In the Matter of Neo Material Technologies Inc. et al is a recent decision of the Ontario Securities Commission dismissing an application by a hostile bidder seeking to cease trade a target’s tactical shareholder rights plan that had been adopted in the face of an unsolicited partial bid. This decision is of significant interest to boards of directors of potential targets because it represents a departure from earlier decisions where securities commissions have primarily focused on whether the time had come in the circumstances to set aside a shareholder rights plan. The OSC released this decision on May 11, 2009, noting that full reasons will follow in due course.

Neo Material Technologies Inc. (Neo) is a Canadian public corporation carrying on business in the mining and resources sector. Pala Investments Holdings Limited (Pala), an investment company, held approximately 20 per cent of Neo’s outstanding common shares and had been an investor in Neo since July 2007. On February 9, 2009, Pala announced its intention to commence a partial bid to acquire up to an additional 20 per cent of Neo’s outstanding common shares at a price of $1.40 per share (the offer was subsequently varied by Pala to increase the offer price, reduce the number of shares subject to the offer, and extend the expiry time).

Neo had two shareholder rights plans in effect. The first shareholder rights plan was approved by Neo’s shareholders in June 2004 and subsequently reconfirmed in April 2007. Pala’s offer was structured to comply with the "permitted bid" provisions of the first shareholder rights plan, which included a minimum tender condition, so as not to trigger the issuance of rights under the plan. The second shareholder rights plan was adopted by Neo’s board of directors on February 12, 2009 in response to Pala’s offer, and was subsequently approved by Neo’s independent shareholders at a meeting held on April 24, 2009. This second shareholder rights plan was substantially similar to the first shareholder rights plan except that it prohibited partial bids.

In dismissing Pala’s application and refusing to cease trade Neo’s second shareholder rights plan, the OSC noted that it was influenced by the following considerations:

the second shareholder rights plan was adopted by Neo’s board in the context of, and in response to, Pala’s offer;

  • there was no evidence that the process undertaken by Neo’s board to evaluate and respond to Pala’s offer was not carried out in what the board determined to be in the best interests of Neo and its shareholders, as a whole;
  • an overwhelming majority of Neo’s shareholders approved the second shareholder rights plan while Pala’s offer remained outstanding;
  • Neo’s shareholders were sufficiently informed about the second shareholder rights plan prior to casting their votes; and
  • there was no evidence that Neo’s management or board of directors coerced or unduly pressured Neo’s shareholders to approve the second shareholder rights plan.

McCarthy Tétrault Notes:

While the reasons for decision have not yet been released, it remains to be seen how key the overwhelming support of the rights plan by sufficiently informed shareholders of Neo was in the OSC’s decision to dismiss Pala’s application and permit Neo’s second shareholder rights plan to stand. Overwhelming shareholder support was also cited as a principal factor that led the Alberta Securities Commission to reach a similar conclusion in its 2007 decision to let a shareholder rights plan stand in Re Pulse Data Inc. In the meantime, boards of directors should be mindful of the positive impact that the approval of a tactical shareholder rights plan by sufficiently informed shareholders could have on mounting a successful takeover defence.