In alleged response to an insider bid by 30% shareholder CAIH in the recent contest for control of Hurricane Hydrocarbons, the Hurricane board declared a special dividend payable by way of senior unsecured notes. A controversy arose because the notes contained a change-of-control provision that would be triggered by the acquisition of more than 50% of the Hurricane shares. Upon a change-of-control, the holders of the notes could elect to have the notes redeemed. The net effect was a potential cash depletion of $200 million from Hurricane's cash flow.
CAIH applied to the Securities Commissions, claiming that the notes were intended to prevent the Hurricane shareholders from exercising their fundamental rights to consider and accept CAIH's bid. CAIH claimed that the notes were a pseudo poison pill implemented without shareholder approval to supplement the shareholder rights plan previously approved by Hurricane's shareholders. Hurricane responded by claiming that the notes were part of a preconceived strategy to reduce "overcapitalization", that the change-of-control provision was standard for debt instruments and that the market's favourable reaction was evidence of its acceptability. Hurricane further argued that the distribution of the notes did not bear the hallmark of a poison pill - a recapitalization resulting in such an increase to Hurricane's leverage that it would make Hurricane an unattractive acquisition target.
Staff at the Commissions advised that they would not support a cease trade order of the notes if shareholder approval was obtained before the change-of-control provision imbedded in the notes took effect. It would appear that staff took the view that the provision, like a tactical poison pill put in place after a bid is initiated, was in the nature of a defensive mechanism that required shareholder approval. Not unexpectedly, Hurricane shareholders voted overwhelmingly to approve the change-of-control provision in the notes and the notes were subsequently distributed. In the meantime, CAIH withdrew its offer.
Hurricane's distribution of the notes is a poignant example of using a special dividend to ward off an unsolicited bid when the target believes the bid is under-priced. The strategy underlying such dividends is obviously to reduce the ability of a bidder to "bootstrap" the acquisition by using the target's assets to buy the target and thereby discourage a potential offeror from making an opportunistic bid for a cash-rich target.
Paul Fornazzari and Nicholas Dietrich