Spider Resources

The offer made by Cliffs has a number of conditions in it. Every condition is for the benefit of Cliffs, giving them the right to withdraw the offer if any of the conditions are not fulfilled. It's like when you put in an offer to buy a house at a set price, but the offer is conditional on a satisfactory home inspection. You could obtain a bad home inspection report, and still decide to close the deal, or you could get what most people would think was a good inspection, and declare it unsatisfactory and withdraw the offer. The conditions of the offer are for the purchaser's benefit, and are exercised at its discretion.

Here's what Cliffs said, in the preamble immediately preceding the oft-quoted term requiring 50.1% of the shares to be tendered to the offer: "the Offeror will have the right to withdraw or terminate the Offer.... unless all of the following conditions are satisfied or waived by the Offeror at or prior to the Expiry Time".

If they decide to waive that term (and now that the merger is dead in the water, they have every reason to do that), then they can take up all the shares that were tendered, so long as they pay for them according to the terms of the offer, and in accordance with applicable legislation.

Now we have to consider what happens under different scenarios thereafter. You're probably all aware that Cliffs had bought into KWG at 19.9%, and had the pre-emptive right to maintain that ownership share of the corporation. That number wasn't picked at random. Under the Ontario Securities Act, any shareholder at 20% or more of the outstanding shares of any corporation (fully diluted) is deemed to be a control person. They're defined to be attempting a management takeover of the corporation, unless and until a standstill agreement is signed and publicly reported by the Board of Directors. Similarly, under the Canada Business Corporations Act, the same takeover assumption exists, but the threshold is 30%. The reason for these low numbers is that so few shares are typically voted. A 20% or 30% block of shares voting together could easily take over a company without some very strongly organized resistance. To protect minority rights as much as possible, any shareholder at 10% or above must report their ownership, and then when they break 20%, they have to make their intentions very clear.

According to the last news release, Cliffs shares, combined with the lock-up agreements with Mineralfields and the Spider BoD, already will give them over 20%. So, unless something changes, a takeover is well underway. If you don't tender your shares, you will get to vote on any management takeover proposal. But that will come later on. What's happening here is only setting the stage for Cliffs. Spider Resources will continue to exist, and for the time being it will still have the same management, but I think it's a certainty that things will change very quickly.

After seeing Cliffs in action so far, I can't possibly predict what they'll do. They are shrewd, calculating, and patient. I can roughly sketch out some possible scenarios going forward.

If Cliffs obtains 20-40% of the shares, I think they will call a Special Meeting, and propose for election their selections for the Board of Directors. The minority shareholders would have a challenge ahead of them, to organize sufficient votes to resist Cliffs dissident proxy challenge. And the current members of the Board will have tendered to Cliffs already. Not much of an alternative management structure.

If they're in the 20-40% range, there's a good chance that they'll simply extend the tender deadline, so that minority shareholders who see the writing on the wall can tender their shares, too.

If Cliffs obtains 40% or more, I think they will ask the Board to resign, or failing that, we go to a Special Meeting. Only this time minority shareholders have little to no hope of choosing the new Board. At 50.1%, Cliffs just installs their own Board, basically.

In both these cases, if you don't tender, you're likely to be a minority shareholder in a Cliffs-controlled corporation. That could be good, or that could be bad. I don't do crystal balls.

If Cliffs obtains much higher percentages, then there are legal steps they can take to force the minority shareholders to sell, but that would mean they were taking Spider private, and I don't think that's likely to happen. But you never know.

I've also been reading the Spider Shareholder Rights Plan, under which the Spider Board of Directors could declare that the Cliffs takeover bid is not in the best interests of Spider shareholders, and that it violated one of the conditions (the Cliffs offer was not open for 60 days, so it does technically violate the SRP). Under that plan, all non-Cliffs shares would obtain a separated right to purchase 2 more shares for each share presently held, for half the price for each new share. To the extent that shareholders exercised those rights, Cliffs would be diluted. But the float could easily break a billion shares, any shareholders who did not exercise their rights (not everybody can afford that) would be diluted along with Cliffs, and the Board had better have a clear plan in place to proceed thereafter (I'm rather doubtful about that part). The upside is the corporation would have a lot more cash than they have now.

As you know, the OSC blocked Cliffs' attempt to strike down the SRP, so it remains an option. But I don't think it serves in any positive way for minority shareholders at the moment. Cliffs could just go back to their waiting game, and where does that leave Spider? And, the support agreement Spider's Board signed with Cliffs would virtually eliminate the poison pill option, in any case.

Next week will be interesting. Stay tuned.

Lar