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The board of directors at Inter Pipeline Ltd. said it supported a takeover deal the company signed with Pembina Pipeline Corp., despite an increased offer from Brookfield Infrastructure Partners. That has now led to an unfair tactics dispute with regulatory agency.HO/The Canadian Press

Inter Pipeline Ltd. unfairly favoured Pembina Pipeline Corp. by agreeing to pay it an onerous break fee if Pembina’s takeover offer does not succeed, rival bidder Brookfield Infrastructure Partners LP told a regulatory hearing on Friday, while Inter Pipeline countered that Brookfield’s offer was misleading and deterred other parties from bidding.

The battle between Brookfield, which lodged a hostile bid for Inter Pipeline in February, and Pembina, which made an improved white knight offer in June, has moved to the Alberta Securities Commission after all parties complained about unfair tactics in the takeover fight. Pembina’s bid is supported by Inter Pipeline’s board of directors.

Lawyers for Brookfield argued Tuesday that there should not be a $350-million termination fee attached to Pembina’s friendly takeover offer for Inter Pipeline, which is payable if the Pembina deal does not succeed. If the fee is not removed and Brookfield’s bid is supported by Inter Pipeline shareholders, Brookfield will effectively have to pay it.

Brookfield’s lawyers said the fee is “option chill” that serves as a tax on Inter Pipeline shareholders who could have unlocked value by now, and said Inter Pipeline never consulted with Brookfield about a suitable sum for a break fee.

Inter Pipeline’s lawyers said the break fee was within a typical range, and necessary to attract Pembina’s friendly bid. They countered that Brookfield’s use of securities known as total return swaps to acquire an ownership stake in Inter Pipeline was misleading because the swaps made Brookfield appear to have nearly 20-per-cent voting control in the company, when it actually has just less than 10 per cent.

Brookfield owns a 9.75-per-cent stake in Inter Pipeline’s common shares outright, and has another 9.9-per-cent economic interest in Inter Pipeline through its total return swaps with its counterparty, Bank of Montreal.

Lawyers for Inter Pipeline also referenced court documents that said that BMO would receive a $15-million success fee if Brookfield’s hostile bid won, which, they say, creates a conflict of interest and could sway BMO’s vote as a shareholder of Inter Pipeline.

Inter Pipeline’s lawyers argue Brookfield has always combined the outright ownership with the total return swaps in its materials, which effectively discouraged other bids for Inter Pipeline.

Canadian securities laws require shareholders with a stake of more than 10 per cent to publicly disclose their holding. The rule is meant to prevent creeping takeovers, in which a shareholder amasses a large position covertly and can then effectively control the outcome of a takeover battle. Brookfield has remained below the early warning threshold because it owns just 9.75 per cent of Inter Pipeline.

Brookfield made its takeover offer in February after Inter Pipeline’s stock plummeted because of weak oil prices, along with delays and rising costs at its Heartland Petrochemical Complex northeast of Edmonton. The facility has been under construction for more than three years, and Inter Pipeline struggled to find a partner on the project until Pembina’s offer arrived in June. The facility will convert Alberta propane into polypropylene pellets for manufacturers.

The ASC panel said it expects to deliver an oral decision on Monday.

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