Chief Justice Myron Steele
Justice Marie Deschamps
On October 5 2011 a panel discussion on cross-border issues in mergers and acquisitions brought together Chief Justice Myron Steele of the Delaware Supreme Court, Justice Marie Deschamps of the Supreme Court of Canada and senior M&A lawyer Jeff Barnes.
The panel discussion focused on the review of shareholder rights plans – also known as poison pills – in Canada and Delaware, and the differing approaches taken by courts and the securities regulators. Although there are clearly dramatic differences in the analysis carried out under Delaware and Canadian law and significant differences in the approach taken by courts and regulators, the panellists noted that, in appropriate circumstances, the outcomes may be similar. Highlights of the panellists' remarks are set out below.
Chief Justice Myron Steele
The chief justice suggested that the view that Delaware law allows a board of directors to 'just say no' to a hostile offer has been overstated. In the context of appropriate findings of fact that a poison pill is no longer reasonable or that there is no sufficiently articulated long-term strategy that requires protection, he suggested that a case could be made for a mandatory injunction removing a poison pill under Delaware law.
Steele noted that poison pills are generally considered under the intermediate form of scrutiny that falls between the business judgement rule, where the court will defer to the judgment of the board of directors, and the entire fairness review, where the burden shifts to the board to demonstrate that a judgment was fair to the shareholders, both in terms of the process that gave rise to the price and the price achieved.
Under this intermediate standard it is acceptable for boards of directors to raise defensive measures to hostile offers when they believe – in good faith, after reasonable diligence and in the exercise of their duty – that the offer is inadequate or is a sham offer that cannot be reasonably consummated. The board's duty is initially to protect the strategy that it believes is in the long-term interests of the corporation and to exercise its fiduciary duty to protect shareholders' interests, as long as they are consistent with that strategy. In assessing a board's actions, courts must consider whether:
- there is a genuine cognisable threat to the long-term strategy of the corporation; and
- the board's response is reasonable and proportionate.
The focus should be on whether there is a long-term strategy in place that the board intends to pursue, but this does not mean that a board can say no for ever.
Steele noted that the analysis is determined primarily by the facts found in each decision. Findings of fact made by the Court of Chancery are accepted on review by the Delaware Supreme Court unless they are clearly erroneous. Steele suggested that, with appropriate findings of fact, a pill could be removed under Delaware law.
As an example, Steele reviewed the recent decision of Chancellor Chandler in Air Products v Airgas, which was not appealed to the Delaware Supreme Court. In that decision, Chandler declined to issue an injunction against a poison pill maintained by the Airgas board to block an unsolicited offer from Air Products.
The 'best and final' offer from Air Products fell short of the Airgas board's view of the corporation's fair value and the board's valuation was supported by both independent shareholder advisory firms and by three independent directors who had been successfully nominated to the Airgas nine-member staggered board by the bidder. There was also evidence that a substantial number of shares were held by short-term arbitrageurs, which would be likely to tender their shares to any offer at a premium to the current market price, regardless of the long-term prospective value of the corporation. The willingness of shareholders to accept an inadequate offer, referred to as substantive coercion, has been recognised as a legitimate threat to a long-term corporate strategy in prior Delaware decisions.
Steele noted that there was a tension between the view, on the one hand, that the board should have power to defeat an inadequate hostile offer and the view, on the other hand, that, once the board has discharged its duty to make clear to shareholders its view of the long-term value of the corporation and there is no likelihood that the poison pill could be used to generate an alternative offer, it should be the shareholders' responsibility to decide whether to accept the board's view of the corporation's value or accept the bidder's offer. Chandler's opinion appeared to show some sympathy for the latter position. However, he described his analysis as "constrained by Delaware Supreme Court precedent".
Steele took issue with the view that the Chancery is constrained in its ability to remove a pill in the appropriate circumstances. He suggested that if the chancellor had found facts that were inconsistent with it being reasonable to keep the pill in place, an injunction against maintaining the pill could be issued under Delaware law. Where there is a battle of valuations, rather than the defence of a long-term strategy, a case can be made for removing the pill and letting the shareholders decide.
Steele also addressed the rationale for the existence of the Revlon duty under Delaware law. The paradigmatic situation under which Revlon applies is where the board decides that the corporation is for sale. Once there is a decision that there is no alternative to a sale, there is only one duty – to maximise value for shareholders. The board is free to pursue a range of strategies in seeking to fulfil this duty, but there is no valid course other than a process that is reasonably dedicated to maximise value for shareholders. He noted that under Delaware law, once it has been decided that a corporation's long-term strategy is not viable, it no longer makes sense to consider that the board owes a duty to the corporation or any class of stakeholders other than the shareholders. He noted that this appears to be a significant difference from Canadian law and the considerations under the public interest approach taken by the Canadian securities regulators.
Mr Barnes opened the session with an overview of the operation of poison pills and the Canadian securities regulators' review of poison pills. He noted that a significant difference between poison pills in Canada and the United States is the widespread existence of the 'permitted bid' concept. Canadian poison pills allow a permitted bid to be made without triggering the pill. A permitted bid must be open for at least 60 days and must have specific minimum conditions. By contrast, in the United States, there is generally no mechanism for effecting a bid without going to court to have the poison pill removed.
In Canada, the securities regulators took jurisdiction over poison pills shortly after they came into existence. Canadians regulators use their broad powers to make orders in the public interest to regulate poison pills. National Policy 62-202, entitled 'Takeover Bids: Defensive Tactics', outlines how the public interest jurisdiction will be interpreted in connection with poison pills.
The Canadian review of poison pills is focused on the regulatory concern that there is an inherent conflict of interest between management and directors, which may have an interest in maintaining their positions, and shareholders, which have an interest in maximising the value of their investment. The policy strongly favours unrestricted auctions for corporations in Canada as a means of dealing with this inherent conflict of interest.
As a result, a poison pill can be used only as an auctioneer's gavel. Once there is an offer, the board generally cannot stand in the way of the shareholders deciding whether to accept the offer. Although there have been exceptions, the securities regulators will generally require a poison pill to be removed after an average of approximately 75 days. In particular, while the conduct of the board of directors may be taken into account, the fact that a board acts in accordance with its fiduciary duties will not justify maintaining a poison pill indefinitely.
Justice Marie Deschamps
Justice Deschamps's remarks focused on the directors' fiduciary duty and duty of care under the Canada Business Corporations Act. She noted, with reference to the 1971 Dickerson Report on the reformulation of the act, that the balance between shareholder rights and other stakeholders was specifically considered by the drafters of the act. The act was intentionally formulated as a director-centric statute, with the responsibility for managing the corporation resting exclusively with the directors. However, broad remedies were provided to stakeholders, such as the oppression remedy. Furthermore, while the directors' fiduciary duty is owed only to the corporation, the scope of the duty of care was left open-ended and was framed in the same terms as common law professional liability.
The Supreme Court of Canada has dealt with change of control situations in Peoples, which concerned an insolvency, and BCE, which concerned a friendly leveraged buy-out. In these decisions, the court was not considering the inherent conflict between directors and shareholders, as is the case under a poison pill, but between competing stakeholders. The issue was whether the directors had met their duties in the process leading up to the challenged action. In both cases, the court emphasised that the directors' fiduciary duty is owed only to the corporation. Directors must look to the long-term interests of the corporation and there are no specific stakeholders, including shareholders, whose interests are to be preferred.
In response to Steele's comments, Deschamps noted that under Canadian law, the directors' fiduciary duty is always owed to the corporation, regardless of whether the directors have decided that a sale is inevitable. Even if the shareholders change, the corporation continues to exist and the directors' duties remain intact. However, despite this difference, she noted that the Canadian courts' review, with the focus on the directors' execution of their fiduciary duty and the long-term interests of the corporation, is closer to the review conducted by the Delaware courts than the public interest review of the Canadian securities regulators.
It will be interesting to see whether the regulation of poison pills by Canadian securities regulators will continue in its current form. It appears increasingly likely that the regulators may revisit the application of National Policy 62-202 to poison pills and consider a specific rule to remove the uncertainty that arises from regulating poison pills through the contested hearing process.
For further information on this topic please contact David Surat or Fred Enns at Borden Ladner Gervais LLP by telephone (+1 416 367 6000), fax (+1 416 367 6749) or email ([email protected] or [email protected]).