Standstill, Confidentiality and the “Just Say No” Defence
- By Pilot Law LLP
Note: In Canada, unlike the US, the ability of a board to “just say no” to an unsolicited hostile bid has not been generally accepted. But there maybe ways for a board to “say no” instead of “just saying no”.)
It’s a Friday evening in mid-December. Peoples’ thoughts are on the holidays. It’s the doldrums and tax loss selling is dominating the equity markets. Perfect time to launch a hostile bid!
So when you get the letter and call (“We’d like you to accept our friendly bid by Sunday, and if you don’t, we are going public Monday AM”), what do you do?
Your financial and legal advisors may tell you: “Time to put the company in play. Appoint a special committee. Open a data room. Start an auction. You have no option. You cannot “Just Say No.”
But let’s wait a minute here. There are at least three things you should do first before taking that advice:
1. Do you have a standstill agreement¹ with the bidder? If you do, is it still in force? If so, get to court right away and get an injunction to stop the bid. Even if you have given no confidential information to the other side, the standstill agreement may still be enforceable2 . And you may be able to enforce the standstill covenant even if the agreement has expired3.
2. Do you have a confidentiality agreement (CA) with the bidder, but no standstill agreement? A standstill agreement removes the need to prove that the information provided was confidential, and that the confidential information was used in the bid4. But if you have provided confidential information to the bidder, you may be able to enjoin the bid, even without a standstill agreement if you can prove that confidential information was used in contravention of the CA. But you have to pay close attention to the wording of the CA. Parties receiving confidential information are typically permitted to use that information for a defined purpose, such as for a “financing transaction”, a “joint venture”, an “offtake agreement” or a “negotiated transaction”. But if the permitted use includes a “business combination”, then the receiving party may be able to use that information to make a bid directly to the disclosing party’s shareholders. The confidentiality agreement will be of no use to stop the bid.
3. Do you suspect that an advisor to the bidder has your confidential information and that it has assisted the bidder? This third question may often be overlooked. It is not uncommon for financial advisors to mining companies to act for many clients, and these clients could quite easily come into conflict with each other. In Gold Reserve v. Rusoro5, an advisor to Rusoro, Endeavour Financial Corporation, was also an advisor to Gold Reserve. Gold Reserve successfully enjoined the bid from Rusoro on the basis that Endeavour had confidential information of Gold Reserve that it had passed on to Rusoro. The judge stated:
“Endeavour agreed not to misuse Gold Reserve’s confidential information. It is obliged to honour that promise. Endeavour must not be permitted to make any use thereof, including acting as an advisor to any person making a hostile takeover bid for Gold Reserve. For the reasons given, an Order will issue… granting an interlocutory injunction restraining Rusoro from proceeding with any hostile takeover bid to acquire the shares of Gold Reserve…”
Finally, you may ask why would you want to stop a hostile bid, other than to entrench management? Surely it can’t be in the best interests of the shareholders to stop an offer being made to them? The judge in Gold Reserve v. Rusoro summarized this issue as follows:
“Rusoro and Endeavour have created an unfair imbalance of knowledge. They have knowledge of confidential information which other potential bidders do not have. Given the uneven knowledge base, other potential bidders, and Gold Reserve’s own shareholders, are all at an unfair disadvantage relative to Rusoro and Endeavour. Mr. Stanley M. D. Beck, former Chair of the Ontario Securities Commission has given expert opinion evidence on normal commercial practice with respect to standstill agreements, emphasizing that absent a level playing field, in terms of equal access to confidential information, a corporation’s shareholders are not likely to achieve an active auction that maximizes value.”
There you have it. You may have the option to “say no”, even if you can’t “just say no”.
Pilot Law LLP
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¹ (Sample Standstill Agreement) The Receiving Party will not, directly or indirectly, alone, jointly or in concert with any other Person (including by providing financing to any other Person), without the express prior written consent of Disclosing Party, which consent will be subject to and upon the terms determined under the sole discretion of the board of directors of the Disclosing Party, use the Confidential Information, or take any action based upon the Confidential Information, to: (Sample Standstill Agreement) The Receiving Party will not, directly or indirectly, alone, jointly or in concert with any other Person (including by providing financing to any other Person), without the express prior written consent of Disclosing Party, which consent will be subject to and upon the terms determined under the sole discretion of the board of directors of the Disclosing Party, use the Confidential Information, or take any action based upon the Confidential Information, to:
(i) initiate or maintain contact (other than contact made in the ordinary course of business) with any Representative of the Disclosing Party regarding the business, operations, assets, liabilities, prospects or finances of the Disclosing Party;
(ii) propose, offer, negotiate or agree to:
(iii) purchase, transfer or otherwise acquire any voting securities of the Disclosing Party;
(iv) acquire a material portion of the assets or property of the Disclosing Party or any of its Affiliates;
(v) enter into any merger, arrangement, amalgamation or other business combination involving the Disclosing Party; or
(vi) participate in any recapitalization, restructuring, liquidation, dissolution, or other extraordinary transaction with respect to the Disclosing Party or any of its Affiliates;
(vii) “solicit”, or participate with any Person in the “solicitation” of any “proxies” (as such terms are defined in the Securities Act (Ontario)) in order to vote, advise or influence any Person with respect to the voting of any securities of the Disclosing Party;
(viii) otherwise attempt to control or to influence the management or board of directors of the Disclosing Party;
(ix) make any public or private disclosure of any consideration, intention, plan or arrangement inconsistent with any of the foregoing, except as required by Applicable Law; or(x) advise, assist or encourage any other Person in connection with any of the foregoing.
This Agreement does not prohibit:
(i) the consummation of a Proposed Transaction between the Parties;
(ii) the Receiving Party from engaging in discussions with financial institutions concerning financing with respect to a Proposed Transaction, provided that such discussions are otherwise conducted in accordance with this Agreement;
(iii) the negotiation and discussion of a Proposed Transaction; or
(iv) the Receiving Party from making a confidential proposal to the Disclosing Party’s board of directors.
2 Aurizon Mines Ltd. v. Northgate Minerals Corp.(2006), 19 B.L.R. (4th) 171 (B.C. Court of Appeal)
3 Certicom Corp. v. Research in Motion Limited (2009), 94 O.R. 3d 511 (Sup. Ct. J.)
4 Aurizon Mines Ltd. v. Northgate Minerals Corp., supra.
5 Gold Reserve Inc. v. Rusoro Mining Ltd., (2009) O.J. No. 533, 54 B.L.R. (4th) 226, 2009 CanLII 4855 (ON SC), 2009 CanLII 4855 (S.C.J.) [Leave to appeal refused  O.J. No. 1442, 251 O.A.C. 127, 2009 CanLII 16291 (ON SC), 2009 CanLII 16291, 176 A.C.W.S. (3d) 832 (S.C.J.)]