Break Fees and Take Over Bid Defensive Tactics – The BCSC Aurizon Decision 

publication 

October 2013

Securities Bulletin

The British Columbia Securities Commission (the "BCSC") released the full reasons for its decision regarding the application by Alamos Gold Inc. ("Alamos") to have the shareholder rights plan of Aurizon Mines Ltd. ("Aurizon") cease traded along with the competing white knight bid by Hecla Mining Corporation ("Hecla") in the face of Alamos' hostile bid for Aurizon. The BCSC cease traded the shareholder rights plan, but denied the application to cease trade the Hecla transaction. At issue was the $27.2 million break fee that Aurizon would have to pay to Hecla should Alamos have acquired a certain amount of Aurizon shares. Alamos asked the BCSC to consider this break fee an unusual defensive tactic in the face of a take over bid. The BSCS disagreed and had allowed the break fee to remain and the Hecla transaction to continue. As a result, Alamos withdrew its bid to acquire Aurizon in light of the BCSC decision.

The salient facts are as follows:

  • On January 14, 2013, Alamos offered to acquire all of the shares of Aurizon for $4.65 per share, with the offer left open until February 19, 2013.

  • In response, Aurizon adopted a shareholder rights plan (which was eventually cease traded by the BCSC). As a result, Alamos extended its bid to March 5, 2013.

  • Two days before the Alamos bid deadline, Aurizon and Hecla entered into an arrangement agreement that valued Aurizon shares at $4.75 per share. The arrangement agreement required Aurizon to pay a break fee to Hecla, which equaled about 3.5% of the value of the Hecla transaction, in the event Alamos acquired
    33 1/3% of Aurizon's shares (which would be enough to block the Hecla transaction).

  • In response, Alamos extended the expiry of its offer to March 19, to which Aurizon responded by adopting a second shareholder rights plan.

  • Alamos sought an order from the BCSC to cease trade the second shareholder rights plan and the Hecla transaction unless the break fee was removed.

  • On March 18, 2013 the BCSC cease traded the second shareholder rights plan, but denied the application to cease trade the Hecla transaction.

  • The Alamos offer expired and was not extended. Alamos sited that with the break fee "the cost of acquiring Aurizon is now simply too high".

The BCSC decision contains noteworthy discussion of break fees in the context of a take over bid. Alamos argued that the break fee was an unusual defensive tactic and was included in the Hecla transaction solely to defeat the Alamos bid as it ensured that "the only choice shareholders are able to make is on the Hecla transaction".

Aurizon argued that the inclusion of a break fee was necessary in order to obtain a deal with Hecla and the terms of the Hecla deal were negotiated vigorously. Evidence was presented that the board of Aurizon, in exercising its fiduciary duties reviewed the value of the Hecla transaction as a whole and concluded that the transaction was in the best interest of Aurizon. The BCSC agreed and concluded that the break fee was a "necessary element of an alternative transaction the Aurizon board negotiated for its shareholders to consider, rather than an attempt to frustrate the Alamos offer".

In light of the BCSC decision, Alamos terminated its bid for Aurizon. Alamos claimed that the break fee made the acquisition of Aurizon too costly. The BCSC noted that Alamos did not make this submission in its application materials, nor did Alamos offer any evidence to support this position at the time of the BCSC hearing. The BCSC stated the break fee was within market range for these types of transactions and the 33 1/3% trigger was not unreasonable.

One is left to consider whether the BCSC would have determined the break fee to be an unusual defensive tactic if Alamos had submitted evidence that it would terminate its bid if the break fee was upheld, as the break fee would make the deal too expensive.

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2013