No going back: ASC’s reasons for blocking retroactive shareholder rights plan poison pill

The Alberta Securities Commission (ASC) has released written reasons following its order last November to cease trade a shareholder rights plan of Greenfire Resources Ltd. (the Rights Plan). The Rights Plan was adopted two days after the announcement that entities managed by Waterous Energy Fund (the WEF Entities) were acquiring 43 percent of Greenfire’s shares through private transactions. The ASC’s decision offers a cautionary tale regarding when poison pills can and should be adopted.

Background

On September 16, 2024, the WEF Entities signed agreements with certain shareholders of Greenfire (the Selling Shareholders) to buy 43 percent of the outstanding shares of Greenfire (the Transaction). The Selling Shareholders included two companies controlled by Greenfire directors, one of whom was the chair of Greenfire’s board of directors. The Transaction was structured to comply with the private agreement exemption of National Instrument 62-104 – Take-Over Bids and Issuer Bids, which allows a limited control premium to be paid without all target shareholders being involved in certain circumstances.

Prior to the announcement of the Transaction, Greenfire’s board was aware of the WEF Entities’ interest in purchasing shares from some of the Selling Shareholders and that at least one Selling Shareholder had expressed a desire to sell. Greenfire’s board was also in the initial stages of a strategic alternatives process and while it had considered whether to impose a trading blackout, had ultimately decided one was not necessary because there was no material non-public information. Although it had been previously discussed, Greenfire had not adopted a strategic shareholder rights plan, and there were no lock-up agreements preventing any of the Selling Shareholders from selling their Greenfire shares when the Transaction was announced.

On September 18, 2024, after the Transaction was announced but before it was completed, Greenfire’s board approved the Rights Plan with retroactive effect and without shareholder approval. The Rights Plan would be triggered if any party (including the WEF Entities) acquired more than 20 percent of the shares, effectively blocking the Transaction.

Applications before the ASC

The WEF Entities and the Selling Shareholders applied to the ASC for a cease-trade order against the Rights Plan, arguing it was abusive. Greenfire brought a cross-application to restrain the share transfers contemplated by the Transaction and alleged its own selling directors had breached their fiduciary duties.

Decision

The ASC granted the WEF Entities and Selling Shareholders’ application and dismissed Greenfire’s cross-application. Both decisions were made under the ASC’s public interest jurisdiction, applying a “clearly abusive standard” – which looks at whether the conduct at issue exploited a loophole in securities law in a way that could harm the public interest or integrity of the markets. Although the clearly abusive standard was applied, the panel noted it would have reached the same conclusions if it had applied the less strict “animating principles” standard.

In its extensive written reasons, the panel held:

1. Applicability of the take-over bid regime: The Transaction was not a take-over bid under Alberta securities legislation even though it involved the acquisition of more than 20 percent of Greenfire’s shares, because the purchasers were not located in Canada. Nevertheless, the ASC continued its analysis and determined that the Transaction did not infringe on either the letter or spirit of the Canadian take-over bid regime and complied with the private agreement exemption. In addition, the ASC found that there was no evidence the Transaction was abusive, coercive, or unfair to minority shareholders.
2. Retroactive effect of the Rights Plan: The retroactive implementation of the Rights Plan as a defensive measure was abusive and would have prevented completion of the lawful proposed Transaction as intended. Allowing the Rights Plan to stand would send a message that issuers could implement a shareholder rights plan at any time to upend completed or nearly completed transactions, even where those transactions fully comply with the letter and spirit of the law. Doing so would undermine confidence and predictability in the capital markets.
3. Reasonable expectations: Market participants including Greenfire’s board and shareholders would have had a reasonable expectation that the Selling Shareholders may sell shares in an exempt transaction where there were no restrictions or blackouts in place against doing so. Further, the market would expect that a nearly completed and lawful transaction would be upheld by the ASC. These reasonable expectations were informed by Greenfire’s prior awareness of the contemplated transaction and the fact Greenfire had several months to consider and implement a shareholder rights plan or other restrictions to prevent transactions or a hostile take-over bid but had not done so.
4. Business judgment rule: Greenfire’s board was not entitled to deference under the business judgment rule for its decision to implement the Rights Plan. Greenfire argued the board was exercising its business judgment when implementing the Rights Plan because it considered the plan necessary as a defence to a take-over bid. However, because the Rights Plan would have retroactively affected a private share transaction that fell within the letter and spirit of the Canadian take-over bid regime, the implementation of the Rights Plan was not within the range of reasonable alternatives available to the board in exercising its business judgment.
5. Fiduciary duties: The actions of the Greenfire directors that controlled two of the Selling Shareholders were neither abusive nor contrary to the public interest, and the directors were not in breach of their fiduciary duties. The ASC confirmed that as shareholders, directors are permitted to buy and sell securities for their own benefit, provided they comply with any legal restrictions such as those related to insider trading or taking corporate opportunities.

Takeaways

The ASC panel was clear in its finding that the Rights Plan's retroactive, targeted effect on the otherwise lawful Transaction was abusive and could not be justified under the business judgment rule. The ASC panel emphasized throughout its reasons that an ad hoc restriction on share transfers, such as the one imposed by the Rights Plan at issue, would undermine market predictability and run contrary to the existing regulatory framework governing take-over bids.

There are often good reasons to have shareholder rights plans in place, which the ASC affirmed in its decision. However, it is typically better for companies to put in place a strategic rights plan before any issues, rather than implementing it as a tactical plan after the horse has left the barn. Shareholder rights plans with retroactive effect risk being struck down, and boards cannot rely on retroactive poison pills to rewrite otherwise lawful deals.