an opportunity to revise National Policy 62-202 and provide clarity on the regulatory approach to poison pills
In considering applications to cease trade shareholder rights plans (commonly referred to as “poison pills”(SRPs)), certain decisions in recent years of securities regulators in Ontario, British Columbia and Alberta have produced inconsistent results and have introduced a level of uncertainty to market participants (i.e., potential acquirers, target companies and shareholders) as to the likely outcome of SRP hearings. While the recent decision of the Ontario Securities Commission (OSC) in Baffinland Iron Mines Corp., Re1 made clear that directors of a target board can’t employ an SRP to effectively “just say no” to hostile bids and keep an SRP in place forever (laying to rest speculation as to whether recent decisions in Ontario and Alberta were pointing towards a Delaware style approach that gives significant deference to the business judgment of directors in control contests), there remains an irreconcilable gap in regulators’ decisions in cases where shareholder approval of an SRP has been obtained in the face of a specific bid. More generally, this gap reveals differing approaches of securities regulators with respect to the purpose of SRPs, the manner in which they can be used, and the resulting length of time for which an SRP may be allowed to stand. Essentially, two poles have emerged:
- the position that the only legitimate purpose of an SRP is to allow a target board to seek an improved or alternative offer as each shareholder has an absolute right to accept or reject a bid (represented by the majority decision of the British Columbia Securities Commission (BCSC) in Icahn Partners LP et al and Lions Gate Entertainment Corp.2); and
- a more nuanced and fact-specific approach that recognizes that an SRP may be adopted for broader longer-term purposes when approved by an “overwhelming” majority of shareholders in the face of a specific bid (represented by the decisions of the OSC in Neo Material Technologies Inc., Re3, the Alberta Securities Commission (ASC) in Pulse Data Inc., Re4 and the minority reasons of the BCSC in Lions Gate5).
This inconsistency brings into question the interpretation and application of National Policy 62-202 – Take-Over Bids – Defensive Tactics (NP 62-202), the policy under which securities regulators consider unsolicited takeover bids and the defensive tactics employed by target boards. Criticism from certain quarters has questioned securities regulators’ exercise of their public interest jurisdiction to cease trade an SRP and the broad nature of the public interest power generally. Some commentators, including a former Chair of the OSC6, have gone so far as to question the very utility of NP 62-202, suggesting that securities regulators exit the picture entirely on defensive tactics, NP 62-202 be repealed and that such matters be left to the courts to decide. With respect, the repeal of a defensive tactics regime that is approaching its 25th anniversary (when one includes its predecessor policy) accompanied with a decision of securities regulators to not exercise their public interest discretion in respect of defensive tactics, seems an unrealistic prospect. The regulators’ jurisdiction to intervene on public interest grounds has longstanding authority, and courts afford a high degree of deference to the decisions of securities regulators.7 Although the 2006 Task Force to Modernize Securities Legislation in Canada recommended the creation of a specialized “Capital Markets Court”8 akin to the Commercial List of the Ontario Superior Court of Justice, such an endeavour appears unlikely to materialize. Against this backdrop, a way forward on poison pills would most productively be forged by way of modified and improved policy guidance from the Canadian Securities Administrators (CSA). We note with interest that the OSC’s Statement of Priorities for fiscal year 2010-2011 states that a key regulatory priority is to propose a revised policy on defensive tactics. This provides an opportunity for the CSA to reflect upon the inconsistency surrounding the recent decisions and work towards providing comprehensive guidance in a revised NP 62-202. Given the need for clarity, we think that the minority reasons of the BCSC in Lions Gate, which agreed with the conclusion of the majority but also with the reasoning of the OSC and ASC in the Neo Material and Pulse Data decisions, could effectively inform a rethink of NP 62-202 and provide a possible template for the CSA to articulate a set of conditions and guiding principles regarding the regulatory treatment of SRPs. The following points can be drawn from a reading of the minority reasons of Commissioner Williams in Lions Gate:
- Consideration of long- term interests of shareholders. Commissioner Williams noted that much has changed in the corporate governance landscape and with respect to board accountability since the establishment of the predecessor of NP 62-202 nearly 25 years ago and these changes support securities regulatory authorities showing “greater” deference to the business judgment of target boards. The Commissioner also noted that “commissioners can … , in appropriate circumstances, also consider the collective long term interests of shareholders as a whole”.9
- Shareholder approval is a key factor. While we may question Commissioner Williams’ calibration of determining an “overwhelming” majority, particularly employing as a metric a consideration of the total percentage of issued and outstanding shares actually voted, this exercise points to a fact-specific determination that recognizes that where shareholders have a chance to vote in the face of a specific bid and approve a tactical SRP by a wide margin, they can’t realistically be viewed as having been disenfranchised by the SRP. It may well be that in determining what constitutes an overwhelming vote, it may be best to consider only the votes cast by independent shareholders – i.e., votes not cast by the bidder or insiders of the target. The receipt of written evidence of support from independent shareholders, as well as the existence of a material level of shareholder opposition are also key factors for consideration.
- An SRP may still be abusive despite shareholder approval. Consistent with the decision in Neo Material, the minority decision recognizes that there may be circumstances where an SRP may be abusive notwithstanding overwhelming and sufficiently informed shareholder approval. The minority agreed with the majority’s ultimate decision to cease trade the SRP, quite logically concluding that where an SRP is designed so that a “permitted bid” under a plan’s provisions will, as a practical matter, be difficult if not impossible to achieve, such an SRP could well be abusive of the capital markets. In Lions Gate, the impugned SRP’s “permitted bid” provisions, combined with the existence of large insider holdings, acted as impediments to the possibility of a successful offer as a “permitted bid” could only have been achieved if over 80% of all shares had tendered to the bid or been held by independent shareholders.
- Upholding the reasonable expectation of shareholders. The jurisdiction to intervene on public interest grounds, as articulated by the OSC in Magna International Inc., Re10, includes addressing conduct that is abusive of investors or capital markets. Conduct may be abusive if a proposed transaction defeats the reasonable expectation of shareholders. As the reasonable expectations of shareholders are surely reflected by “overwhelming” and recent support of a tactical SRP by fully informed shareholders, the minority decision must surely be correct in endorsing the line of thinking in Neo Material and Pulse Data and in respecting a consideration of shareholder approval of a long-term value maximization strategy.
These points encourage a fact-specific approach to SRP hearings. It is suggested that such an approach which is focused primarily on upholding the reasonable expectations of shareholders, while being cognizant of the fact that long-term value maximization may sometimes be in the public interest, may well form the basis for a revised and updated NP 62-202. With policy guidance from the CSA, we are confident that a consistent yet nuanced approach to poison pills is achievable.