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TSX Reversal and Shareholder Objections Spur BlackBerry to Revise Related Party Transactions with Fairfax
[September 02, 2020]

TSX Reversal and Shareholder Objections Spur BlackBerry to Revise Related Party Transactions with Fairfax

TORONTO, Sept. 2, 2020 /CNW/ - Dorsey R. Gardner, a long-standing shareholder of BlackBerry Limited ("BlackBerry" or the "Company") has issued this press release to express his continued concerns over BlackBerry's recently completed recapitalization transactions (the "Related Party Transactions"), which 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 Mr. 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. The second set of revisions BlackBerry announced late on Friday, August 28, 2020 do not "sanitize" the Related Party Transactions, which are tainted by director conflict of interest, a flawed process, and the absence of disinterested shareholder approval.

In sum, the Related Party Transactions are extremely troubling because:

  • They were the product of potential breaches of fiduciary duty given that BlackBerry's lead director, Watsa, stood on both sides of the deal, and his interest in acquiring BlackBerry stock at the lowest cost possible on behalf of Fairfax is antithetical to the interests of BlackBerry and its common shareholders;
  • They were accomplished via a flawed process that did not ensure arm's length negotiations designed to obtain the best terms available for the Company and its shareholders; and
  • The Company went to great lengths to force the deal through without the required shareholder approval, including several revisions to the deal terms and reliance on a temporary pandemic-related exception to the shareholder approval requirement.

In response to concerns raised by shareholders and regulators scrutinizing the Related Party Transactions, including the Toronto Stock Exchange ("TSX")'s unprecedented recent reversal of conditional approval of the issuance of US$500 million in 1.75% unsecured convertible debentures (the "1.75% Debentures") to Fairfax, BlackBerry revised the terms of Fairfax's subscription for the 1.75% Debentures in order to avoid seeking disinterested shareholder approval of the transaction, as required by applicable TSX and New York Stock Exchange ("NYSE") rules. Mr. Gardner believes that the revisions announced on August 28th—namely, the reduction of Fairfax's subscription for 1.75% Debentures to US$330 million such that Fairfax's beneficial ownership of BlackBerry common stock, assuming conversion, would amount to 16.6%—do not cure the transaction's harmful dilution and oppression of minority shareholders. The transaction still enables Fairfax, an affiliate of BlackBerry's lead director, to become the Company's largest single shareholder at the low price of US$6 per share, a scant premium over the current market price of US$5.58.

More troubling to Mr. Gardner is the unfair and flawed process by which BlackBerry's board of directors (the "Board") negotiated the transaction with its lead director, Prem Watsa, who stands on both sides of the deal as he is also the Chairman, CEO, and controlling shareholder of Fairfax. The Board did not employ adequate safeguards to ensure an arm's length process that would lead to the best terms for the Company and its unaffiliated shareholders. Instead, as the Company describes in its recent press releases, the Board and management negotiated directly with Prem Watsa despite his conflict of interest, relying only on Watsa's recusal from the Board's decision-making on whether to accept Watsa's proposal. No independent committee was struck. Nor did Watsa resign from the Board while it considered the Related Party Transactions which, as initially disclosed, would have delivered a 20.3% control block to Farfax. The Board also did not actually canvass the market to determine whether BlackBerry could obtain more favorable financing terms from an unaffiliated third party.  Rather, the Board simply compared the Related Party Transactions with hypothetical "terms expected to be available in a marketed offering" apparently based on consultation with the Company's financial advisor.

BlackBerry's recently announced second round of revisions to the transaction lead Mr. Gardner to the inescapable conclusion that the Board determined to force through a hopelessly conflicted transaction, which materially affects control of the Company, without putting it to a disinterested shareholder vote. If, as BlackBerry contends, the Related Party Transactions truly represent the best terms available and are in the best interest of the Company and its shareholders, why did the Board do everything in its power to prevent a shareholder vote? If the Board is so confident it obtained the best terms, surely it should have been able to convince shareholders to vote in favor of the Related Party Transactions through complete and accurate disclosure in a proxy circular.

Mr. Gardner believes the Board is beholden to Prem Watsa and is therefore turning a blind eye to Fairfax's and Watsa's 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 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 Watsa and Fairfax, Watsa purposely refrained from disclosing Fairfax's true intentions to Fibrek management.

Despite these red flags, instead of thoroughly scrutinizing Watsa's proposal for the Related Party Transactions by subjecting it to an actual market check and constituting a properly functioning special committee to conduct arm's length negotiations, the BlackBerry Board negotiated directly with Watsa. Worse, it appears the Board considered the Related Party Transactions a forgone conclusion. As disclosed in the Company's August 21, 2020 press release, "promptly" after the meeting at which the Board decided to pursue new financing alternatives, Watsa approached John Chen, BlackBerry CEO and Executive Chair of the Board, to propose the refinancing by Fairfax.  The Board then proceeded to negotiate exclusively with Fairfax and Watsa rather than developing an offering to present to the market. It then took steps to circumvent shareholder approval.

Why did the Board push through the Fairfax proposal rather than seeking alternative offers or an informed shareholder vote? Mr. Gardner believes the Company's directors could not overcome the influence and power Watsa wields as Lead Director and Chair of the CNG Committee.  As CNG Committee Chair, Watsa plays a significant role in key executive and director compensation, director appointments, and corporate governance. Mr. Gardner believes the Board did not take adequate steps to disable Watsa's influence when negotiating the Related Party Transactions.

Based on Fairfax's and Watsa's track record as shown in the Fibrek case, Mr. Gardner believes the Related Party Transactions are likely part of a "loan-to-own" strategy by Fairfax, with preferential terms approved by the BlackBerry Board on which Watsa sits.  BlackBerry has more than US$300 million in unrestricted cash on its balance sheet.  The 1.75% Debenture issuance is therefore a nearly risk-free loan for Fairfax by which it will be able to nearly double its equity and voting power, paving the way for a potential buyout at the "lowest cost possible" as in the case of Fibrek.

Indeed, the Related Party Transactions enable Fairfax's acquisition of a controlling position in BlackBerry at the bargain price of US$6—a steep discount from the US$10 conversion price of the 3.75% Debentures BlackBerry redeemed from Fairfax before issuing the 1.75% Debentures to it. As of the close of trading on September 1, 2020, BlackBerry was trading at US$5.58 per common share. Fairfax will therefore obtain a controlling position without paying an adequate control premium, but with a harmful dilutive impact on minority shareholders. 

What is more, the timing of the announcement of the Related Party Transactions is suspicious, to say the least. BlackBerry stock was trading above the US$6 conversion price of the 1.75% Debentures as recently as February 20, 2020. Notwithstanding pandemic-related market dislocation, at the Company's June 23, 2020 Annual General Meeting BlackBerry CEO John Chen touted that BlackBerry is "very bullish" about increasing shareholder value. Chen further suggested that pandemic conditions have created growth opportunities for BlackBerry, noting the increase in number of cyberattacks—a boon for a company specializing in cybersecurity solutions. Nevertheless, as described in its August 21, 2020 press release, to avoid submitting the Related Party Transactions to the requisite shareholder vote, BlackBerry inexplicably relied on a temporary exception to the NYSE rule requiring shareholder approval based on pandemic-related hardships.

Following the July 22, 2020 announcement of the Related Party Transactions, the Company has issued no fewer than four (4) press releases announcing positive developments—the deal to license its QNX technology to electric vehicle ("EV") company Canoo; BlackBerry's expanded partnership with Vodafone for secure crisis communications; its partnership with Desay SV Automotive to place QNX operating systems in EVs manufactured by Xpeng Motors; and its achievement of Department of Defense Information Network approval for BlackBerry UEM. These announcements have coincided with BlackBerry's stock price rally from US$4.79 on July 22, 2020 to US$5.58 as of September 1, 2020.

Based on the above, Mr. Gardner believes it is reasonable to conclude that BlackBerry management, including its lead director Prem Watsa, had reason to believe that BlackBerry stock would appreciate in value such that the US$6 conversion price of Fairfax's 1.75% Debentures would reflect not only a dramatic discount from the US$10 conversion price of Fairfax's previous 3.75% Debentures, but also a discount from market price by the time Fairfax elects to convert its debentures into common shares.

Simply put, Mr. Gardner views the Fairfax "refinancing" as an unfair, oppressive transaction designed to transfer low-priced equity to Fairfax, a firm controlled by BlackBerry insider Prem Watsa, with nothing in return for unaffiliated BlackBerry shareholders.

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SOURCE Dorsey R. Gardner

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