During a recent contest for control of Partners REIT, Orange Capital, LLC, a New York‐based hedge fund, used a novel kind of tender offer at a premium to market to supplement its proxy fight effort.

On May 28, 2014, in advance of a meeting of unitholders at which directors would be elected, Orange announced an offer to
acquire up to 10% of the units of the REIT at a 7% premium to the unit price on the date of offer. The offer, made on June 3rd and open until June 12th, was only made to holders of units entitled to vote at the meeting. As a condition of tendering, a unit holder was required to appoint Orange as its nominee and proxy for all units deposited. In the event that the number of units deposited exceeded the 10% maximum, Orange would take up and purchase units on a pro rata basis in accordance with the number of units delivered by each unitholder. Orange disclosed that it would vote all proxies obtained as a result of the tender process in favour of a new slate of independent trustees, which it would nominate to replace the existing trustees at the meeting.

Take‐Over Bid Rules
While Orange’s offer would potentially enable Orange to obtain control over more than 20% of the voting rights associated with units, it would not have resulted in Orange owning more than 20% of the units themselves. This would, in theory, enable Orange to obtain proxy control of Partners while avoiding application of laws regulating take‐over bids.

Offers that could result in the offeror owning 20% or more of the outstanding securities of a class are regulated as “take‐over bids” under Canadian securities laws. Such offers are subject to procedural and disclosure requirements designed to ensure that securityholders are treated equally, and that they have sufficient information and time to make an informed decision.

A take‐over bid must be made to all holders of a class of securities, and must offer each holder the same terms and conditions. Bids must remain open for at least 35 days, after which the offeror must take up and pay for deposited securities when the bid conditions are fulfilled, or within 10 days after it expires. Holders may withdraw securities they have tendered at any time before they are taken up.

Complaint to the OSC
On June 5, Partners announced that it had filed a complaint with the OSC, calling Orange’s offer was coercive, abusive to the
capital markets, and to unitholders. Partners characterized Orange’s offer as a “bait and switch” tactic designed to acquire control over the REIT for no compensation. It argued that Orange made no purchase commitment: the offer could be withdrawn, varied, or extended at any time, and was therefore nothing more than a “free option” to acquire deposited units. Even if Orange elected to purchase units, unitholders might only be able to sell a portion of the units they tendered, while Orange would retain voting power associated with all such units. The REIT alleged that Orange would treat a unitholder’s appointment of Orange as proxy for deposited units would be treated as irrevocable, regardless of whether the unitholder withdrew its units, or if Orange withdrew its offer. Partners argued that the offer’s short timeframe unfairly pressured unitholders into making such an irrevocable proxy appointment quickly, without sufficient information. These complaints essentially reflect the take‐over bid regulations that Orange’s bid did not meet. The REIT also argued that Orange was effectively soliciting proxies without filing a dissident circular in violation of Canadian proxy solicitation laws.

OSC Intervention

On June 9, Orange announced extension of its bid and “procedural clarifications” of its offer as a result of discussions with the OSC. Amendments and clarifications included:

  • tendered units could be withdrawn at any time prior to take‐up;
  • withdrawal would automatically revoke proxies associated with any units withdrawn;
  • if more than 10% of the outstanding REIT units were tendered and all other bid terms were satisfied, Orange would take up the full 10% of units, and would pay within three business days;
  • proxies associated with units not taken up due to pro‐ration could be revoked and voted at the meeting;
  • if the offer was withdrawn, all proxies associated with deposited units would be revoked automatically.

Orange also extended its offer by 12 days to June 24, and filed a proxy circular disclosing its nominees for the Partners REIT board.

Assessment

Take‐over bid rules exist to help ensure that securityholders receive adequate information to make an informed decision about a proposed change in control of a company. Regardless of whether Orange’s tender offer was intentionally designed to dodge takeover bid rules, following the OSC’s intervention, it looked a lot more like a standard take‐over bid.

The OSC’s intervention in this case suggests a willingness on the part of regulators to enforce rules that promote fairness and transparency in proxy contests, even if the securities laws that contain those rules are not directly applicable. Such interventions may limit the strategic advantages of creative offer structures and proxy solicitation tactics, especially where advantage is sought in ways that restrict securityholders’ ability to make informed decisions or freedom of choice.