The decision of the Ontario Securities Commission in Neo Material Technologies (described below) and the musings of Vice Chancellor Leo Strine, Jr., of the Delaware Chancery Court, have revived the debate on both sides of the border on whether and when a target board may rely on a poison pill to “just say no” to a hostile takeover bid, pre-empting target shareholders from determining the outcome of the bid. Until the uncertainty created in Canada by Neo is clarified through further decisions, there is the prospect of more contested securities regulatory hearings in Canada on the use of poison pills as a defensive tactic.
The legal position on pills in Canada before Neo was well-settled. Whether or not the target corporation was in sale mode, securities regulators would not permit the target board to use a poison pill to prevent target shareholders from gaining access to an unsolicited offer and determining the outcome of the bid. At most, a target board could delay target-shareholder access to an offer in order to provide time for the board to seek out a better bid. But the only question was when – not whether – the pill would be cease-traded by securities regulators.
In Neo, the OSC signalled a possible change in approach. The OSC declined to cease-trade a pill deployed in the face of what the target board considered an undervalued and opportunistic bid in circumstances in which the target board was not seeking out a better offer and target shareholders had ratified the continued deployment of the pill. The OSC said that a pill can be maintained in the face of an unsolicited bid as long as it continued to serve the purpose of allowing the target board to fulfill its fiduciary duty to protect the long-term best interests of the target corporation. Neo raises at least the possibility that a target board may be permitted to “just say no” to an unsolicited bid that it considers, on reasonable grounds, a threat to the long-term best interests of the corporation – at least when, as in Neo, the continued deployment of the pill has been ratified by shareholders.
An interesting counterpoint to the possible expanded scope for pills in Canada occurred in Delaware. There, Vice Chancellor Strine, in a chambers appearance in the takeover battle between Broadcom Corporation and Emulex, appeared to be inviting a challenge to the use of a poison pill as a defensive tactic when coupled with a supermajority by-law provision relating to the calling of a special meeting.
Delaware courts, after showing some early hostility to poison pills, have taken a generally deferential approach since the late 1980s to the use of pills to “just say no” to unsolicited offers if the target corporation was not for sale. This deferential approach appears to have been premised, in part, on the ballot box being open to target shareholders, making a proxy fight possible to replace a recalcitrant board. Vice Chancellor Strine, with reference to Emulex’s adoption of a supermajority by-law, seems to be saying that if it can be shown that the ballot box is not open, “just say no” would not be allowed under Delaware law, and the Delaware court may order the target’s poison pill to be redeemed. Accordingly, U.S. target boards may be more cautious in 2010 about the active steps they take to discourage an unsolicited offer.