Lexpert magazine features articles and columns on developments in legal practice management, deals and lawsuits of interest in Canada, the law and business issues of interest to legal professionals and businesses that purchase legal services.
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34 www.lexpert.ca Top 10 Business Decisions WRITTEN BY AIDAN MACNAB, BERNISE CAROLINO, JASON TAN, AND ANGELICA DINO "IN A lot of ways, this case was like a law school exam," says David Tupper, a corpo- rate/commercial litigator and partner at Blake, Cassels & Graydon LLP. "It had all kinds of different elements – all of which are fundamental in the hostile take- over context – all bundled together in a package, which made it fascinating and energizing , and important as well." e case dealt with Brookfield Infra- structure Corporation's hostile takeover bid of Inter Pipeline Ltd. (IPL). Brookfield owned close to 10 percent of IPL shares in its name. But it also had an economic in- terest in another nearly 10 percent of IPL using an instrument called a total return swap, which is a contract between parties to exchange cash flows in the future. In this case, Brookfield paid an upfront fee to the bank to hold IPL shares. At the end of the swap's term, if the shares had gone up in value, Brookfield would get the gain. If their value had fallen, Brookfield would pay the bank the difference. "Use of the total return swaps essential- ly gave a 20 percent economic interest to Brookfield," says Tupper. "It was novel, and it was clever, and it was something that had been contemplated as a possibility across North America. ere was a lot of aca- demic commentary about the use of total return swaps and the effect on corporate governance. But it had never been done in a hostile situation." Tupper acted for Pembina Pipeline Corporation, which, as part of a white knight bid, negotiated a $350-million break fee with IPL. IPL also had a share- holder rights plan, which it amended so that the total return swaps would be de- fined as a share accumulation and trigger the rights plan if share-ownership crossed 20 percent, he says. "You've got three interesting issues," says Tupper. "Is the use of a total return should not be used in hostile bids and used its public interest power to issue a novel remedy, says Tupper. e ASC increased the minimum take-up condition and said Brookfield could not proceed to make an offer for the balance of shares if there was less than 55 percent tendered to address the potential risk of empty voting. Another novel issue was that the ASC found the $350-million break fee accept- able and that the use of the shareholder rights plan when faced with the use of total return swaps in a hostile bid was also ac- ceptable and proper, he says. "is is the first decision in all of North America to actually address what had been, to that point, an issue that had been com- mented on in certain US cases but not in the hostile takeover context, and that had been the subject of academic commentary and alarm." RE BISON ACQUISITION CORP., 2021 ABASC 188 • Special Committee of the Board of Inter Pipeline Ltd. > Dentons Canada LLP > Gordon Tarnowsky, Rachel How- ie, Bill Jenkins, and Jessica Myers • Inter Pipeline Ltd. > Burnet, Duckworth & Palmer LLP > Jeff Sharpe, Paul Chiswell, Andrew Sunter, Joanne Luu, Bill Maslechko, James Kidd, Alicia Quesnel, and Bronwyn Inkster • Bison Acquisition Corp. and Brookfield Infrastructure Corporation Exchange Limited Partnership > McCarthy Tétrault LLP > Shane D'Souza, Robert Richardson, Jonathan See, John Osler, Kara Smyth, William Main, Jonathan Nehmetallah, and Simon Lusztig • Pembina Pipeline Corporation > Blake Cassels & Graydon LLP > David Tupper, Alyssa Duke, Chad Schneider, Jeff Bak- ker, Ryan Morris, Liam Kelley, Vanessa Williams, and Jenna Green CLIENTS > FIRMS > LAWYERS swap in a hostile bid proper according to securities laws ? Is the break fee proper or an improper defensive tactic? And is the amendment to the rights plan to target the swap instrument proper, or is it an im- proper defensive tactic?" e Alberta Securities Commission (ASC) ultimately determined that using the total return swaps was abusive to the capital markets and the IPL shareholders. Parties had raised three issues with the swaps, says Tupper. The first was that they subvert the "early warning system." In securities law, once a party acquires 10 percent of shares, they must publish a press release. This act can signal to the public that the company is "in play" and might be subject to a future bid. Hostile bidders tend to want to avoid triggering early warning systems so the share price does not rise, which would make the ac- quisition more expensive. Because Brook- field owned less than 10 percent in stock outright, the company argued it had not triggered the early warning system. e second concern was influence, says Tupper. Counterparties to swaps oen purchase the equivalent value of shares to the swap so that if the share price rises, they have shares available to cover the in- crease, and they are not out of pocket for the difference in value at the end of the swap term. at can raise the concern that the counterparty will be influenced to vote those shares to benefit its swap partner. "Empty voting" was the third issue, says Tupper. When the swap counterparty, such as a bank or other financial institu- tion, accumulates shares in the market, that party often has a policy that it will be neutral and will not vote those shares at all. When those shares are taken out of the pool, the clout of the remaining vot- ing shares is magnified. e ASC said that total return swaps