Alberta Securities Commission Cease-Trades Retroactive Poison Pill

Introduction

On November 6, 2024, the Alberta Securities Commission (ASC) issued an order that will serve as an important precedent for the review of shareholder rights plans in the wake of the 2016 amendments to Canada’s takeover bid regime. In Re Greenfire Resources Ltd, the ASC allowed an Application to cease-trade a shareholder rights plan (Rights Plan) that had been adopted by Greenfire Resources Ltd. (Greenfire) in the absence of a formal takeover bid and in direct response to the announcement of an exempt purchase of Greenfire common shares. The ASC also dismissed a Cross-Application that had been brought by Greenfire to cease-trade the share purchase.

Background 

On September 16, 2024, certain funds managed by Waterous Energy Fund Management Corp. (WEF) announced that they had entered into share purchase agreements to acquire 43.3% of Greenfire’s common shares from three Greenfire shareholders (the Share Purchase). As each of the selling shareholders were located outside Canada, the Share Purchase did not constitute a “takeover bid” as defined by National Instrument 62-104 – Take-Over Bids and Issuer Bids (NI 62-104).

Notwithstanding that NI 62-104 did not apply to the Share Purchase, the transaction was structured in a manner consistent with the private agreement exemption set out in subsection 4.2 of NI 62-104. Among other conditions, the parties ensured that Greenfire shares were purchased from not more than five persons and that the value of the consideration paid to each selling shareholder was not greater than 115% of the market price for the Greenfire shares (as calculated in accordance with NI 62-104).

On September 18, 2024, Greenfire adopted the Rights Plan. The Rights Plan prohibited a transfer of 20% or more of the Greenfire shares except pursuant to a “Permitted Bid” (as defined in the Rights Plan). The Rights Plan also targeted the Share Purchase by expressly deeming that WEF was not a beneficial owner of Greenfire shares at the time the Rights Plan was put in place. The effect of the Rights Plan would have been to heavily dilute WEF’s interest in Greenfire upon the closing of the Share Purchase.

Greenfire did not obtain shareholder approval of the Rights Plan. Instead, Greenfire asserted that the Rights Plan was justified on the basis that the Share Purchase would undermine a strategic alternatives process that Greenfire alleged was underway to maximize shareholder value. Greenfire also argued that WEF had improperly engaged in a “creeping” takeover bid for a negative control block of Greenfire shares without the payment of a control premium to all Greenfire shareholders.

WEF brought an Application before the ASC to cease-trade the Rights Plan. In response, Greenfire brought a Cross-Application to cease-trade the Share Purchase. In its Cross-Application and its response to WEF’s Application, Greenfire relied heavily on allegations of misconduct by the principals of two of the selling shareholders who had served on the Greenfire board of directors at the time that the Share Purchase was arranged. Greenfire also argued that the decision of the Greenfire board and its special committee to adopt the Rights Plan should be subject to deference in accordance with the business judgment rule.

ASC Decision and Greenfire’s Response

On November 6, 2024, the ASC issued an order cease-trading the Rights Plan and dismissing Greenfire’s Cross-Application, with reasons to follow. Shortly after the ASC announced its decision, Greenfire adopted a new shareholder rights plan that treated WEF as a beneficial owner of Greenfire shares such that the Rights Plan would not be triggered upon the closing of the Share Purchase.

Reasons to Follow

The ASC’s reasons will offer important guidance about the use of shareholder rights plans under Canada’s modern takeover bid regime, particularly when a plan is adopted tactically in the absence of a formal takeover bid made to all shareholders and without shareholder approval or evidence of shareholder support.

The recalibration of Canada’s takeover bid regime in 2016 incorporated a number of shareholder protections previously available only if imposed in a shareholder rights plan, including a prescribed period of time for a target board to consider a formal takeover bid and find a superior alternative transaction. These amendments largely displaced traditional justifications for a target company’s reliance on a shareholder rights plan.

In recent years, securities regulators have recognized that shareholder rights plans may still serve an important purpose. In Re Greenfire Resources Ltd, the ASC was asked to consider the current permissible limits of shareholder rights plans, particularly where a shareholder rights plan is adopted as a tactical plan intended to prevent an exempt bid transaction, such as the Share Purchase, and without a formal takeover bid for the entire company having been announced or launched.

In its reasons, the ASC may also provide guidance about other important issues that arose during the proceedings. These include the threshold applicable to the exercise by the ASC of its public interest jurisdiction, the relevance of allegations of director misconduct to the exercise of public interest jurisdiction, and the role of expert evidence on issues within the expertise of a specialized tribunal. A further bulletin will follow after the ASC’s reasons are released.

For more information, please contact any of the authors of this bulletin.