In a rather active year for hostile M&A activity in Canada1, there were only two shareholder rights plan decisions. These decisions generally signalled a return to the traditional treatment of rights plans in Canada following controversial and inconsistent decisions made by regulators across several jurisdictions (notably, Ontario, Alberta and British Columbia) over the prior two-year period. In cease-trading the shareholder rights plans of MOSAID and Afexa, both the Ontario Securities Commission (OSC) and the Alberta Securities Commission (ASC), respectively, indicated that the question remains when, not if, a rights plan will be set aside.
Poison Pills in Canada
The most common defensive tactic available to Canadian companies faced with a hostile take-over is a shareholder rights plan or “poison pill”. Since Toronto Stock Exchange rules require that pills be approved by shareholders within six months of adoption, institutional shareholders, proxy advisory firms and corporate governance advocates have had considerable influence over their terms, which have become fairly standardized in both form and substance. Rights plans are well established in Canada and have many features in common with their U.S. counterparts, with two significant differences. First, Canadian rights plans typically allow for a “permitted bid”, which allows a bidder to acquire shares free of dilution after the bid has been outstanding for 60 days provided that the bidder acquires a majority of the shares held by independent shareholders and agrees to extend its bid for a further 10 days after the initial acquisition. Second, Canadian pills are less effective and less durable than U.S. pills, due in large measure to differences in the way disputes over their application have been litigated in the two countries. In the United States, challenges to shareholder rights plans are heard by the courts, which apply a directors’ duties analysis in determining whether a board can implement and maintain a plan. In Canada, the securities regulators will typically exercise their jurisdiction to issue cease-trade orders to invalidate rights plans, usually no later than 60-70 days after the bid has been launched. The regulators weigh the interest of shareholders in not being deprived of the ability to decide whether to accept or reject a bid against the likelihood of the target being able to secure a better offer.
Consequently, Canada has generally been said to be a bidder-friendly environment as shareholder rights plans will be cease-traded within two to three months of the commencement of an offer, absent unusual facts. By comparison, in a recent and prominent U.S. decision (Air Products and Chemicals, Inc. v. Airgas, Inc.), the Delaware court refused to invalidate a rights plan over a year after the bid had been made. There are also no staggered boards in Canada to frustrate potential buyers and most rights plans are structured so as to allow for a “permitted bid”. This means that a Canadian board of directors cannot “just say no”, and will almost always seek to elicit a better bid. Generally speaking, once a Canadian target company is put in play, a change of control transaction is likely to occur.
Recent Pill Jurisprudence of the Past Two Years
How we arrived in 2011 at a return to the principles of past pill jurisprudence deserves some explanation. In mid-2009, the OSC declined for the first time to exercise its public interest jurisdiction to cease-trade a rights plan in Re Neo Material Technologies. The decision came as a surprise to many observers as it saw the OSC engage in an extensive fiduciary duty analysis, whereas previous rights plan decisions had expressed the view that fiduciary duty determinations were properly left to the courts. Some practitioners had suggested that the decision (combined with a similar 2007 decision of the ASC in Re Pulse Data) might enable boards to “just say no”, whereas others believed that the decisions involved unique facts and did not represent a change in the traditional Canadian approach to rights plans.
In May 2010, the British Columbia Securities Commission (BCSC) opted for the latter view and cease-traded a rights plan adopted by Lions Gate in response to a hostile take-over made by Carl Icahn. In Re Lions Gate, the BCSC expressed reservations about the decision in Neo and noted that it represented a departure from the Canadian securities regulators’ prior view of the public interest as it relates to the adoption of rights plans. The BCSC also noted that shareholder approval of a rights plan, in itself, is insufficient to justify preserving the rights plan. Rather it is a relevant consideration if the rights plan is designed to give a board more time to seek an improvement of an offer or a competing bid or an alternative transaction.
In December 2010, the OSC cease-traded a rights plan in Re Baffinland Iron Mines as it was not prepared to leave the plan in place in light of competing bids for Baffinland. Consistent with earlier decisions, the OSC took the position that shareholders should be allowed to choose which bid they wished to accept. The OSC confirmed that directors could not use a rights plan to “just say no”. The OSC also made clear that it felt its decision in Neo involved unusual facts and that any consideration of fiduciary duties was a relevant, but secondary, consideration. However, unlike the BCSC, the OSC did not take issue with the proposition that informed shareholder approval in the face of a bid may be a significant factor in determining whether to cease-trade a pill.
Developments in 2011
The MOSAID and Afexa decisions of 2011 build upon Lions Gate and Baffinland in that they reaffirm the traditional public interest analysis undertaken by securities commissions with respect to rights plans.
In September 2011, the ASC cease-traded a rights plan in Re Afexa Life Sciences, effective at the expiry of a go-shop period contained in a support agreement entered into with a white knight in the face of a hostile bid and over seven weeks after the bid was commenced. Afexa was able to point to a number of confidentiality agreements that had been signed and asserted that there was a real prospect that a better offer might emerge from the go-shop process. Staff of the ASC and the hostile bidder argued for an immediate cease-trade order. The ASC indicated that while some deference to the Afexa board was warranted, it was ultimately within the commission’s own authority (acting in the public interest), and not within the directors’ authority, to determine when a shareholder rights plan has served its purpose and should be terminated.
In October 2011, the OSC permitted MOSAID’s shareholder rights plan to remain in place for approximately three additional weeks as it found that the pill was serving a purpose by providing for the continuation of an auction which might enhance shareholder value. MOSAID was able to point to an acquisition proposal that had been delivered and which might with time turn into a superior offer (which in fact turned out to be the case). The OSC decided to grant additional time to MOSAID, but less time than MOSAID had requested, despite the fact that over 90% of MOSAID shareholders had voted to renew the rights plan after the commencement of Wi-LAN’s hostile bid. Noting that the date of the cease-trade order would be 70 days from the commencement of the hostile bid, the OSC appears to have been influenced in its decision to leave the rights plan in place for a limited period of time by traditional factors such as shareholder approval, the size and complexity of MOSAID and evidence of an auction process.
Having regard for the current environment, the deference shown to shareholder approval of rights plans in allowing the rights plans in Neo and Pulse Data to remain in place can be characterized as outlier cases that are distinguishable by their unique facts. The Afexa and MOSAID decisions mark a continuation of traditional Canadian rights plan jurisprudence, and the question today remains when, not if, a rights plan will be set aside.
As a result, we now appear to have a common view regarding the weight to be placed on a shareholder vote for a rights plan: it is a relevant factor but is not determinative. In the Afexa and MOSAID decisions, the key factor was whether the rights plan, if allowed to continue, might enable a better offer to emerge. In each case, there was evidence to that effect, and in MOSAID a superior offer from Sterling Trust succeeded. Shareholder approval, even timely and overwhelming, appears not to have been given substantial weight. We also have some deference shown by the ASC and the OSC to the boards of target corporations with respect to the timing of cease-trading a rights plan; however, it is unclear where the BCSC stands on this issue. So while it is fair to say that the “just say no” defence strategy has not found favour in Canada, our securities commissions have more work ahead of them if they are to unite in respect of the issues raised in these cases.
Our View for 2012
One theme that emerges from the rights plan jurisprudence is a classic conundrum of Canadian securities regulation: the inconsistencies and uncertainty that can arise from decisions made by Canada’s multiple securities regulators. In December 2011, the Supreme Court of Canada ruled that the national securities act proposed by the federal government was unconstitutional. In the absence of a national securities regulator, any effort to resolve the inconsistencies and uncertainty in Canadian rights plan jurisprudence will be led by the provincial securities commissions, if such efforts are made at all. It is also worth noting that the OSC has recently signalled in public forums that it is in the preliminary stages of reconsidering its policies on defensive tactics, including rights plans. In particular, the OSC has suggested that it may be open to the proposition that once a rights plan has received shareholder approval, the rights plan should then be able to stay in place for the approved term unless and until the board in the exercise of its fiduciary duties decides that the time has come for the rights plan to go. Were the OSC to proceed with this approach, the implications would be significant for M&A defence planning. Accordingly, 2012 may bring new developments to the regulation of rights plans in Canada.