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The Alberta Securities Commission ruled in favour of Inter Pipeline and its friendly takeover partner Pembina Pipeline Corp. by raising the percentage of shares that must be tendered to Brookfield’s hostile takeover bid.JASON FRANSON/The Globe and Mail

Alberta’s securities watchdog has delivered a significant blow to Brookfield Infrastructure Partner LP’s dreams of acquiring Inter Pipeline Ltd. , with the regulator modifying shareholder-voting requirements and shooting down Brookfield’s request to quash a termination fee.

The Alberta Securities Commission ruled in favour of Inter Pipeline and its friendly takeover partner Pembina Pipeline Corp. by raising the percentage of shares that must be tendered to Brookfield’s hostile takeover bid. Before the ruling, Brookfield needed the support of a simple majority of Inter Pipeline’s independent shareholders but it will now need the support of 55 per cent under a modified tender condition. In a release Tuesday, Brookfield said the shareholder vote has been extended to Aug 6.

The ASC also dismissed Brookfield’s request to remove a $350-million termination fee that Inter Pipeline has agreed to pay Pembina if their friendly takeover isn’t approved by shareholders. “We were not satisfied that Inter Pipeline engaged in any improper defensive tactics,” the regulator said in an oral ruling.

The ASC’s ruling follows Brookfield’s request for the regulator to rule against the $350-million termination fee, because if Brookfield’s hostile bid is successful, the infrastructure giant would effectively be on the hook for it. Brookfield pledged to boost its takeover price, which is worth $8.47-billion and slightly higher than Pembina’s, if the fee was scrapped.

To counter, Inter Pipeline filed an argument with the ASC that was backed by Pembina, alleging Brookfield was using “coercive tactics” to win the takeover battle. The two companies zeroed in on Brookfield’s use of securities known as total return swaps that give Brookfield a 9.9-per-cent economic interest in Inter Pipeline – but do not provide Brookfield with voting control of that block of shares. These are in addition to Brookfield’s outright ownership of a 9.75-per-cent stake in Inter Pipeline’s common shares.

In Canada, securities laws require any shareholder with a stake of more than 10 per cent to publicly disclose the holding. The rule is designed to prevent creeping takeovers, in which a shareholder quietly amasses a large holding and can then effectively control the outcome of a takeover battle.

Because Brookfield owns just 9.75 per cent outright, it has remained below the early-warning threshold that would require public disclosure. Yet Brookfield has been touting its 9.9-per-cent economic interest through the swaps, and Pembina and Inter Pipeline worried Brookfield scared off rival bidders and also convinced some shareholders that its hostile bid was tough to stop because the perceived voting block is so large.

The ASC agreed. “We find that Brookfield’s use and disclosure relating to the total return swaps was clearly abusive to the Inter Pipeline shareholders and the capital markets, and as such, contrary to the public interest,” the regulator said in its oral ruling, adding that the limited disclosure “adversely affected Inter Pipeline’s shareholders and the Inter Pipeline auction process.” A detailed written ruling will be released in the near future.

Because the use of swaps in a takeover battle is a relatively novel issue, the ASC said its powers were constrained to a few options, one of which was to shoot down Brookfield’s bid altogether. Instead, the regulator increased the minimum tender condition to 55 per cent.

The ASC also demanded more disclosure, asking Brookfield to publish the names of its counterparties and the dates of the swap transactions. Brookfield must also disclose more information about a $15-million success fee it agreed to pay Bank of Montreal, which served as both its financial adviser as well as a swap counterparty.

Brookfield originally launched its hostile bid for Inter Pipeline in early February, and many analysts believed the Canadian infrastructure giant would be the sole bidder. But Pembina surprised many and emerged as a late white knight by submitting an $8.3-billion bid that won the support of Inter Pipeline’s board of directors.

Brookfield initially responded by raising its bid. A few weeks later, the company went so far as to revise the structure of its offer by allowing Inter Pipeline shareholders to opt for an all-cash buyout. Originally, Brookfield had capped how much cash it was willing to pay – which meant the rest would be paid in Brookfield shares.

Inter Pipeline was put in play for a takeover after its stock declined sharply because of weak oil and gas prices and continuing cost overruns and delays at its Heartland Petrochemical Complex, near Edmonton.

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