Canadians develop taste for poison pill concept

As they seek to prevent themselves from being the victims of unwanted takeovers, 10 Canadian companies (including five from the mining sector) have introduced some kind of poison pill mechanism. Falconbridge Ltd. (TSE), Aur Resources (TSE), Pegasus Gold (TSE) and Agnico-Eagle Mines (TSE) are among the other Canadian mining companies which have voted to adopt the mechanism to prevent them from being taken over without the consent of their directors.

Under a typical rights plan, when someone acquires more than the specified threshold of outstanding common shares, shareholders are permitted to buy shares of the company at a price equal to half of the target company’s prevailing market price. Details, however, vary from company to company.

The mechanics of the pill make it financially difficult for a bidder to challenge the threshold without attacking the legality of the rights plan.

While critics argue that poison pills put too much power in the directors’ hands, supporters say that under the right circumstances they are an effective means of generating value for shareholders.

Falconbridge, for example, adopted a plan that prevented Noranda Inc. (TSE) from pursuing a creeping takeover strategy on the open market, by forcing Noranda to make a bid for all of the nickel miners shares.

As demonstrated by Aur Resources recently, rights plans can also be used to protect a private placement agreement until the placement has been completed.

Traditionally, Canadians have been slow to develop a taste for the poison pill concept because the shareholder profile of most Canadian companies is different from their counterparts in the U.S.

“In Canada, there are very few companies which don’t have a controlling shareholder,” said Osler, Hoskin & Harcourt of Toronto lawyer Peter Dey. If the major shareholder doesn’t want to sell his shares, the bid can’t go through.

By contrast many more U.S. companies are vulnerable to a hostile takeover because they don’t have a shareholder with more than 5% of the company’s outstanding shares. It explains why over 1,000 companies south of the border have adopted the poison pill mechanism since the concept was created by a New York law firm in 1985, said Dey, who was among a panel of speakers at a recent “Poison Pill” forum in Toronto.

While the Ontario Securities Commission supports the concept as long as a given rights plan receives shareholder approval, it hasn’t indicated a maximum or minimum time frame during which shareholders should be able to vote their rights.

The Inco plan, for example, which was accompanied by a $10 (US) per share dividend, prevents a bidder from taking a run at the Toronto-based nickel miner without board approval until 1998.

Although the plan was approved by more than 70% of the company’s shareholders, the 10-year time frame allows Inco directors to turn down a bid that shareholders may favor, according to William Allen, president of Toronto-based Allenvest Group.

To prevent management from using a poison pill to entrench itself, any rights plan should expire 90 days after a bid is announced, says Allen. The 90-day period, he argues, would allow the board an opportunity to solicit a higher offer, and after that the bid should be allowed to go forward so that shareholders can decide whether or not to accept it.

But according to Dey, the 90-day concept is unnecessary and puts a straightjacket on the board who may be dealing with a syndicate rather than a single bidder. “The board is the logical group to bargain on behalf of shareholders,” he said.

To soften the impact of the adoption of a rights plan and to encourage its shareholders to vote in favor of it without paying them a special dividend, Pegasus Gold introduced the concept of a “permitted bid” into its rights plan.

Under the Pegasus rights plan, a permitted bid is a takeover bid made to all shareholders as long as it is accompanied by a fairness opinion of an investment dealer and approval of 50% of Pegasus outstanding shares not already owned by the bidder at a special shareholders’ meeting.

As a result, if a takeover bid is made for Pegasus, the company will have about 100 days to find a better deal for shareholders before the bidder learns whether or not its bid has been approved and thus labelled a “permitted bid.”

A number of major mining companies, including the big gold producers like Placer Dome (TSE) and Lac Minerals (TSE), have yet to adopt a rights plan. They, therefore, remain vulnerable takeover targets, says lawyer Wesley Voorheis of Davies, Ward & Beck of Toronto.

But the trend toward adopting rights plans represents a change in the attitude of Canadian shareholders, he says. A growing number seem prepared to let an elected board of directors represent their interests in the event that the company in which they hold shares becomes a takeover target, he adds.

“This type of thinking will become more pervasive in an atmosphere of increasing market volatility.”

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