BC Courts Enforce Standstill Provision and Enjoin Pursuit of Takeover Bid

On June 29, 2006, Madam Justice Allan of the Supreme Court of British Columbia enjoined the takeover bid brought by Northgate Minerals Corporation (Northgate) and its wholly owned subsidiary Northgate Acquisition ULC (collectively, the “Northgate defendants”) for all the issued and outstanding shares of Aurizon Mines Ltd. (Aurizon) for the duration of the standstill provision of a Confidentiality and Standstill Agreement which Northgate and Aurizon had entered on October 19, 2005 (the “Northgate agreement”). At the conclusion of the hearing of the Northgate defendants' appeal on July 6, 2006, the British Columbia Court of Appeal (Justicese Rowles, Low and Lowry) dismissed the appeal with written reasons following on July 14, 2006.

Aurizon and Northgate are public companies in the mining industry. In October 2005, Northgate approached Aurizon with respect to a possible business combination. The companies entered into the Northgate agreement, which contained both confidentiality and standstill provisions. In the latter Northgate agreed to refrain for a period of one year from taking various steps without the prior written approval of Aurizon's board of directors, including acquiring any voting securities of Aurizon or communicating with Aurizon shareholders with a view to discussing such purchase. The companies also entered into a reciprocal confidentiality and standstill agreement setting out Aurizon's confidentiality and standstill obligations vis-à-vis Northgate. Both agreements provided that no modification or waiver would be binding on either party unless approved by each of them in writing.

After some further communication between the parties and Aurizon discussion with its financial advisor, Aurizon's board of directors determined on December 14, 2005 it was not in the best interest of Aurizon or its shareholders to pursue a transaction at that time. Aurizon advised Northgate of this on December 15. On December 19, Northgate advised of its acceptance of Aurizon's decision and its position that, “[g]iven that the entire purpose of the Agreements has been frustrated and that no non-public Information has been exchanged between our two companies, Northgate regards the Agreements, and all of the parties' obligations under them, to be at an end.” No response from Aurizon was requested or given. In February 2006, Northgate purchased voting securities of Aurizon (later sold) without the knowledge of Aurizon's directors. On May 23, 2006, Northgate announced its intention to make a takeover bid, which was ultimately issued on June 1, 2006. The bid was by its terms to expire on July 7, 2006 at which time the Northgate defendants could take up tendered shares.

On June 15, 2006, after Aurizon's directors determined to recommend that shareholders reject Northgate's offer, Aurizon commenced an action in the Supreme Court of British Columbia to enforce the Northgate agreement. Shortly thereafter it delivered an application for declaratory and injunctive relief under Rule 18A, British Columbia's summary trial rule, with an interlocutory injunction sought in the alternative. Northgate applied for dismissal of Aurizon's application for injunctive relief and of its application for judgment under Rule 18A. The cross motions were heard on June 26 and 27, 2006.

Madam Justice Allan determined injunctive relief to be appropriate and further granted the final relief that Aurizon sought. Madam Justice Allan held that the sole issue was one of contractual interpretation and that the standstill provision was unambiguous, with its term specifically measured from the date of execution of the Northgate agreement rather than being tied (as the Northgate defendants had argued) to whether or not confidential information was requested or disclosed. The absence of such a link removed the need to prove “whether information has been requested, whether information that has been exchanged is confidential at all, or that non-public information has been misused in connection with a take-over bid or other conduct.”

Further, Madam Justice Allan held “it was open to Aurizon under the Northgate agreement to conclude that it did not wish to continue discussions with Northgate and that determination did not constitute repudiation or a fundamental breach of the Northgate agreement” and that “not a shred of evidence” supported Northgate's allegation that recitals in the Northgate agreement (providing that both parties wished to evaluate the possibility of a corporate transaction and that Aurizon was prepared to provide requested information) constituted misrepresentations.

In addition, Madam Justice Allan found that discretionary considerations favoured the granting of an injunction. She rejected the Northgate defendants' claims of delay and prejudice and noted inter alia that enforcement of confidentiality and standstill provisions in agreements of this sort “is in the interest of the public generally, and the business community specifically, by permitting market participants to enter into meaningful discussions and consider corporate transactions, strategically and cooperatively, without incurring the risk that if those transactions are not pursued, the participant runs the risk of a hostile takeover bid.”

The Northgate defendants appealed on two grounds. First, they submitted Madam Justice Allan had deprived them of the ability to develop their pleaded defences by making a final order without discovery or cross-examination. Noting this argument ignored Justice Allan's “resolution of the central issue in the case,” which was the interpretation of the unambiguous Northgate agreement, the Court of Appeal held that Madam Justice Allan had properly rejected the Northgate defendants' defences. The Court of Appeal noted as well there was “strong evidence” contrary to Northgate's suggestion that Aurizon had failed to provide the information requested. The Court of Appeal held that “[s]ummary determination of the issues in this case was not only possible but desirable for it prevented the cost and delay that inevitably would have been the result of a full blown trial.”

Second, the Northgate defendants submitted that Madam Justice Allan had wrongly exercised her discretion “to order the equitable relief of an injunction based on her conclusion that Northgate had breached a negative covenant,” without giving “proper consideration to the balance of convenience and irreparable harm and to the interests of parties who were not before the court, namely, shareholders of Aurizon.” The Court of Appeal rejected this argument, noting that Madam Justice Allan's reasons demonstrated that she “took into consideration the relevant factors in exercising her discretion to grant injunctive relief”.

Specifically with respect to the interests of Aurizon shareholders, the Court of Appeal found that the Northgate defendants' argument “ignores the evidence that Aurizon's board of directors, which has a fiduciary duty to act in the best interests of Aurizon and its shareholders, after careful review of the Northgate bid, and after having received the advice and recommendation of an independent special committee, which was itself independently advised, as well as the advice and opinions of two of Canada's investment banks, concluded that the Northgate bid was not in the best interest of Aurizon shareholders.” There was “no evidence that the judgment of the Aurizon board was exercised other than in good faith and free of any conflict,” and “[t]he business judgment of the Aurizon board is evidence of the best interests of Aurizon shareholders as a whole.” Further, the Court of Appeal agreed with Madam Justice Allan that “there is a strong public interest in the enforcement of contracts of the nature at issue.”

Aurizon's claim for damages in relation to the Northgate Defendants' conduct up to the date of the injunction remains pending.

J. Kenneth McEwan, Q.C., and Ludmila Herbst of Farris, Vaughan, Wills & Murphy LLP represented Aurizon in the litigation. Mary Collyer and Doug Seppala of DuMoulin Black LLP acted for Aurizon in respect of the non-litigation aspects of the takeover bid; Marion Shaw of Bull, Housser & Tupper LLP served legal counsel to Aurizon's special committee.

The Northgate defendants were represented in the litigation by Susan Griffin, Q.C., and Sean Boyle of Fraser Milner Casgrain LLP. Fraser Milner Casgrain LLP represented the Northgate defendants in respect of the takeover bid more generally.