Laurel Hill’s Case Study in Canada’s First Hostile Cannabis Takeover
After a hard-fought, complex and headline-grabbing hostile takeover, Aurora Cannabis Inc. (“Aurora”) has now, pending completion of the compulsory acquisition process, completed its $1.1B acquisition of CanniMed Therapeutics Inc. (“CanniMed”). While the soon-to-be combined company and its shareholders now look forward to what promises to be an exciting journey ahead as Canada prepares for recreational cannabis legalization later this year, we wanted to take the opportunity to look back and study this transaction – Canada’s first unsolicited takeover bid in the cannabis space.
This was one of Canada’s most fascinating hostile takeovers in recent years. While it had many of the usual hallmarks of hostile takeovers, including heated charges of ‘opportunism’ and ‘entrenchment’ from both sides, it was most noteworthy for:
- The alternative CanniMed acquisition of Newstrike Resources Ltd. (“Newstrike”) available to CanniMed shareholders;
- CanniMed’s multiple defenses, including its tactical shareholder rights plan;
- Regulatory challenges by both sides – and the resulting rulings;
- Aurora’s capped share exchange offer;
- Cannabis stock price volatility after the launch of the bid and how it influenced shareholder support for the bid and the alternative Newstrike deal; and, of course,
- The ‘brand’ involvement of one of Canada’s most iconic bands, The Tragically Hip, a shareholder and supporter of Newstrike pursuant to a strategic partnership.
- This takeover also played out in the context of an industry which many believe is ripe for consolidation. Indeed, since the launch of the bid, Aphria Inc. (“Aphria”) struck and closed its own acquisition agreement with Nuuvera Inc. (“Nuuvera”) in a deal valuing Nuuvera at approximately $500M.
Key Takeaways – Executive Summary
We cover a lot of ground and detail in this Case Study, but we are pleased to provide a preview of our four key takeaways for future unsolicited bids, as follows:
- Bidders and targets need to stay in the NI 62-104 ‘lane’: The regulators made several important rulings related to the new takeover bid rules set out in National Instrument NI 62-104 (“NI 62-104”) in connection with a tactical shareholder rights plan, “jointly or in concert” status, the 5% open market purchase exemption and the 105-day minimum bid period. In all cases, they ruled against the tactics and defenses that conflicted with or attempted to short-cut the new takeover bid rules and commented that, in the future, parties should expect that the letter and the spirit of NI 62-104 will continue to be upheld, absent extenuating circumstances.
- Lock-up agreements are supported by regulators and can be critical to bidder success: The regulators were very clear in this case that they are generally supportive of lock-up agreements, whether “hard” or “soft”, especially given the bidder’s need during the lengthy 105-day minimum bid period for deal certainty, and targets will have their work cut out for them to convince regulators of any “jointly or in concert” relationships that would result in an “insider bid” determination.
- Targets will continue to employ unique and creative defenses: While targets will need to remain mindful of staying in the NI 62-104 ‘lane’, as noted above, we expect that targets who are unwilling partners will continue to come up with unique and sometimes creative defenses, as evidenced in this and other cases.
- Share exchanges remain winning approaches: Following on another successful hostile bid involving a share exchange last year, share exchanges have again been proven to be winning approaches for bidders under the new takeover bid regime, provided of course that there is both a compelling strategic rationale and a compelling premium to incentivize target company shareholders to continue as shareholders in the merged company.
In this Case Study, we will:
- Provide background and a timeline of material events;
- Summarize and analyze the regulatory challenges and rulings and other noteworthy dynamics and developments; and
- Discuss (in greater detail) our four key takeaways for future unsolicited bids.
Background and Timeline
Date and Key Messaging Content
- Aurora announces that on Nov 13-17 it submitted an acquisition proposal to the CanniMed board proposing an all-share exchange valued at capped $24.00 in Aurora shares per CanniMed share, valuing CanniMed at approximately $586M;
- Cites irrevocable lock-up agreements with shareholders representing 38% of CanniMed outstanding shares (“Locked-Up Shareholders”), Locked-Up Shareholders “are precluded from tendering or voting any of their CanniMed common shares in favour of any other acquisition proposal relating to CanniMed and are required to vote against other acquisition proposals or actions which might prevent, delay or frustrate Aurora’s proposal”;
- Requests response by Nov 17-17 failing which it intends to commence a formal takeover bid.
- CanniMed jointly announces with Newstrike that they have executed an Arrangement Agreement (“Arrangement”) on the basis of 0.033 CanniMed shares per Newstrike share, valuing Newstrike at approximately $197M;
- Arrangement may be terminated by either party “in favour of an unsolicited superior proposal, subject to the payment of a termination fee of C$5 million by Newstrike to CanniMed or C$9.5 million by CanniMed to Newstrike”;
- Arrangement is subject to (among other things) approval of shareholders of both companies (in the case of CanniMed, a simple majority, excluding certain insiders) at meetings to be scheduled in Jan-18.
- Aurora announces that it has formally commenced its offer to purchase CanniMed (“Offer”) on the basis of 4.52586207 Aurora shares per CanniMed share, subject to a maximum of $24.00 per CanniMed share;
- Offer represents 56.9% premium over CanniMed’s Nov 14-17 closing price and a 74.7% premium over the VWAP for CanniMed shares for the last 20 trading days ended Nov 14-17;
- Offer remains open until 11:59 (PT) on Mar 9-18;
- Offer is subject to (among other things) acceptance by at least 66 2/3% of CanniMed shares and termination of the Arrangement;
- States that it in light of the proposed Arrangement it has applied to the Financial and Consumer Affairs Authority of Saskatchewan (“FCAAS”) and the Ontario Securities Commission (“OSC”) for an order to reduce the 105-day minimum deposit period (as required under NI 62-104) for the Offer.
- CanniMed announces that in response to the Offer it has adopted a Shareholder Rights Plan (“Rights Plan”);
- States that it “is very concerned that by secretly obtaining lock-up agreements from four of CanniMed’s shareholders, Aurora may be depriving shareholders of their ability to vote in respect of the Newstrike deal or may coerce them to accept the Hostile Bid”.
- Aurora complains of CanniMed’s “oppressive” Rights Plan and that it will seek an application for a hearing before the FCAAS and the OSC to strike it down.
- CanniMed announces:
o That it has applied to the FCAAS and the OSC for orders that the Offer is an “insider bid” on the basis that the Locked-Up Shareholders have acted “jointly and in concert with Aurora”;
o That it will oppose Aurora’s attempt before the FCAAS and the OSC to shorten the minimum bid period;
o That it has submitted a cross-application for an order that would deny Aurora the use of the exemption available under NI 62-104 to purchase up to 5% of CanniMed shares on the open market during the bid period;
o That it has filed and is mailing its Directors’ Circular recommending shareholders reject the Offer;
o That it has filed and is mailing its proxy circular recommending shareholders vote in favour of the Arrangement.
Further to hearings on Dec 20&21-17 FCAAS and OSC issue joint orders:
o Cease-trading the Rights Plan;
o Requiring Aurora (on or before Jan 12-18) to amend its news releases of Nov 14-17 and Nov 20-17 and the takeover bid circular dated Nov 24-17 to include certain additional disclosure relating to, among other things, “the circumstances under which, and the means by which, Aurora became aware that the board of CanniMed would be meeting on November 13, 2017 to, among other things, consider for approval an arrangement agreement entered into between CanniMed and Newstrike Resources Limited, which information the Commission has determined would reasonably be expected to affect the decision of CanniMed’s shareholders to accept or reject the Aurora Offer”;
o Denying Aurora’s application to shorten the minimum bid period;
o Denying CanniMed’s application to deem the Offer an “insider bid”;
o Denying CanniMed’s application to prevent Aurora the use of the NI 62-104 open market purchase exemption.
Aurora amends and restates its Nov 14-17 and Nov 20-17 press releases (and issues a notice variation to its takeover bid circular dated Nov 24-17) to incorporate the additional disclosure as ordered by the FCAAS and the OSC.
- CanniMed announces that it is postponing its special meeting originally scheduled for Jan 23-18 to Jan 25-18 to approve the issuance of CanniMed shares in connection with the Arrangement “to allow discussions regarding a possible transaction with Aurora” and that CanniMed and Aurora have each agreed to a standstill until Jan 21-18 at 11:59 pm (EST).
- CanniMed announces on each of Jan 22-18 and Jan 23-18 “that it is continuing to discuss terms of a possible transaction with Aurora” and that CanniMed and Aurora have each agreed to extend the standstill until each of Jan 22-18 and Jan 23-18, respectively, at 5:00 pm (EST).
- Aurora and CanniMed jointly announce they have agreed to terms on a friendly transaction:
o Aurora will make a “New Offer” consisting of “3.4 Aurora shares or a combination of cash and shares at the election of each CanniMed Shareholder, subject to pro-ration with the maximum aggregate cash consideration of $140 million”, equates to “$43.00 [per CanniMed share], representing a 181% premium over the closing price of CanniMed Shares on November 14, 2017, the last day prior to the public disclosure of Aurora’s intention to pursue a combination with CanniMed, and a 79% increase to the previous offer Cap Price of $24.00”;
o Aurora and CanniMed have executed a Support Agreement “whereby the Board of Directors and the Special Committee of the CanniMed Board have agreed to support” the “New Offer” and to recommend to CanniMed shareholders in an amended directors’ circular that they tender to the “New Offer”;
o the “New Offer” has the support of the Locked-up Shareholders representing 36% (reduced from 38% at start of the Offer) of the CanniMed shares and the support of certain CanniMed shareholders, including CanniMed’s CEO, representing approx. 15% of CanniMed shares;
o CanniMed and Newstrike have terminated the Arrangement, CanniMed has paid Newstrike the $9.5M termination fee and the CanniMed special meeting has been cancelled.
Aurora announces that approx. 70.66% of the outstanding CanniMed Shares have been tendered to the Offer, that all of the conditions to the Offer have been met, that it will take up and pay for the tendered shares and that it will extend the Offer by 15 days until 11:59 (PT) on Mar 25-18.
- Aurora announces that further to its take up pursuant to the expiry of its extension of the Offer, it now owns 95.9% of CanniMed and it intends to acquire the remaining shares through a compulsory acquisition on the same terms as under the Offer.
Regulatory Challenges, Rulings and Other Dynamics and Developments
The Rights Plan:
- In response to the Aurora Offer, CanniMed announced in its Nov 28-17 press release that it had adopted a Rights Plan which “prevents Aurora from acquiring any CanniMed shares other than those tendered to its Hostile Bid or from entering into any lock-up agreements in respect of its Hostile Bid other than those it has already entered into and filed on SEDAR (the “Current Lock-up Agreements”) in order to (i) encourage fair treatment of the shareholders of the Company in connection with any other potential acquisition transaction of the Company, (ii) ensure that CMED shareholders have the opportunity to vote on the previously announced acquisition of Newstrike Resources Ltd. (“Newstrike”) by the Company, and (iii) ensure that shareholders are not coerced into tendering to the Hostile Bid”. The Rights Plan was criticized by Aurora who stated in their Nov 30-17 press release that it “is oppressive and serves only to thwart Aurora’s compelling offer” and is “unprecedented in its scope and scale”. The Rights Plan was ultimately cease-traded by the FCAAS and the OSC.
- In the FCAAS and OSC joint reasons for their orders dated Mar 15-18 (“Reasons”), the regulators noted that the Rights Plan was clearly a defensive tactic intended to protect the Arrangement and thwart the Offer and that there was no evidence that CanniMed sought additional time to conduct an auction or allow for higher bids to emerge. On the contrary, they noted that the Arrangement specifically prohibited CanniMed from soliciting other transactions and that there was no evidence of higher bids emerging in the five weeks from Aurora’s announcement of its intention to make an offer and the regulatory hearing. They commented: “As things stand, shareholder choice is being promoted without the operation of the Rights Plan since CanniMed shareholders will decide on whether the Newstrike transaction will proceed well before the Aurora Offer ends, since we have declined to shorten the 105-day deposit period” and “The rebalancing of the take-over bid regime by mandating the 105-day deposit period, the minimum tender condition and the mandatory 10-day extension… provides sufficient protections in this case for shareholder choice to occur while allowing bids to be made and management to respond to such bids in an appropriately predictable and even-handed manner”.
- The regulators also reinforced the legitimacy of lock-ups in the context of hostile bids, especially in light of the longer bid period pursuant to NI 62-104, and criticized the Rights Plan for its assertion that Aurora was deemed the beneficial owner of the shares held by the Locked-Up Shareholders. They commented: “If tactical shareholder rights plans could, as a general matter, operate to prevent lock-ups and permitted market purchases, the take-over bid regime would be made far less predictable and the planning and implementation of shareholder value-enhancing transactions made more difficult or inappropriately discouraged by such intervention” and “such plans should not generally be utilized to deem a bidder to beneficially own locked-up shares in circumstances where they would not be deemed to be joint actors under the applicable rules”.
- The regulators also took exception to the Rights Plan reproducing certain existing features of NI 62-104 while also including certain variations to the new rules. For example, while the Rights Plan replicated the 105-day minimum deposit period, it did not provide for a reduction in the case of an alternative bid and it amended the NI 62-104 mandatory 10-day extension to 10 business days. They stated: “Reproducing these features, with variations in how the requirements are to be satisfied, would generate confusion and in this case serve no useful purpose”.
- Finally, they concluded: “It will be a rare case in which a tactical plan will be permitted to interfere with the established features of the take-over bid regime such as the opportunity for bidders and shareholders to make decisions in their own interests regarding whether to tender to a bid by entering into lock-up agreements of the kind under consideration in this case”.
The “jointly or in concert” and “insider bid” challenge:
- As detailed in the FCAAS and OSC Reasons, the CanniMed Special Committee sought a regulatory order that Aurora and the Locked-Up Shareholders were “joint actors” per Multilateral Instrument 61-101 (“MI 61-101”) and were “acting jointly or in concert” per NI 62-104, ‘relationships’ that involve identical considerations and, if established, would deem the Offer to be an “insider bid” and which would prevent Aurora from including the shares held by the Locked-Up Shareholders in its calculation of whether it had met the NI 62-104 minimum 50% tender condition and which would also require Aurora to obtain a formal valuation, among other things. The CanniMed Special Committee argued that the terms of the lock-up agreements and the circumstances that led to their execution and to the Offer gave rise to such a conclusion.
- In their Reasons, the regulators first noted an important test for determining “jointly or in concert” status, namely that “a person is deemed to be acting jointly or in concert with an offeror if, as a result of any agreement, commitment or understanding with the offeror or any other person acting jointly or in concert with the offeror, that person acquires or offers to acquire securities of the same class as those subject to the offer”. In other words, the parties have to be on the “same side of the transaction”.
- The regulators carefully considered the lock-up agreements, first noting that, as per NI 62-104, “an agreement or understanding to tender securities to a bid does not, in and of itself, lead to a determination of acting jointly or in concert” and further that NI 62-104 “does not distinguish between “hard” lock-up agreements, as were entered into this case, in which a shareholder is committed to tender to a bid as long as a threshold price is achieved, from “soft” lock-up agreements where the shareholder is permitted to tender to a superior offer”. As such, they could not “conclude that the Locked-Up Shareholders are acting jointly or in concert solely on the basis of the strong commitments to tender set out in the lock-up agreements” and furthermore “we did not find the lock-up agreements objectionable in this case”. They also commented in respect of the legitimacy of lock-up agreements generally: “Lock-up agreements are an established practice in M&A transactions that allow investors to pursue their financial interests. Such agreements can also help facilitate transactions by providing a degree of deal certainty to a bidder, who might otherwise be deterred from making a bid that is advantageous to all shareholders”.
- In respect of the voting provisions set out in the lock-up agreements that required the Locked-Up Shareholders to vote against the Arrangement and to vote for the Offer should it be reformulated into a transaction requiring a shareholder vote, the regulators did not find them to go so far as to be objectionable and, noted that in the absence of such provisions, “the effect of the “hard” commitments would be substantially watered down”.
- With regards to the circumstances that led to the lock-up agreements and the Offer, the regulators considered the interactions of the Locked-Up Shareholders (three of which had an associated person on the CanniMed board of directors) and Aurora and concluded that Aurora did in fact learn “material non-public information that was extremely valuable to Aurora is formulating its bid. We find that this knowledge impelled Aurora to pursue this bid on an accelerated basis, from a standing start to its news release announcing its bid in eight days, gaining valuable information for its campaign, and allowing it to proceed before the Newstrike Arrangement Agreement was entered into”.
- However, on the whole, the regulators could not conclude that such information sharing rose to the level of “joint actor” or “jointly or in concert” status. They stated: “it is not obvious that the disclosure of the material non-public information we have outlined means that Aurora is a joint actor with the Locked-Up Shareholders. Aurora is still the only buyer, did not make toehold purchases based upon such information, and the Locked-Up Shareholders were seeking the most attractive exit possible”.
- They did, however, suggest that there may be circumstances that could lead to such a determination: “That does not mean that the transfer of material non-public information to a bidder could never be a factor in finding joint actor status”.
- material non-public information and noted: “Shareholders can reasonably be expected to consider the facts related to the transmission of material non-public information as a potential ethical consideration in deciding whether to tender to a bid. These considerations can have long-term financial effects and are reasonable consideration in and of themselves for potentially broad segment of shareholders”. As a result, they ordered Aurora to amend certain press releases and its takeover bid circular to include additional background information.
- Consequently, in its Jan 12-18 amended and restated press releases and notice of change to it takeover bid circular of same date, Aurora disclosed:
o That while it learned through discussions with the Locked-Up Shareholders that the CanniMed board would be meeting on Nov 13-17 to consider an acquisition in the adult usage cannabis market, it “was not aware of the company being considered, the nature or size of the acquisition, or the stage of the acquisition”;
o That when it engaged its financial advisor it “was unaware that [same financial advisor] had been previously engaged by Newstrike”;
o That the Locked-Up Shareholders required as a condition to the lock-up agreements that the Offer be delivered by 12:30 ET on Nov 13-17;
o That while it was aware that 3 directors of CanniMed were directors and/or officers of certain of the Locked-Up Shareholders, it had no contact with any of the 3 directors prior to the start of the Offer.
Minutes later, CanniMed announced via press release its $725M “lawsuit in the Ontario Superior Court of Justice alleging breach of confidentiality, intentional interference with economic relations, conversion, breach of contract and other allegations pursuant to the Securities Act (Ontario). The lawsuit also alleges that … Aurora, several large shareholders of CanniMed,… [Aurora’s financial advisor] and others, participated in a civil conspiracy intended to injure the economic interests of CanniMed”. “Additionally, CanniMed is seeking personal damages against one current and one former member of the CanniMed board… for their alleged involvement in the civil conspiracy and for breaching their fiduciary duties by failing to act in the best interests of CanniMed and its shareholders and instead acting out of self-interest and/or for the benefit of other corporations for which they are also directors”.
- CanniMed agreed to discontinue the lawsuit as a result of the “New Offer”.
The 5% open market purchase exemption challenge:
- CanniMed also sought an order from the FCAAS and OSC to prevent Aurora from utilizing the NI 62-104 5% open market purchase exemption. In their Reasons, the regulators noted that “CanniMed sought to prevent Aurora from purchasing any CanniMed shares prior to the expiry of the Aurora offer, arguing that such purchases could put Aurora in a blocking position, enabling it to preclude any superior offers”.
- The regulators made several observations: First, since the record date for the CanniMed meeting to approve the Arrangement had already passed, any shares purchased pursuant to the exemption could not be voted against the Arrangement. Second, Aurora did not already own any CanniMed shares. Third, since the regulators did not separately find Aurora and the Locked-Up Shareholders to be acting “jointly or in concert”, the shares held by the Locked-Up Shareholders cannot be attributed to Aurora. And finally: “Since the minimum tender condition is calculated to exclude any shares held by the bidder and persons acting jointly or in concert with the bidder, any shares acquired by Aurora pursuant to the 5% exemption are excluded from the calculation of the minimum tender condition”.
- They declined to grant the order, while leaving open the possibility that there may be cases that warrant such intervention: “The 5% exemption is an established feature of the Canadian take-over bid regime. Prohibiting the use of the 5% exemption may be appropriate in the public interest if the policies underlying the take-over bid regime are undermined by allowing its use. That is not the case here”.
Other “poison pills” and defenses
- In addition to the Rights Plan, Aurora characterized two other CanniMed actions as “poison pills”:
o First, it charged that the $9.5M termination fee payable by CanniMed to Newstrike under the Arrangement, which equated to approximately 4.82% of the $197M deal value, was in fact the first such poison pill (as it was announced prior to the adoption of the Rights Plan) given that the Locked-Up Shareholders were required to vote against the Arrangement, making it unlikely that the Arrangement would receive the required majority shareholder support.
o Second, in a Jan 2-18 press release, CanniMed announced that they had entered into a Supply Agreement with Up Cannabis Inc., a wholly-owned subsidiary of Newstrike, for a variety of medical cannabis strains, citing it “as just one example of the type of value-added synergies between the two companies”. In response, in a Jan 3-18 press release, Aurora called the Supply Agreement “bizarre”, questioned its strategic rationale and timing and called on CanniMed to provide additional disclosure, commenting: “is this an attempt to entrench a relationship between CanniMed and Newstrike under adverse terms that are counter to the interests of CanniMed shareholders, as the latest attempt at creating a poison pill?”.
- Finally, according to Aurora’s press release of Dec 11-17, CanniMed reportedly sought Saskatchewan government intervention to stop the Aurora Offer (via letter to members of the legislative assembly) to “keep jobs in the province, [ensure] our patients receive quality produce when they need it, and [generate] the kind of returns our shareholders deserve”, though the report quotes a government spokesperson as saying that they will not intervene and that the government “views this as strictly a commercial transaction”.
Aurora’s Attempt to Reduce the 105-Day Minimum Bid Period
- In response to the announcement of the Arrangement, Aurora sought a regulatory ruling from the FCAAS and the OSC to reduce the NI 62-104 minimum bid period from 105 days to a period of at least 35 days from the date that the Offer was made, pursuant to the “Alternative Transaction Exception” as set out in NI 62-104, such that the Offer would expire on or before the date of the CanniMed meeting in Jan-18 to approve the Arrangement.
- In their Reasons, the regulators noted that while Aurora acknowledged that the Arrangement did not specifically meet the technical requirements for use of the exception, they argued “that the policy rationale for the exception… is present, and that the exemption should be granted to enable CanniMed shareholders to consider the Newstrike proposal and the Aurora Offer within the same time frame” and “Aurora submitted that CanniMed’s rejection of the Aurora Offer and endorsement of the Newstrike transaction, together with deal protections that CanniMed implemented to avoid interference with the Newstrike transaction, was tantamount to the Newstrike transaction being an alternative transaction in the spirit of the exception”.
- The regulators disagreed, noting: “The principal reason that the Newstrike transaction is, in an informal sense, ‘alternative’ to the Aurora Offer is that Aurora included a condition in its bid that the Newstrike transaction not be completed” and “Aurora’s decision to include this condition set up the narrative of alternative transactions, but does not give the Newstrike legal character of an alternative transaction under NI 62-104”.
- They declined to grant Aurora’s request, concluding: “Preserving the 105-day deposit period holds out the possibility of superior offers, which we find not to have been precluded by the Newstrike transaction, even if CanniMed is not currently conducting an auction for the sale of the company”.
Aurora’s Capped Share Exchange Offer:
- Since the new NI 62-104 takeover bid rules came into effect in May-16 requiring, among other things, that bids remain open for at least 105 days (with certain exceptions), we do know that share exchanges remain legitimate and winning options, as evidenced by both this case and by the successful 2017 hostile offer by Total Energy Services Inc. (“Total Energy”) for Savanna Energy Services Corp. (“Savanna Energy”). In addition, Anaconda Mining Inc. has this month launched an unsolicited offer via share exchange for Maritime Resources Corp.
- However, a share exchange where the value of the consideration is capped at a share value ceiling, as was the case here, is not common and perhaps even more unusual in a hostile bid. This approach was heavily criticized by CanniMed in light of the incredible run up in cannabis stock prices, including Aurora’s, that began in the final two weeks of 2017, as discussed in detail below.
- It also noteworthy that even before the Dec-17 stock price run up, CanniMed had criticized the Offer terms as based on an inflated Aurora share price, stating in its Nov 15-17 press release that “CanniMed cautions that the share consideration (or equivalent share value) offered by Aurora in its press release [of Nov 14-17] is inflated and CanniMed believes over values Aurora in that it is based on the closing price of the Aurora shares on the TSX on November 14, 2017, which reflects an increase of 124.9% over Aurora’s closing price on the TSX over the preceding 12 trading days”. This point would become a central theme in CanniMed’s communications, including its Jan 3-18 letter to shareholders in which it noted that the pre-bid “run up in Aurora’s share price is not based on anything Aurora did – just pure speculation”, only to be compounded by their criticisms resulting from the Dec-17 stock price run up.
Cannabis Stock Price Volatility:
- Starting in late Dec-17, cannabis stocks went on an unbelievable upwards tear and, by most accounts, this was based purely on market speculation and not on any news or changes in fundamentals.
- To illustrate, refer to the chart below (source: https://web.tmxmoney.com), a representation of the stock price performances of several cannabis stocks, namely Aurora (“ACB”), Aphria (“APH”), CanniMed (“CMED”), Newstrike (“HIP”), MedReleaf Corp. (“LEAF”) and Canopy Growth Corporation (“WEED”) versus the performance of the S&P/TSX Composite Index (“TSX”) over the three-month period ending March 9-18 (the day on which Aurora announced its initial take up of CanniMed shares). These stocks just went through the roof, all hitting breathtaking highs in Jan-17 and all but APH remained significantly above the Dec 9-17 starting point by the end of period, with each of ACB, CMED, HIP, LEAF and WEED delivering 60.23%, 92.27%, 107.41%, 21.16% and 62.36%, respectively, while the TSX (displayed more or less straight across the 0.00% vertical) delivered -3.22% for the period.
- Let’s take a closer look at the stock price run ups for each of Aurora, CanniMed and Newstrike (source: https://web.tmxmoney.com):
o Aurora: From a $7.00 close on Dec 21-17, Aurora increased through to a $12.32 close on Jan 17-18 (the day prior to CanniMed’s announcement that it was in discussions with Aurora regarding a possible transaction) – a 76% increase over just 15 trading days (disregarding that it closed as high as $14.18 on Jan 3-18).
o CanniMed: From a $19.65 close on Dec 21-17, CanniMed increased through to a $27.82 close on Jan 17-18 – a 41.58% increase over the 15 trading days. Also note that it started trading above the capped Offer price of $24.00 on Jan 12-18 (closing that day at $24.15).
o Newstrike: From a $0.50 close on Dec 21-17, Newstrike increased through to a $1.12 close on Jan 17-18 – a 124% increase in the 15 trading days (disregarding that it closed as high as $2.95 on Jan 9-18).
- So what did this all mean for the relative financial merits of the Offer and the Arrangement from the perspective of CanniMed shareholders?
o In regards to the Offer: As Aurora shares increased in value, CanniMed shareholders would receive fewer Aurora shares pursuant to the Offer (due to the capped price) and would not enjoy the benefit of Aurora’s stock appreciation. At the same time, CanniMed shares were also firing upwards, making the perceived merits of continuing as a stand-alone company appear much more attractive.
o In regards to the Arrangement: As Newstrike shares increased in value and at a significantly higher rate than the CanniMed share appreciation (124% increase for Newstrike, 41.58% increase for CanniMed), CanniMed shareholders viewed the acquisition of Newstrike even more favourably.
o While at the start of the Offer Aurora was offering CanniMed shareholders a significant premium, that premium had effectively disappeared a little over a month into the bid period and it became clear that, at current prices, Aurora would have to sweeten the bid in a meaningful way to get its Offer over the finish line.
ISS and Glass Lewis Voting Recommendations:
- CanniMed shareholders had two very distinct and mutually exclusive options – to be acquired by Aurora via the Offer or to acquire Newstrike via the Arrangement – each with a compelling strategic rationale and merits trumpeted by their respective sides. ISS and Glass Lewis, the two proxy advisory firms, played a key role in distilling and deciphering all of the public disclosure and data in regards to each option (including the impact of current stock prices, as discussed above), weighing their relative merits and ultimately issuing voting recommendations to CanniMed shareholders in connection with the CanniMed special meeting to approve the issuance of CanniMed shares pursuant to the Arrangement.
- In its Jan 11-18 press release, CanniMed announced ISS’ supportive voting recommendation:
o Quoting ISS’ support for the Arrangement: “[CanniMed Shareholders should] vote FOR the proposed acquisition of Newstrike, which will allow the company to access the recreational cannabis market while also significantly expanding its production capacity and diversifying its geographic footprint. The transaction is expected to be accretive on a 2019 estimated EBITDA-per-share basis and may have a positive branding impact”;
o And quoting their negative view of the Offer: It has “a $24 offer cap that has effectively halved the exchange ratio and CanniMed’s expected ownership stake in the combined entity… turning the transaction into a dilutive one for CanniMed shareholders”.
Then in its Jan 15-18 press release, CanniMed announced Glass Lewis’s support:
o Quoting Glass Lewis’: “Our analyses suggest that the Newstrike/CanniMed merger represents the superior value proposition for CanniMed shareholders at this time” and the “recent run up in Newstrike’s share price, together with the merger exchange ratio, would seemingly imply a significant amount of upside for CanniMed’s shares”;
o And quoting their negative view of the Offer: “the Aurora Offer represents a largely opportunistic attempt by Aurora to gain control of the Company on terms that largely favour Aurora at the detriment to CanniMed shareholders, particularly in an industry upside scenario” and “The Aurora Offer, as currently structured, effectively restrains the near-term upside to CanniMed, particularly as the share prices of Aurora and most other cannabis firms have risen since Aurora first announced its offer… considering the foregoing, the headline unaffected market premium of the Aurora Offer is no longer financially compelling to CanniMed shareholders, in our view”.
- It is noteworthy that both ISS and Glass Lewis made pointed statements regarding the relative unattractiveness of the financial terms of the Offer, as currently constituted, in light of the then current run up in cannabis stock prices, suggesting perhaps that more compelling Offer terms would have tipped the balance for each of them to recommend a vote against the Arrangement.
- The Tragically Hip and the Cannabis ‘Brand Wars’:
- While one of our most beloved of Canadian bands did not take an active role in publicly championing the Arrangement, a key rationale for the Arrangement was the brand value that the “The Hip” would deliver: In its Jan 3-18 letter to shareholders, CanniMed stated: “In a world of similar products and new consumers, branding is critical – Up Cannabis is a premier brand” and “The strategic partnership that Up Cannabis has developed with iconic Canadian band the Tragically Hip means that much of the difficult and uncertain early work of building awareness in an incredibly competitive market can be deployed with relative ease”. In the same letter, CanniMed told shareholders: “Aurora is not a brand but is a mirage based on a yet-to-be completed facility”.
- As referenced above, CanniMed also noted that ISS’ supportive voting recommendation stated that the transaction may have a “positive branding impact”.
- While this takeover battle is now complete, the ‘brand wars’ in the cannabis space are really just starting to take shape. Stay tuned.
Key Takeaways for Future Unsolicited Bids
This first unsolicited offer in the cannabis space provides a number of valuable lessons and insights. Here are our four key takeaways for future unsolicited offers, whether in cannabis or otherwise:
- Bidders and targets need to stay in the NI 62-104 ‘lane’: This case has clearly demonstrated that the regulators are keen to ensure that the new takeover bid regime, as set out in NI 62-104, operates without interference in order to provide all parties with a high degree of predictability. Specifically, both bidders and targets will be required to clear a high bar in order to convince regulators to allow certain tactics and defenses if they contradict the letter or the spirit of the new rules, including but not limited to tactical shareholder rights plans. In the concluding remarks of their Reasons, the FCAAS and the OSC noted: “Given the careful rebalancing of the Canadian take-over bid regime and in the absence of factors requiring our intervention in the public interest, we have preserved the take-over bid requirements as prescribed in our rules”.
- Lock-up agreements are supported by regulators and can be critical to bidder success: The regulators made clear and unambiguous statements in this case that they are generally supportive of lock-up agreements, whether “hard” or “soft”, and targets will have their work cut out for them to convince regulators of any “jointly or in concert” relationships. These lock-ups, especially from top shareholders, not only get you that much closer to the NI 62-104 minimum 50% tender condition right out of the gate, they are also very persuasive in gaining the support of other shareholders, they can hinder sufficient shareholder support for alternative transactions that may currently be on the table and they can act as a deterrent to other potential ‘white knight’ suitors. We also saw the importance of this in the successful Total Energy unsolicited offer for Savanna Energy in which Total Energy had lock-ups with 43% of Savanna Energy shareholders.
- Targets will continue to employ unique and creative defenses: While targets will need to remain mindful of staying in the NI 62-104 ‘lane’, as noted above, we expect that targets who are unwilling partners will continue to put up unique defenses – whether through tactical shareholder rights plans (assuming they do not include ‘objectionable’ provisions similar to the ones that we saw here), high termination fees pursuant to alternative transactions, unusual commercial agreements or seeking government intervention like we saw in this case, or through private placements or debt financing change of control provisions like we saw in the Total Energy unsolicited offer for Savanna Energy, or through other ‘creative’ means.
- Share exchanges remain winning approaches: While Aurora eventually increased their Offer (to secure CanniMed’s support) to include an election for either shares or a combination of cash and shares, the cash consideration was capped at $140M and so the lion’s share of the $1.1B consideration was still paid in shares, proving once again that share exchanges are winning approaches for bidders under the new takeover bid regime, provided of course that there is both a compelling strategic rationale and a compelling premium to incentivize target company shareholders to continue as shareholders in the merged company. We first saw this under the new rules in the Total Energy unsolicited offer for Savanna Energy via share exchange. Of course, there is always the risk of stock price volatility over the lengthy 105-day bid minimum requirement, which came to bear in an unprecedented way on this transaction, but it is hard to imagine that we will see that level of volatility in the middle of a bid again anytime soon. Having said that, we do not expect to see many more capped share exchanges given the risks that the premium may be eroded if and when the bidder’s stock price rises during the term of the bid.
Laurel Hill was pleased to provide Strategic Advisory, Information Agent and Depositary Services to Aurora in connection with Aurora’s Offer and to provide Strategic Advisory and Proxy Solicitation Services to Aurora in connection with Aurora’s solicitation of proxies against the Arrangement. Since the introduction of the new takeover bid rules in May 2016, Laurel Hill has been directly engaged in connection with 8 of the 9 unsolicited bids in Canada.
We invite you to also read our Case Study on the 2017 Total Energy unsolicited offer for Savanna Energy available at www.laurelhill.com.
1 As reported in Aurora and CanniMed’s joint press release of Jan 24-18 announcing a friendly deal.
2 Acquisition value based on the amended consideration terms announced by Aphria and Nuuvera on Feb 20-18, the number of Nuuvera shares reported as issued and outstanding in the Nuuvera proxy circular dated Feb 20-18 and the Aphria closing share price on Feb 16-18, the last trading day prior to the announcement of the amended deal.
3 This background and timeline summarizes the key messaging in certain Aurora, CanniMed and Newstrike press releases and the key content of the joint orders by the Financial and Consumer Affairs Authority of Saskatchewan and the Ontario Securities Commission.
4 Acquisition value based on 24,433,412 CanniMed issued and outstanding shares, as reported in CanniMed’s Arrangement circular dated Dec 8-17, multiplied by the Offer capped price of $24.00 per share.
5 Acquisition value based on 389,534,346 Newstrike issued and outstanding shares, as reported in Newstrike’s Arrangement circular dated Dec 12-17, multiplied by both the exchange ratio of 0.033 CanniMed shares per Newstrike share and $15.30, being the CanniMed share price on Nov 14-17 (the day prior to CanniMed’s Nov 15-17 announcement of their intention to acquire Newstrike).
6 The FCAAS and OSC issued their joint reasons for their orders on Mar 15-18.
Namely, per the regulators, that the “target company announces that it intends to effect an alternative transaction, which is defined generally as a corporate action, including a plan of arrangement or amalgamation, as a result of which a target shareholder’s interest is extinguished, regardless of whether that interest is replaced with another security”. 7