The British Columbia Securities Commission (BCSC) has issued its final majority reasons in the case of Icahn Partners and Lions Gate Entertainment. The BCSC had issued a ruling that cease traded the Lions Gate shareholders' rights plan (SRP) at the conclusion of a hearing in April, 2010. In summary reasons that followed, a majority of the hearing panel expressed reservations that the decisions of the Alberta Securities Commission in Pulse Data Inc. and the Ontario Securities Commission in NEO Materials Technologies may have departed from the Canadian Securities Regulators’ view of the public interest as it relates to SRPs in prior decisions of Canadian Securities Commissions and in National Policy 62-202 on defensive tactics and takeover bids.

It was expected that the final reasons would address the question of when, if ever, a Board acting in its fiduciary capacity could use defensive tactics to "Just say ‘No’" to a hostile takeover bid without giving the shareholders the opportunity to decide whether to tender to the offer.

The majority reasons are a clear statement of the established view that defensive tactics in the face of a hostile takeover bid are temporary measures that are permissible only for as long as they facilitate the effort to maximize shareholder value through enhancements to the bid, competing bids or alternative transactions. However, defensive tactics will be set aside if they will likely result in shareholders being deprived of the opportunity to decide whether to tender into the bid.

Notwithstanding the strong position taken by the majority, this decision leaves open the issue of whether informed shareholders’ support of an SRP adopted in response to either a specific bid, or a decision of a Board, acting in its fiduciary capacity, that the long-term interest of the corporation is best served by just saying "No" to a hostile bid, could be an adequate basis for refusing to set aside an SRP.

The background to this decision begins on March 1, 2010, when the Icahn Group offered to acquire up to 10 per cent of the outstanding shares of Lions Gate at US $6.00 per share. The Lions Gate Board recommenced rejection of the offer on the basis that it was financially inadequate, coercive and not in the best interests of the Company. The Lions Gate Board adopted an SRP and set a shareholders’ meeting for May 4, 2010 for the shareholders to vote on the plan. Icahn amended the offer to seek to acquire all outstanding shares of Lions Gate at US $7.00 per share; this amended offer expired April 30, 2010.

Icahn’s offer had a minimum tendering condition that the number of shares tendered when combined with those owned by Icahn must exceed 50.1 per cent of the outstanding Lions Gate shares. The amended offer reserved the right to waive this minimum-tender condition. Icahn applied to the BCSC to cease trade the Lions Gate SRP, and on April 27, 2010, following a hearing that day, the BCSC ordered that the SRP be cease traded.

The majority reasons elaborated on the BCSC’s decision that it was in the public interest to order that the Lions Gate SRP be cease traded in light of Icahn’s bid: "The majority adapts the principle that each shareholder of a target company should have the opportunity to decide whether to tender their shares into the bid. The Board of a target company has a fiduciary duty to act in the best interest of the corporation, and Canadian Securities Regulators are reluctant to interfere with a target company board’s discharge of its fiduciary duty in a face of a hostile bid."

Defensive tactics such as SRPs are not contrary to the public interest when they are used as part of an effort to maximize shareholder value through enhancements to the existing bid, competing bids or alternative transactions. However, defensive tactics are only temporary measures and will not be allowed to stand when they will deprive the shareholders of the opportunity to decide whether to accept a bid.

The majority reasons recognize that takeover bids are fact-specific and that different factors will apply in each case. Factors that are often relevant to determining whether it is time to cease trade the SRP or whether there are realistic potential alternatives to the existing bid include: (i) when the SRP was adopted; (ii) whether it has broad shareholder support; and (iii) whether the existing bid is coercive or unfair.

The most significant factor in the majority reasons was the decision by the Lions Gate Board not to seek an improved or alternative transaction to the Icahn bid. In other words, the Lions Gate Board just said "No" to the Icahn bid.

The BCSC did not consider whether this decision was a breach of the Boards’ fiduciary duty but did conclude that, having made the decision, the Lions Gate Board should not expect securities regulators to allow the SRP to interfere with the shareholders’ right to decide whether to tender into the bid.

The BCSC concluded that, in the absence of any attempts by the target company board to take any steps to increase shareholder value through an improvement to the bid or the presentation of alternative transactions, there is no basis for allowing an SRP to continue.

The majority reasons pointed to National Policy 62-202 and the line of decisions from Canadian Securities Commission Panels as establishing two things:

1.The only reason a Canadian Securities Regulator will tolerate an SRP is to give the target company board time to discharge its fiduciary duty.

2.The focus of that duty is to improve the existing bid or to find a better one.

The majority rejected the interpretation of "Pulse" and "Neo" as authority for the proposition that the target company boards can enshrine an SRP and "Just say ‘No’" to offers not permitted under the SRP if the target’s shareholders have approved the SRP in the face of a bid. Instead, the BCSC interpreted "Pulse" and "Neo" as not representing any significant change to the Canadian Securities Regulators’ public interest policy principles governing SRPs, and specifically refer to the fact that both of those decisions had contemplated that a change in circumstances could lead to the SRPs being cease traded.

Notwithstanding the clear rejection of the "Just say ‘No’" regime, questions remain about the legitimate scope of defensive tactics in response to a hostile takeover bid and whether the target board’s fiduciary duty is solely focused on seeking an improved or alternative transaction to the hostile bid.

The intersection of Corporate Law and Securities Law is at the centre of these questions. If the shareholders’ right to decide whether to sell their shares in response to a takeover bid is given primacy over the board’s fiduciary duty to manage with a view to the best interest of the corporation, there is a risk that short-term or exceptional circumstances will overtake what the board determines is in the long-term best interest of the Corporation. Put the other way, the shareholders could lose the right to determine what they do with their shares.

The decision in Lions Gate is a strong endorsement of the view that shareholders cannot be deprived of their opportunity to tender into a bid by defensive tactics adopted by the target board. However, when read together with "Pulse" and "Neo," it remains uncertain whether a target company will always be required to demonstrate a realistic possibility of a better bid or alternative transaction as a condition of supporting an SRP. A minority number of the panel agreed with the result, but not with the reasoning. At the time of writing, those reasons have not been released.

To read our related article discussing, among other things, Canadian Heritage approval of the acquisition of Lions Gate by Icahn, click here.