of National Instrument 62-105 by the Canadian Securities Administrators.

In Pulse Data Inc. and Neo Material Technologies Inc., the Alberta Securities Commission and the Ontario Securities Commission, respectively, allowed rights plans adopted by target boards to stand where overwhelming shareholder support for the plans was obtained in the face of those hostile bids. In Lions Gate Entertainment Corp., two members of the three person panel of the BCSC expressed reservations regarding the decisions in Pulse Data and Neo Material based on their apparent departure from the principles that shareholders ultimately must have the opportunity to decide whether to tender to a take-over bid, and that target boards cannot “just say no” to unsolicited offers. Our discussion of these decisions can be found here.

Following these decisions, the Canadian Securities Administrators proposed National Instrument 62-105, setting out a new regime for the regulation of shareholder rights plans in Canada. The proposed rule would shift decision making regarding rights plans from securities regulators to shareholders, to allow a rights plan adopted by a target board to stay in place, provided shareholder approval is obtained within specified periods. Our discussion of the proposed rule can be found here.

In the Augusta matter, the BCSC clearly has given weight to the outcome of Augusta’s shareholder vote, given that the length of time that Augusta’s rights plan has been permitted to remain in force is significantly longer than the 45 to 70 days following the announcement of a hostile bid that typically has been afforded by the Canadian securities regulatory authorities. The BCSC, however, did not go so far as to give full effect to Augusta’s shareholder vote, which called for the continuance of the rights plan until the next annual meeting of shareholders in 2015.