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Regulators should get out of takeovers Add to ...

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Can an endangered wild animal determine the fate of a hostile takeover bid? In Canada, the answer seems to be “yes.”

On May 22, an ocelot was spotted on the site of Augusta Resource Corp.’s Rosemont copper project and speculation is that this wildlife sighting could be a boon for HudBay Minerals Inc.’s hostile bid for Augusta. The U.S. Fish and Wildlife Service will now have to conduct further analysis of the project site, which means Augusta will likely not receive final development permits until the third quarter.

While this delay may seem minor, it may have a major effect on the outcome of HudBay’s bid by putting final permitting on the wrong side of the British Columbia Securities Commission’s (BCSC) arbitrary poison pill cease-trade deadline.

This reveals a fundamental issue with Canadian securities regulation: Regulators, not shareholders, are the ones who determine whether a hostile takeover succeeds or fails. By forcing companies to abandon takeover defences after arbitrary periods of time, regulators leave shareholders vulnerable not just to hostile bidders but to unexpected turns of fate, feline or otherwise.

Such deadlines mean that the most powerful voice in the debate over the fate of Augusta may not be the shareholder’s proxy ballot, but a dwarf leopard’s meek roar.

In May, the BCSC gave Augusta 160 days before it would cease trade its poison pill – a relatively large extension in the context of Canadian M&A. Traditionally, securities commissions cease trade pills after 85 days, a period deemed sufficient for competing bidders to emerge. Although the BCSC has yet to release reasons for the decision, a big part of Augusta’s pitch was that the company needed extra time for the Rosemont permits to go through and to get financing. Now, assuming that HudBay further extends its bid beyond the July 15 cease-trade deadline, the point is moot as the pill is due to be cease traded months before U.S. Fish and Wildlife Services completes its review.

In that case, shareholders of Augusta will be left with little choice but to tender into HudBay’s bid. Shareholders who do not tender risk being left with illiquid securities, a diminished premium, or receiving a delayed premium in the second step of a “squeeze out” merger.

This is made worse by the bid’s lack of a “minimum tender condition” specifying the minimum number of independent shareholders that need to tender into the bid for it to go through. It’s a classic co-ordination problem; even though a recent shareholder vote revealed that approximately 95 per cent of independent shareholders support Augusta’s use of the pill to defend against HudBay’s bid, shareholders will be forced to tender to preserve the value of their investment, even if they think that HudBay is not offering them a good price.

All because of a poor, wayward ocelot.

This doesn’t make much sense. At its core, the HudBay-Augusta story is the story of the struggle for the Rosemont project. HudBay believes that it’s best situated to fund the project and unlock its value, while Augusta’s board believes that it is (or, at least, that HudBay is not). When the bid was announced, shareholders were faced with a simple option: either tender into the HudBay bid or take the risk that the Rosemont project succeeds or fails themselves. On multiple occasions, first by banding together to block HudBay’s friendly bid then by resoundingly approving of Augusta’s pill, Augusta’s shareholders have chosen to bear the risk and reward of the Rosemont project. In the struggle for shareholder hearts and minds between HudBay and Augusta’s board, it seems that Augusta’s board is winning.

Augusta’s board is using the pill not to thwart shareholders’ wishes but to defend shareholders’ choices – the pill has put the board’s proposal and HudBay’s hostile bid on equal footing, giving shareholders the power to decide the fate of the company. Should Augusta’s shareholders decide they want to tender into HudBay’s bid, Canadian law allows shareholders controlling 5 per cent of a company’s shares to call a special meeting to turf the board. If not, Augusta’s board should be able to comply with the wishes of shareholders not to tender through strong takeover defences.

While some trumpet regulators’ willingness to cease trade poison pills as an example of a “shareholder-centric” enforcement regime, where such a ruling operates contrary to shareholders’ wishes, it is nothing of the sort. A truly “shareholder centric” approach to regulation would create an environment that puts incumbents and bidders on equal footing, empowering shareholders to collectively determine the fate of their ownership interest.

A shareholder-centric approach should not be an approach that inevitably favours acquirers by cease trading poison pills that are supported by shareholders, nor should it be an approach that can transform a minor delay in regulatory approval into a significant event.

This problem wouldn’t be so obvious if it wasn’t for the ocelot.

Had the BCSC refused to give Augusta a timeline for cease trading the pill, there would be no risk of Augusta shareholders being coerced into tendering to HudBay. With no timeline, Augusta’s shareholders could choose to bear the risk that the Rosemont project is a favoured breeding ground of this rare, miniature leopard. If shareholders want to hold onto their shares and risk that permitting process goes south and Augusta is unable to obtain financing, they should retain this prerogative for more than 160 days.

No such luck. As it is, the BCSC’s arbitrary deadline may have made what should be a non-event into a significant one.

The lesson from this is that Canada needs a new policy for dealing with hostile takeovers. Otherwise, the fate of Canadian companies rests not with shareholders but with securities commissions or, even worse, ocelots.

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