The notion that the highest bidder ought to win when a Canadian company is up for sale is yet again facing a challenge.
Four years after the Supreme Court of Canada ruled in the BCE Inc. takeover drama that boards of directors could not simply seek the highest bid to the exclusion of other factors, the highest court is now being asked whether it’s appropriate to further curtail the ability of boards to use their judgment on how best to drum up a bigger price.
In the messy matter of the hostile takeover battle for pulp-and-paper maker Fibrek Inc., the Quebec Court of Appeal, upholding a lower tribunal’s decision, has sharply limited the ability of Fibrek to help the highest offer for the company to succeed.
Fibrek wants to appeal that decision to the Supreme Court. The high court is now considering the request to hear the case on an accelerated timetable, reflecting the fact that a deal hangs in the balance.
BCE was a $35-billion transaction. Fibrek is less than $200-million. But when it comes to setting court precedents for future deals, size doesn’t matter.
If the Supreme Court allows the Fibrek decision to stand, it will continue what the court started in BCE: making it tougher for boards of target companies to do their job. Both cases revolve around questions of the primacy of the board’s fiduciary duty to get the highest bid, and what constrains that.
In BCE, the court amended one of the long-held rules that govern corporate auctions. The court said that target boards could no longer simply focus on getting top dollar for shareholders; they had to consider the effect of a sale on other stakeholders, such as bondholders and employees.
In Fibrek, the top court must decide whether securities regulators looking at the actions of target boards need to give deference to the directors of the target company as they seek a higher bid, so long as they are acting legally and in good faith. This so-called “business judgment rule” has long meant that courts have been reluctant to criticize business decisions, so long as they do not contravene other regulations.
Fibrek argues that Quebec securities regulators and the provincial Court of Appeal didn’t give any deference to the decisions made in the name of fiduciary duty as the company sought a white knight, when they should have.
“There exists a nationwide controversy as to the level of consideration and deference that is owed by the securities commissions to boards of directors and their business judgment in the context of defensive measures taken by a board of directors in response to a take-over bid,” Fibrek said in its application for leave to appeal to the Supreme Court, adding that “it is essential for this honourable court to offer guidance.”
The hostile bidder, AbitibiBowater Inc., disagrees, of course. Abitibi’s response was to tell the court that there’s no question of national importance that needs to be addressed.
The Fibrek situation began late last year when Abitibi launched a hostile takeover bid for Fibrek. The bid from Abitibi (which is in the process of changing its name to Resolute Forest Products) was for $1 a share.
The Abitibi bid had the backing of some key shareholders of Fibrek. They included Fairfax Financial Holdings, which was also a large shareholder in Abitibi and so would benefit from Abitibi buying Fibrek for as little as possible.
The shareholder support for Abitibi out of the gate made it tough for any other bid to succeed, but Fibrek’s board set out to try to drum one up anyway. The board found a white knight, in the form of Mercer International, which is now offering $1.40 a share.
Mercer demanded help from Fibrek, in the form of a batch of warrants to purchase shares at $1 apiece that would enable Mercer to level the playing field with Abitibi and the shareholders who had pledged to support the Abitibi offer. Without the share issuance, Mercer’s bid would have no hope.
Abitibi asked the securities tribunal in Quebec to stop the share issue. The tribunal did. Fibrek appealed that in court and won. Abitibi then turned to the Court of Appeal, which threw out the lower-court ruling and once again stopped the share issue. That forced Fibrek to seek an appeal to the Supreme Court.
The Quebec tribunal, and the appeal court, said the share-issue financing was offside because it was clearly a tactical move to stop Abitibi, and Fibrek didn’t really need the money. The evidence showed that Fibrek was hardly in dire straights, but a little extra cash can always come in handy.
Surely the decision of when to raise money is the purview of a company’s management, not the courts. More importantly, even if the tactic were a defensive measure to stop a hostile bid, it wasn’t aimed at entrenching management. It was aimed at selling the company for even more to another bidder.
In essence, the Quebec rulings said that the Fibrek board wasn’t owed any deference for its business judgment when it decided to enter into a transaction with Mercer that brought a lot more money to shareholders.
If the Supreme Court allows the Quebec rulings in Fibrek to stand, Canada will be moving further from the long-standing regime that boards have a primary duty to maximize shareholder value in a takeover, whatever way they can. The losers will be shareholders.