Regulators should get out of takeovers – by Adrian Myers (Globe and Mail – June 12, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

Can an endangered wild animal determine the fate of a hostile takeover bid? In Canada, the answer seems to be “yes.”

On May 22, an ocelot was spotted on the site of Augusta Resource Corp.’s Rosemont copper project and speculation is that this wildlife sighting could be a boon for HudBay Minerals Inc.’s hostile bid for Augusta. The U.S. Fish and Wildlife Service will now have to conduct further analysis of the project site, which means Augusta will likely not receive final development permits until the third quarter.

While this delay may seem minor, it may have a major effect on the outcome of HudBay’s bid by putting final permitting on the wrong side of the British Columbia Securities Commission’s (BCSC) arbitrary poison pill cease-trade deadline.

This reveals a fundamental issue with Canadian securities regulation: Regulators, not shareholders, are the ones who determine whether a hostile takeover succeeds or fails. By forcing companies to abandon takeover defences after arbitrary periods of time, regulators leave shareholders vulnerable not just to hostile bidders but to unexpected turns of fate, feline or otherwise.

Such deadlines mean that the most powerful voice in the debate over the fate of Augusta may not be the shareholder’s proxy ballot, but a dwarf leopard’s meek roar.

In May, the BCSC gave Augusta 160 days before it would cease trade its poison pill – a relatively large extension in the context of Canadian M&A. Traditionally, securities commissions cease trade pills after 85 days, a period deemed sufficient for competing bidders to emerge. Although the BCSC has yet to release reasons for the decision, a big part of Augusta’s pitch was that the company needed extra time for the Rosemont permits to go through and to get financing. Now, assuming that HudBay further extends its bid beyond the July 15 cease-trade deadline, the point is moot as the pill is due to be cease traded months before U.S. Fish and Wildlife Services completes its review.

In that case, shareholders of Augusta will be left with little choice but to tender into HudBay’s bid. Shareholders who do not tender risk being left with illiquid securities, a diminished premium, or receiving a delayed premium in the second step of a “squeeze out” merger.

This is made worse by the bid’s lack of a “minimum tender condition” specifying the minimum number of independent shareholders that need to tender into the bid for it to go through. It’s a classic co-ordination problem; even though a recent shareholder vote revealed that approximately 95 per cent of independent shareholders support Augusta’s use of the pill to defend against HudBay’s bid, shareholders will be forced to tender to preserve the value of their investment, even if they think that HudBay is not offering them a good price.

All because of a poor, wayward ocelot.

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