Navigating control transactions: clarifying acceptable conduct boundaries

While Canadian M&A activity remained relatively stable throughout 2023 and 2024, it has been a busy period for decisions from Canadian securities regulatory authorities who have been asked to referee disputes between targets and hostile bidders, and between companies and activists. The decisions demonstrate a balancing of shareholder and company interests and the importance of the particular facts of each case in establishing appropriate guidelines for acceptable behaviour.

On the one hand, the Aimia decision was deferential to the board of a target company in adopting a private placement in the face of a hostile bid. On the other hand, the NorthWest Copper Bitfarms and Greenfire decisions have sheltered discussions amongst shareholders from joint actor determinations or have prevented target boards from adopting shareholder rights plans that are inconsistent with the take-over bid regime.

Collectively, these decisions provide important new guideposts for market participants in planning corporate transactions that might involve acquisitions of control.

The future of private placements in fights for control

In Aimia Inc. (Aimia) [PDF], the Ontario Capital Markets Tribunal (Tribunal) provided guidance on the use of private placements in control transactions. The tension faced by securities regulatory authorities under these circumstances arises from the need to balance legitimate financing needs of an issuer against the effect that a private placement may have in preventing or delaying a potential change of control transaction.

Aimia and its 31% shareholder, Mithaq, were engaged in a proxy contest and litigation in the lead up to the announcement of a private placement by Aimia. The Tribunal recognized that it should be wary of imposing financing constraints on issuers involved in protracted control battles when the determination of that battle is not imminent.

The announcement of the private placement followed months of negotiations between Aimia and the subscribers, as well as conditional listing approval from the TSX. Shortly before Aimia announced the private placement, Mithaq commenced an unsolicited all-cash take-over bid for all outstanding common shares of Aimia.

In response to the private placement, Mithaq brought an application to the Tribunal to cease trade on the grounds that it was an improper defensive tactic designed to thwart its bid. Mithaq also sought to set aside the decision of the TSX to approve the private placement without requiring shareholder approval.

Applying the principles set out in the Ontario Securities Commission’s (OSC) decision in Hecla Mining Company and Dolly Varden Silver Corporation (Re) (Hecla) [PDF], the Tribunal found that the private placement addressed Aimia’s serious and immediate need for financing and was not planned or modified in response to or in anticipation of Mithaq’s bid. Although it had the effect of changing the bid environment in a manner unfavourable to Mithaq, that characteristic was secondary and insufficient to justify cease trading the private placement.

It was significant for the Tribunal that Aimia had begun planning the private placement months before the announcement of Mithaq’s bid, at a time when there was no reason to believe a takeover bid was imminent. The Tribunal also found that Aimia had a demonstrable “serious and immediate” need for financing, noting Aimia’s cash position, its difficulty in obtaining debt financing, and the opinion of its financial advisor. Importantly, the Tribunal determined that “immediate” did not necessarily imply urgency. Although the private placement proceeds were earmarked to fund operations for 12 to 24 months, this was sufficient to establish that the need currently existed and was not merely speculative.

Decisions of Canadian securities regulatory authorities provide important new guideposts for market participants in planning corporate transactions that might involve acquisitions of control.

The Aimia decision affords flexibility to issuers that can demonstrate a “serious and immediate” need for financing in the face of a hostile takeover bid. The result may be that potential targets will be more willing to engage in private placements that have the effect of obstructing a take-over bid.

The dispute is also noteworthy as the Tribunal allowed the private placement to close on an undertaking to unwind the transaction if ultimately ordered to do so at the merits hearing. Closing was also conditioned on a commitment that the shares issued in the private placement could not be tendered to an alternative take-over bid.  

Osler was counsel for the lead investor in the private placement and in the hearing before the Tribunal. Additional detail on the Aimia decision is available in our Osler Update of March 11, 2024.

Acting together does not necessarily mean acting jointly

In NorthWest Copper Corp. (Northwest Copper), the British Columbia Securities Commission (BCSC) reinforced the importance of unfettered communication between shareholders. The BCSC also confirmed the high threshold required to determine that shareholders are acting “jointly or in concert”. Joint actor determination has significant implications for Canadian shareholder disclosure obligations under securities laws, particularly in relation to early warning and take-over bid requirements.

In Northwest Copper, the BCSC followed the Alberta Securities Commission’s (ASC) decision in DIRTT Environmental Solutions which found that the fact that the interests of the parties are aligned does not mean they were acting jointly or in concert. The BCSC noted that a finding that parties are acting “jointly or in concert” requires an applicant to demonstrate, on a balance of probabilities, that the parties “actively worked together” to achieve a “joint specific purpose”. It is not sufficient that the shareholders are simply aligned in interest and have discussed their respective interests and objectives. Further, the BCSC found that, even if parties were found to be acting jointly or in concert, early warning disclosure requirements only will be triggered on a subsequent acquisition by a joint actor and do not automatically arise when the group is deemed to collectively hold 10% or more of outstanding securities. In its decision, the BCSC held that it was better to insist that a finding of acting jointly be based on clear evidence and take the risk that some groups may fly under the radar, rather than stifle discussion among shareholders. Moreover, the BCSC held that if there had been a violation, the appropriate remedy would have been disclosure rather than restraining voting rights.  

In Aimia, the Tribunal also found that there was no evidence to support a finding that the private placement investors were acting together. The private placement investors were all acting in their own self-interest despite being connected to the lead investor, and there was no evidence that they were acting jointly.   

The outcome of these decisions supports the ability of shareholders to freely communicate with one another. Allegations of undisclosed joint actorship require compelling evidence to prove. Moreover, even if there is a finding of joint actor status, it is unlikely to result in remedies beyond disclosure orders. Nevertheless, shareholders should remain cautious in their communications and take care to avoid inadvertently triggering take-over bid or early warning disclosure requirements.

Certainty of the Canadian takeover bid regime

There has been a recent resurgence in shareholder rights plans hearings as issuers seek to use shareholder rights plans in novel ways.

In Bitfarms [PDF], the Tribunal reaffirmed the 20% ownership threshold under the take-over bid rules in cease trading a shareholder rights plan that set a 15% trigger to the poison pill. Bitfarms adopted its rights plan to allow it to pursue a strategic review process. However, the effect of the plan was to preclude its 14.9% shareholder from acquiring additional securities, which would otherwise have been permitted under Canadian securities laws. The Tribunal indicated that the 20% threshold is a clear bright line and that the Bitfarms rights plan would undermine the animating principles of the take-over bid regime in a real and substantial way. The Tribunal went on to say that if the Bitfarms plan was allowed to continue, it would diminish the predictability and certainty inherent in the take-over bid regime and would weaken confidence in the capital markets, and that it was therefore in the public interest to cease trade the Bitfarms plan.

Similarly, in Greenfire, the company adopted a shareholder rights plan in response to an announced acquisition by a third party of 43% of the outstanding shares. The company had been evaluating strategic alternatives and argued that the purchase would undermine its ability to maximize shareholder value. The acquiror brought an application to the Alberta Securities Commission (ASC) to cease trade the shareholder rights plan. Greenfire brought a cross-application seeking to cease trade the share purchase agreements. The hearing was held on November 5, 2024 and the following day the ASC issued an order cease trading the rights plan and dismissing the cross-application. Reasons for the decision will follow.

In Aimia, the Tribunal also reinforced the certainty provided by the take-over bid regime. The Tribunal denied a request from Aimia that would have prevented Mithaq from acquiring up to an additional 5% of Aimia’s shares during the course of the bid.

These decisions continue a line of securities regulatory decisions that emphasize certainty of the takeover bid regime, including the joint decision of the OSC and the Financial and Consumer Affairs Authority of Saskatchewan in Aurora Cannabis [PDF] and the OSC’s decision in Optiva [PDF]. With securities regulators emphasizing the certainty of the takeover bid regime, we expect that the traditional benefit of shareholder rights plans will continue to be subsumed in the regime. However, rights plans will continue to have important benefits to issuers to address exempt transactions such as creeping bids or transactions under the private agreement exemption.

Control transactions and interventions in the future

Although hostile take-over bids are becoming increasingly uncommon, shareholder activism in Canada continues to rise. As demonstrated in the decisions from the past year, issuers, shareholders and other interested parties need to have a nuanced understanding of the regulatory landscape in control transactions and the facts and circumstances of developing regulatory case law. That landscape reinforces the consistency of the take-over bid regime, while also in certain cases sheltering decisions of boards of directors, as well as discussions amongst shareholders.

While the take-over bid regime has been upheld across recent decisions, the “playbook” for acceptable behavior for companies, bidders and shareholders operating under that regime continues to evolve.