The two seminal U.S. M&A cases are Revlon v. MacAndrews & Forbes Holdings and Paramount Communications Inc. and KDS Acquisitions Corp. v. Time Incorporated decided in 1986 and 1989, respectively, both by the Delaware Supreme Court.

In Revlon, the court held that, at the point when the break-up of Revlon became inevitable, the duty of the board changed from preservation of Revlon as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit. Baldly stated by the court, the directors role changed from defenders of the corporate bastion to auctioneers charged with getting the best price. The case has subsequently given its name to the proposition that, once a company is for sale, the directors must fulfill their "Revlon duties".

In the Time Warner case, Paramount Communications made an unsolicited all cash offer for Time at a price significantly above the price at which Time had negotiated a merger with Warner Communications. Time responded by revising the merger such that it no longer required shareholder approval. Paramount Communications applied for an injunction to restrain the transaction on the basis that, by entering into the proposed merger, Time had put itself up for sale and thereby triggered Revlon duties to obtain the highest price. The court refused the injunction and held that there are two circumstances which trigger Revlon duties:

  1. when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization; and
  1. in response to a bidder's offer, when a target abandons its long term strategy and seeks an alternative transaction also involving a break-up of the company.

The Time Warner case has subsequently become universally known for its justification of the "just say no" defence.

In the intervening years, the Revlon case has greatly overshadowed the Time Warner case, to the point where U.S. commentators have been questioning whether the "just say no" defence continues to exist (although no one seems to consider the possibility that, in the evolving M&A environment particularly of the past decade, there are very few companies which would be in a position to credibly argue that they have the kind of long term strategy put forward by Time).

What does either the Revlon case or the Time Warner case have to do with the Reasons for Decision issued by the Ontario Securities Commission ("OSC") on September 1, 2009 involving the unsolicited offer by Pala Investments Holdings Limited ("Pala") for Neo Material Technologies Inc. ("Neo")? The answer is that it is the first M&A decision in which the tension between the two legal principles is raised, if not resolved, in a Canadian context.


The facts are straightforward:

  1. Pala owned just over 20% of the issued shares of Neo, a company listed on the Toronto Stock Exchange.
  1. Neo had a shareholder approved shareholder rights plan (the "First Plan"). The First Plan contained a permitted bid exception which applied, among other conditions, where at least 50% of the independently held shares were tendered into an offer (the "Minimum Tender Condition").
  1. On February 25, 2009, Pala made a take-over bid for Neo which complied with all of the permitted bid requirements of the First Plan except the Minimum Tender Condition.
  1. Previously, on February 9, 2009, Pala had written to Neo requesting that the Minimum Tender Condition be waived.
  1. On February 12, 2009, Neo's board adopted a second shareholder rights plan (the "Second Plan"). The Second Plan was the same as the First Plan except that the permitted bid exception required a take-over bid to be made for all of the Neo shares.
  1. On April 24, 2009, the Neo shareholders approved the adoption of the Second Plan by a vote of 81% (of the 83% of the issued Neo shares which were represented at the meeting).
  1. Pala applied to the OSC for an order cease trading the Second Plan. A hearing was held on May 7, 2009 and the OSC issued its decision on May 11, 2009 which denied the requested relief.


The May 11, 2009 decision took into consideration the following factors:

  1. "the Second Shareholder Rights Plan was adopted by the Neo Board in the context of, and in response to, the Pala Offer;
  2. there is no evidence that the process undertaken by the Neo Board to evaluate and respond to the Pala Offer, including the decision to implement the Second Shareholder Rights Plan, was not carried out in what the Neo Board determined to be the best interests of the corporation and of Neo's shareholders, as a whole;
  3. an overwhelming majority of Neo's shareholders (excluding Pala) approved the Second Shareholder Rights Plan while the Pala Offer remained outstanding;
  4. the evidence supports a finding that Neo's shareholders were, or were provided with a reasonable opportunity to be, sufficiently informed about the Second Shareholder Rights Plan prior to casting their votes, and there is no evidence that Neo's shareholders were insufficiently informed; and
  5. there is no evidence to suggest that management or the Neo Board coerced or unduly pressured Neo's shareholders to approve the Second Shareholder Rights Plan."

Reasons for Decision

The OSC's Reasons for Decision reiterate and expand upon the factors that influenced its decision rendered on May 11, 2009. As well, the OSC retraces the factors set out in earlier cases involving the decision whether to cease trade a shareholder rights plan and examines the circumstances under which the OSC should exercise its public interest jurisdiction to cease trade a shareholder rights plan. The OSC concludes that it should examine all of the circumstances surrounding the establishment of the plan, including whether informed shareholder approval was given, and the context of such shareholder approval. In this case, the OSC found that there was ample evidence that shareholder approval was informed. However, with respect to a rights plan implemented in the face of a hostile bid, the OSC held that fully informed shareholder approval would not be determinative where: (a) there was evidence that the board's process in dealing with a bid, including the decision to implement a shareholder rights plan, was not carried out in the best interests of the target and its shareholders as a whole; or (b) there was evidence that management or the board coerced or pressured shareholders to approve the rights plan. In this case, the OSC held that the evidence on both questions supported Neo.

Having found that there was no evidence of impropriety in the conduct of the Neo board and that the shareholders of Neo had overwhelmingly voted to confirm the Second Plan despite the Pala offer, the OSC was still faced with a dilemma. Canadian M&A law has been built on the proposition that, at some point in time, a rights plan must go - the only question is, under the facts of any particular case, when that time should be. That being understood to be a general principle, Pala specifically argued that Canadian law does not permit a board to permanently "just say no". In support, Pala referred to the frequently quoted passage from the Ontario Court of Appeal decision in Maple Leaf Foods Inc. v. Schneider Corp. as follows:

"When it becomes clear that a company is for sale and there are several bidders, an auction is an appropriate mechanism to ensure that the board of a target company acts in a neutral manner to achieve the best value reasonably available to shareholders in the circumstances. When the board has received a single offer and has no reliable grounds upon which to judge its adequacy, a canvass of the market to determine if higher bids may be elicited is appropriate, and may be necessary... [emphasis added.]"

Pala argued that, in the face of a take-over bid, the duty of directors is to "achieve the best value available to shareholders in the circumstances", that at the very least the Neo board should be canvassing the market to determine whether higher bids could be elicited and that, by failing to take any such steps, the Neo board failed to discharge its fiduciary duties.

The OSC did not agree with Pala's arguments. Instead, the OSC agreed with Neo and OSC staff that in the past, the OSC has recognized that at least two underlying and animating principles emerge from the rules, policies and cases in the context of take-over bids: (a) the principle of procedural fairness for all; and (2) the principle of the fiduciary duty of directors, members of a special committee of directors, and their advisors. The OSC states in its Reasons for Decision that it flows from these principles that the process of implementing a shareholder rights plan in the face of a hostile take-over bid must be carried out in accordance with the fiduciary obligations of the directors, which, under Canadian corporate law, are owed to the corporation and not to the shareholders of the corporation.

A review of the Canadian case law supported the proposition that the determination of whether a board has discharged its fiduciary obligations is governed by the business judgment rule - that means the board must have acted reasonably and fairly and that they have made a reasonable decision, not a perfect decision. In that context, although in many instances a primary purpose for adopting a shareholder rights plan is to allow the board to pursue alternative value-enhancing transactions, the OSC did not see this as the only legitimate purpose for a rights plan. Relying on the Supreme Court of Canada in the BCE and Peoples cases, the OSC stated that "there is no specific formula to apply on directors in every case, including an obligation to permit and facilitate an auction of company shares each and every time an offeror makes a bid". To the contrary, the Ontario Court of Appeal in Schneider clearly stated that Revlon is not the law in Ontario and an auction need not be held every time there is a change of control of a company. Again, relying on established Canadian case law, the OSC held that a shareholder rights plan may be adopted for the broader purpose of protecting the long-term interests of shareholders, where, in the directors' reasonable business judgment, the implementation of a rights plan would be in the best interests of the corporation. Here it was evident that, in the view of the Neo board, avoiding an auction at this time was in the long-term best interests of the corporation and of the shareholders, as a whole. That decision reflected the business judgment of the Neo board and there was no evidence to suggest that it was made in any manner other than in furtherance of its fiduciary obligations to the corporation. Put another way, although the OSC did not use the expression, the OSC recognized a board's right, in a proper case, to "just say no".

That left the OSC with only one more question. If the Second Plan was allowed to stand, had the time come for it to be terminated? Pala argued that, despite a considerable amount of time having passed since its offer was launched, the Neo board had not identified any alternative transaction or made any attempt to attract a competing bid. Accordingly, the Second Plan served no purpose and should be terminated. The OSC agreed with Pala that "there comes a time when a rights plan must go". However, so long as the rights plan continued to allow management and the board the opportunity to fulfill their fiduciary duties, the plan continued to serve a purpose. In light of all of its other findings, the OSC was not convinced that the time had come to cease trade the Second Plan and gave no indication of when it might be convinced otherwise.


It is probably now clear that, given an unconflicted board, a fair and informed process, and a reasonable result, the business judgment rule trumps Revlon duties under Canadian law. It is also possible that, given the foregoing circumstances, the board of a target corporation can employ defensive tactics which have an effect similar to the "just say no" defence under the Time Warner case, although it is premature at this point to say for how long.