BlackBerry Shareholder Dorsey R. Gardner has objected to BlackBerry’s recently announced recapitalisation transactions, which he argues give rise to a clear conflict of interest as they involve Fairfax Financial Holdings Limited and certain of its affiliates (collectively, “Fairfax”), a related party of BlackBerry, and Prem Watsa, who is not only Lead Director and Chair of the BlackBerry Compensation, Nomination and Governance Committee (the “CNG Committee”), but also Chairman and CEO of Fairfax.
Mr. Gardner has urged the Board of the Company to withdraw the Related Party Transactions.
Mr. Gardner is concerned that, among other things, BlackBerry has taken the position that no shareholder approval is required under Toronto Stock Exchange and New York Stock Exchange rules despite the fact that the Related Party Transactions will materially affect control of BlackBerry and will involve the issuance to insiders of entitlements to listed securities greater than 10% of BlackBerry’s outstanding shares, and, secondly, that BlackBerry purports to have an available exemption from minority shareholder approval requirements for a related party transaction under Multilateral Instrument 61-101 – Protection of Minority Shareholders in Special Transactions (“MI 61-101”).
In light of these concerns, Mr. Gardner has engaged with the staff of NYSE, the TSX and the Ontario Securities Commission in order to require disinterested shareholder approval for the Related Party Transactions as mandated under the applicable rules of the TSX and the NYSE and under MI 61-101.
BlackBerry announced the Related Party Transactions on July 22, 2020, including the intended September 1, 2020 early redemption of its 3.75% debentures held by Fairfax and other minority debenture holders, which have a conversion price of US$10.00 and are currently “out of the money” given that BlackBerry shares are currently trading below US$5.00.
As part of the Related Party Transactions, the Company would immediately refinance Fairfax’s US$500 million principal amount of 3.75% debentures by way of a private placement of 1.75% debentures on the same terms, except the conversion price will be significantly reduced to US$6.00.
Under the terms of the Related Party Transactions as initially announced by BlackBerry, Fairfax was entitled to increase its share ownership to a controlling stake of more than 20% of the current outstanding shares at a substantial discount to the 3.75% debenture conversion price of US$10.00.
Gardner said:
BlackBerry disclosed that the new 1.75% debentures will not be redeemable by BlackBerry prior to maturity, making Fairfax’s acquisition of an additional 13% of the shares of the Company, and the dilution of minority shareholders, essentially a fait accompli.
In essence, the Board of Directors, led by Mr. Watsa, put Fairfax in a position to acquire a controlling stake (more than 20%) in the Company at a conversion price that has been dramatically reduced from US$10.00 for the 3.75% debentures, to US$6.00 for the 1.75% debentures.
The Company has taken the position that it will not seek minority shareholder approval of the issuance of the 1.75% debentures, despite the fact that, upon conversion based on the terms of the original transactions as disclosed on July 22, 2020, Fairfax stands to increase its ownership position to more than 20%—a change in control that requires shareholder approval under the TSX and NYSE rules.
In addition, the issuance of the 1.75% debentures will involve the issuance to insiders of entitlements to listed securities greater than 10% of BlackBerry’s outstanding shares, which also requires shareholder approval under the TSX rules. In addition, the transactions are related party transactions that require “majority of the minority” shareholder approval under MI 61-101.
Gardner says that this is in breach of security laws:
Shockingly, and in breach of securities laws, among other things BlackBerry’s July 22, 2020 announcement hid the fact that the Related Party Transactions deliver a control block to Fairfax and did not disclose the particulars of the Board deliberations or any financing alternatives to a transaction with a related party that were considered.
Gardner engaged with the regulators in order to express concern over the inadequate disclosure concerning the Related Party Transactions and the breach of the requirements to obtain minority shareholder approval under the TSX and NYSE rules and under MI 61-101. In response to these concerns, BlackBerry was compelled to provide additional disclosure, which they did on August 21.
However, Gardner said that this update revealed a deeply flawed process with regards to the Related Party Transactions – in particular, the Board did not properly constitute an independent committee to consider the Related Party Transactions or alternative financing options available to the Company, and Mr. Watsa negotiated the transaction directly with management who are effectively beholden to him in his position as the Company’s Lead Director and Chair of the CNG Committee.
Gardner claimed that this update revealed that no actual market check was conducted with regards to financing alternatives.
Finally, Gardner says that the update discloses that the Company inserted a “blocker provision” in the terms of the new 1.75% debentures, such that Fairfax cannot convert above 19.99% of the common shares of the Company.
There can be no question this feature was added in direct response to Mr. Gardner’s concerns about creation of a new control block in a bald attempt to “sanitise” the Related Party Transactions and ensure that minority shareholders do not get to vote on the Related Party Transactions. The insertion of the “blocker provision” does not accomplish its intended objective, and the Related Party Transactions nevertheless remain subject to shareholder approval under the TSX and NYSE rules and under MI 61-101.
Disregard of Minority Shareholders
Gardner says the BlackBerry Board is trying to force the Related Party Transactions through in blatant disregard of minority shareholders:
Why is the BlackBerry Board trying to force the Related Party Transactions through in blatant disregard of minority shareholders? Fairfax and Mr. Watsa have a history, when presented with a conflict of interest, of working against the interests of minority shareholders and for the benefit of Fairfax.
In September 2019, the Québec Superior Court rendered a judgment in which it found that Mr. Watsa and Fairfax, as insiders of Fibrek Inc., acted in a “blatant conflict of interest situation” for the benefit of Fairfax by enabling the acquisition of Fibrek at the “lowest cost possible,” to the detriment of Fibrek’s minority shareholders who were bought out at an unfairly low price. The Court also found that despite the trust and confidence Fibrek placed in Mr. Watsa and Fairfax, Mr. Watsa purposely refrained from disclosing Fairfax’s true intentions to Fibrek management.
Gardner didn’t stop there, adding:
In light of Fairfax’s and Mr. Watsa’s history of misusing their insider positions at a target company for their own benefit and at the expense of minority shareholders, as described in the Fibrek case, how can the BlackBerry Board of Directors facilitate Fairfax’s potential acquisition of a controlling stake in the Company?
There is no reasonable answer. Nor is there a good business reason for issuing the new 1.75% debentures. The interest rate is well above the 10-year government rate, the Company’s cash flow is positive and it has over $300 million in unrestricted cash on its balance sheet. Essentially, the new debentures are a nearly risk-free loan for Fairfax with an equity kicker at a discounted price.
If management and the Board truly believe that the Company would benefit from enhanced liquidity, they can pursue another source of financing, even if at a rate higher than 1.75%, that would be preferable than facilitating Fairfax’s potential acquisition of BlackBerry at a discount price, and at substantial dilution to minority shareholders.
