Alberta Securities Commission Provides Reasons for Cease Trading Tactical Shareholder Rights Plan in Re Greenfire Resources

The Alberta Securities Commission (ASC) released the reasons for its recent order cease trading a tactical shareholder rights plan adopted by Greenfire Resources Ltd. (“Greenfire”) to prevent a private acquisition of approximately 43% of Greenfire’s shares from three of Greenfire’s shareholders. While the reasons were driven in large part by the unique facts, the decision in Re Greenfire Resources Ltd. reinforces the underlying message in many recent decisions of Canadian securities regulators that, absent exceptional circumstances, it is a high bar for issuers to use tactical shareholder rights plans to change the “ground rules” for acquisitions of control reflected in the modernized take-over bid regime that was implemented in 2016. The decision also strongly endorses the general fairness of the “private agreement” take-over bid exemption that can result in a purchaser acquiring effective control of an issuer at a modest premium to market price, without offering that premium to all shareholders.

Background

Before July 2024, certain Greenfire directors (who were also significant shareholders) had discussions with affiliates of Waterous Energy Management Financial Corp. (“Waterous”) about whether funds managed by Waterous or another affiliated entity would be interested in acquiring Greenfire. Waterous indicated it was not interested in acquiring 100% of Greenfire.

In July and August of 2024, Greenfire’s board of directors (the “Greenfire Board”) began preparing for a sales process to market Greenfire to third parties, including engaging a financial advisor and obtaining an updated reserves report. However, Greenfire did not begin soliciting indications of interest from third parties at that time.

Beginning in August 2024, Waterous engaged in discussions with, and provided various transaction proposals to, certain Greenfire directors with respect to the potential acquisition of their Greenfire shares in a transaction that would comply with the private agreement take-over bid exemption (under which a purchaser can acquire an unlimited number of shares from up to five sellers, provided the purchaser does not pay more than 115% of the market price (as defined in the take-over bid regime) for such shares). Those directors initially rejected Waterous’s offers but kept the Greenfire Board apprised of the proposals. During this period, Waterous continued to reject solicitations to make an offer for 100% of Greenfire.

Over the next month, the timeline for the sales process was delayed, and oil prices and Greenfire’s share price continued to decline.

On September 16, 2024, funds managed by Waterous (collectively, the “Purchaser”) entered into and publicly announced share purchase agreements with three Greenfire shareholders (the “Sellers”) to acquire approximately 43% of Greenfire’s outstanding shares (the “Proposed Transaction”). The transaction would not close until a later date, after Canadian antitrust approval had been obtained. The Proposed Transaction was not a take-over bid under Canadian securities laws because the Sellers were not located in Canada. Nonetheless, the Proposed Transaction was structured to comply with the private agreement take-over bid exemption.

In response to the announcement of the Proposed Transaction, on September 18, 2024, Greenfire adopted a tactical shareholder rights plan (the “Rights Plan”) that had a typical 20% ownership trigger but expressly provided that the closing of the Proposed Transaction would trigger the dilutive effects of the Rights Plan, even though the Proposed Transaction had been agreed and publicly announced before the Rights Plan was adopted.

The Purchaser applied to the ASC to cease trade the Rights Plan. In response, Greenfire sought an order to cease trade the Proposed Transaction on the basis that it was contrary to the public interest. On November 6, 2024, the ASC granted the Purchaser’s application and dismissed Greenfire’s application.

The ASC’s Reasons

The ASC engaged in a detailed review and analysis of the history and use of shareholder rights plans, the features of the modern take-over bid regime (including the private agreement exemption), the impacts of the Rights Plan and the Proposed Transaction, and the conduct of all relevant parties.

While the Proposed Transaction was not a take-over bid, the ASC placed considerable weight on the fact that the Proposed Transaction was structured to comply with the private agreement exemption, which the ASC described as a long-standing and deliberate mechanism intended to permit unequal treatment of shareholders by allowing a limited control premium to be transferred in certain circumstances without all target shareholders being involved and benefiting from that premium. Accordingly, the ASC rejected Greenfire’s assertion that reliance on the private agreement exemption in these circumstances defeated the policy objectives of the take-over bid regime.

The ASC also expressed significant concern with the Rights Plan’s retroactive effect on the Proposed Transaction, concluding it would “gravely affect the efficiency of and confidence in our capital market.” The ASC expressly declined to decide whether a shareholder rights plan implemented before the announcement of the Proposed Transaction would have been allowed to continue to operate, at least for some period (for example, while the Greenfire Board pursued the strategic review process).

The ASC also analyzed the conduct of the Greenfire Board, including the director nominees of the Sellers, in adopting the Rights Plan and/or pursuing the Proposed Transaction, although it was careful to highlight this was one factor to be considered as part of its overall public interest analysis. In this case, the ASC concluded the Greenfire Board’s decision to adopt the Rights Plan retroactively was not a reasonable exercise of business judgment. The ASC also held that the director nominees of the Sellers did not act inappropriately in pursuing the sale of their Greenfire shares, given that Greenfire was not in a trading black-out and they kept the Greenfire Board reasonably informed of the Purchaser’s offer. In doing so, the ASC endorsed the ability of directors to decide how and when to sell their shares, subject to compliance with insider trading laws. The ASC rejected novel arguments advanced by Greenfire and its expert witnesses about expanded duties of directors of public companies when considering a sale of their shares.

Finally, while the Proposed Transaction was not a take-over bid, the ASC nonetheless analyzed the other factors Canadian securities regulators have historically considered when deciding whether to cease-trade a tactical shareholder rights plan and generally found those factors weighed in favour of cease-trading the Rights Plan. Most notably, the ASC focused on the lack of evidence of broad shareholder support for the Rights Plan and the fact that Greenfire’s strategic review process was in its early stages.

Key Takeaways

Nearly a decade after Canadian securities regulators recalibrated the take-over bid regime in a way that rendered the primary purpose of shareholder rights plans irrelevant, market participants continue to seek clarity as to when it may be appropriate for a board to adopt a shareholder rights plan to protect the company or its shareholders. Greenfire Resources is the latest decision strongly signalling that securities regulators believe the modernized take-over bid regime (including its exemptions) establishes a fair and reasonable balance among bidders and that, absent unique circumstances, they will not permit shareholder rights plans to interfere with transactions that comply with the letter and spirit of Canadian securities laws.

On the other hand, the unique facts in Greenfire Resources leave open a number of important questions that have yet to be fully addressed by regulators. For example, the ASC expressly declined to opine on whether the result would have been different if the Rights Plan was adopted before the Proposed Transaction was announced. It is also unclear whether the result would have been the same if the Proposed Transaction had not been structured to comply with the private agreement exemption (for example, if the Purchaser had paid more than a 15% premium to the Sellers or purchased the Greenfire shares from more than five sellers).

In the interim, we expect shareholder rights plans to remain a tool that boards will consider using when faced with transactions they believe may not be in the best interests of the company or its shareholders.

For further information regarding this Update or shareholder rights plans, please contact any member of our Capital Markets Group.