A long-time BlackBerry Ltd. minority shareholder has asked regulators to require shareholder approval of a debt refinancing that he says could allow Prem Watsa’s Fairfax Financial Holdings Ltd. to gain a controlling stake of the company.
The Waterloo, Ont., data-security company said in a press release on July 22 that it planned to refinance US$605-million of convertible 3.75-per-cent debentures by Sept. 1, ahead of their November maturity date. Fairfax would exchange US$500-million worth of these for new three-year-term 1.75-per-cent notes, while another unnamed institutional investor would fund US$35-million of the new notes.
Dorsey Gardner, a veteran securities analyst from Florida who says he owns about five million BlackBerry shares, is warning that the terms of the new notes would make it more enticing for Fairfax to convert its new notes to equity – adding an additional nearly 13 per cent to its stake, potentially giving it a controlling share of more than 20 per cent.
Earlier this summer, Mr. Gardner approached the Ontario Securities Commission, the New York Stock Exchange and Toronto Stock Exchange operator TMX Group Ltd. to force BlackBerry to seek approval from disinterested shareholders in order to proceed.
The refinancing was first proposed in late June by Mr. Watsa, the chief executive of Fairfax and BlackBerry’s lead director. The company said Mr. Watsa did not take part in negotiations over its details. In a second press release on Aug. 21, BlackBerry said its board and audit and risk management committee approved the new debt issue without minority shareholder approval, because of an Ontario regulation that exempts transactions from such approvals if they are worth less than a quarter of the company’s market capitalization.
On June 30, BlackBerry’s market cap was about US$2.85-billion, a quarter of which is US$713-million; the proposed US$500-million transaction with Fairfax falls below that.
Ralph Shay, a long-time securities lawyer who has been a TSX executive and OSC director, said in an interview that in such a dispute as Mr. Gardner’s, the exemption regulation is a key factor determining whether a vote might be triggered. “If the company can establish that the value of the transaction is under 25 per cent of the market capitalization, then they’ve got that exemption,” Mr. Shay said.
While regulators have discretion to take action if they are concerned, such as a putting a cease-trade order on the transaction until there is a vote, he said, such a move is rare if a company meets the requirements for the regulatory exemption.
However, Mr. Gardner’s lawyer, Brett Seifred of Davies Ward Phillips & Vineberg LLP, said in an interview that the exemption should apply to the combined value of two transactions – both redeeming the original debentures and offering the new notes – which would be worth north of US$1-billion, more than a quarter of BlackBerry’s market cap.
“Why is BlackBerry fighting so hard not to provide shareholder approval?” Mr. Seifred said. “If this is such a good financing deal for the company, and it’s the best they could find, why are they loath to provide the opportunity for disinterested shareholders to have their say on the transaction?”
Mr. Seifred said that in his client’s view, under Toronto Stock Exchange rules, shareholders should have the right to approve the debt transactions because, among other reasons, the new convertible notes could materially affect control of the company, including because of their lower conversion price.
In a press release, Mr. Gardner also said he was concerned that “no actual market check was conducted with regards to financing alternatives.”
In an e-mailed statement Wednesday, BlackBerry spokesperson Karen Clyne said that Mr. Gardner’s concerns are “incorrect in numerous respects,” including that “the refinancing will not materially affect control of BlackBerry,” and that the company’s board did consider an alternative financing option before proceeding. Fairfax did not respond to multiple comment requests.
The OSC said it received Mr. Gardner’s complaints but was unable to comment to avoid affecting the market and to ensure fairness in the complaint process. The TSX and NYSE said they do not comment on individual companies.
BlackBerry acknowledged on Aug. 21 that the transaction would give Fairfax control of 20.3 per cent of shares on a partially diluted basis – but it also said that the new securities would include “blocker” language that would limit Fairfax’s ability to convert debt to equity so that it could only obtain 19.99 per cent control.
BlackBerry also cited a new regulatory exception granted by the NYSE until Sept. 30 that waives the need for shareholder approval for some securities issuances if they are necessary under pandemic circumstances.
The conversion price of the 1.75-per-cent debentures to equity would be US$6 a share, about a 25-per-cent premium atop BlackBerry’s late-July share price, compared with US$10 a share for the original 3.75-per-cent debentures. Mr. Gardner said that the “dramatically reduced” price increases the likelihood of Fairfax strengthening its control of BlackBerry equity.
In its press release, BlackBerry chief executive John Chen said the refinancing would reduce the company’s interest expense by more than 58 per cent and give it greater liquidity.
Fairfax owned about 8.4 per cent of BlackBerry’s outstanding shares on a non-diluted basis as of July 21, the company said, and would control about 16 per cent of common shares if the 3.75-per-cent debentures were converted to equity. But if the refinancing were to go forward, Fairfax could control 20.3 per cent of shares on a partially diluted basis – though the “blocker” clause would effectively prevent that control from surpassing 19.99 per cent.
Mr. Gardner is also concerned about details omitted from the initial July 22 press release – including that the Fairfax shares converted from the new debt offering could total 20.3 per cent control of BlackBerry, and the “blocker” provision that would prevent that – arguing that BlackBerry only provided crucial details a month later, after his complaint.
BlackBerry’s market capitalization was US$2.82-billion after markets closed Thursday. Fairfax offered US$4.7-billion to buy the company in 2013 as BlackBerry struggled to reinvent itself after losing much of its ground in the smartphone market. Though the effort faltered, Fairfax later led a US$1-billion private placement of convertible debt in the company, and has remained a significant shareholder.
In June of this year, the website Street Insider reported that BlackBerry and Fairfax had discussed Fairfax taking over the former data-security company, though neither company confirmed the discussions.
BlackBerry said that the new 1.75-per-cent debentures would not be redeemable by the company prior to maturity, which Mr. Gardner said gave Fairfax a “fait accompli” in acquiring an additional 13 per cent of the company while diluting minority shareholders. The details revealed Aug. 21, including the “blocker” clause, Mr. Gardner said in his press release, were an attempt to “sanitize” the transaction.
With a report from David Milstead.
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