On May 11, 2009, the Ontario Securities Commission (the “OSC”) released its decision in Neo Material Technologies Inc. and Pala Investments Holdings Limited.
Pala Investments Holdings Limited (“Pala”) brought an application to the OSC to cease trade a shareholder rights plan which was put into place by Neo Material Technologies Inc. (“Neo”) after Pala had announced its intention to make a partial take-over bid. In its decision, the OSC declined to cease trade the Neo shareholder rights plan.
This decision of the OSC is significant as it indicates that the OSC will uphold a shareholder rights plan adopted in the face of an unsolicited take-over bid if it has been approved by a majority of shareholders who have made their decision on an informed basis.
Neo had a shareholder rights plan dated February 5, 2004 (the “First Shareholder Rights Plan”), which received regulatory and shareholder approval. On February 9, 2009, Pala announced its intention to make an offer of $1.40 per share to acquire approximately 20% of Neo’s common shares (the “Pala Offer”), bringing Pala’s aggregate ownership to approximately 40% of the issued and outstanding Neo common shares. Pala structured its offer to comply with the “Permitted Bid” definition under the First Shareholder Rights Plan.
On February 12, 2009, Neo’s board of directors adopted a second shareholder rights plan (the “Second Shareholder Rights Plan”), which was substantially similar to the First Shareholder Rights Plan except that it required that any takeover bid be made to all Neo shareholders for all of their shares. On February 25, 2009, Pala commenced its partial takeover bid. The Neo board recommended that the Neo shareholders reject the Pala Offer. On April 16, 2009, Pala filed an application with the OSC to cease trade the First Shareholder Rights Plan and the Second Shareholder Rights Plan. On April 24, 2009, over 80% of Neo’s disinterested shareholders approved the Second Shareholder Rights Plan at Neo’s annual and special meeting of shareholders.
The Pala Offer was considered a “Permitted Bid” under the First Shareholder Rights Plan. As such, the First Shareholder Rights Plan did not prevent Pala from completing its offer. The main issue in the application was whether the OSC should use its public interest jurisdiction to cease trade the Second Shareholder Rights Plan, which did not permit a partial takeover bid.
Pala argued that the ultimate decision to accept the Pala Offer should be made by the Neo shareholders and not by the directors or management of Neo. In addition, Pala submitted that the Neo shareholder rights plans were not being used by the directors to find alternative value-enhancing transactions and that, despite the Pala Offer being a partial bid, all shareholders had been treated equally and had been given sufficient time to consider the Pala Offer. Pala also submitted that its partial bid was not coercive and was not part of a strategy to effect a creeping takeover of Neo. Pala argued that the Second Shareholder Rights Plan inhibited bids and only served to entrench Neo’s management and board. Pala also referred both to the ISS/Risk Metrics voting guidelines used by Canadian institutional investors in voting on shareholder proposals as well as to legal advisors who had recommended that Neo shareholders vote against the Second Shareholder Rights Plan because it prohibited partial bids.
Neo submitted that the issue was neither the validity of the Pala Offer nor the application of the shareholder rights plans, but was rather solely a question of whether the business judgment of the Neo board, ratified by the Neo shareholders, was susceptible to attack by Pala. Neo noted that its shareholders had made an informed decision and had overwhelmingly passed a resolution to approve, ratify and confirm the board’s decision to implement the Second Shareholder Rights Plan. In exercising their fiduciary duties, the board and management of Neo had exercised their business judgment and had determined that it was not the right time to run an auction for the company. Neo submitted that its shareholders had been provided ample information and sufficient time to decide whether to approve the Second Shareholder Rights Plan and there had been no managerial coercion or pressure on the shareholders. In addition, Neo argued that, if successful in its partial bid, Pala would acquire a blocking position, allowing it to preclude a subsequent offer for all of the shares of Neo.
Submissions of OSC Staff
OSC Staff noted that the objective of a shareholder rights plan is the protection of the bona fide interests of the shareholders of the target company. OSC Staff also noted that the OSC has consistently taken into account shareholders’ support of a rights plan in determining whether to cease trade a plan. OSC Staff submitted that the OSC should not cease trade the plan as (a) the Neo shareholders were sufficiently informed about the Second Shareholder Rights Plan; (b) there was no evidence that management of Neo coerced or unduly pressured the Neo shareholders to approve the Second Shareholder Rights Plan; and (c) there was no evidence that the Neo board did not act in the best interests of the Neo shareholders.
The OSC declined to exercise its public interest jurisdiction to cease trade the Second Shareholder Rights Plan because it was not satisfied that it was in the public interest to do so. Specifying that reasons were to follow, the OSC noted in its decision that it was influenced by the following considerations:
- the Second Shareholder Rights Plan was adopted by the Neo board in the context of, and in response to, the Pala Offer;
- there was 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 the Neo shareholders;
- an overwhelming majority of the disinterested Neo shareholders were sufficiently informed about the Second Shareholder Rights Plan prior to casting their votes; and
- there was no evidence to suggest that management of Neo or the Neo board coerced or unduly pressured the Neo shareholders to approve the Second Shareholder Rights Plan.
The release of the OSC’s full reasons for its decision in this matter will, no doubt, add support to the validity of poison pills in jurisprudence. In the past, shareholder rights plans have been considered to be a temporary defensive tactic, which afforded the board of directors time to create additional value for shareholders. However, the OSC’s decision in this case indicates a willingness to uphold the decision of informed shareholders who have approved shareholder rights plans in response to a specific bid. Combined with the Alberta Securities Commission’s decision in Re Pulse Data, boards may be able to adopt shareholder rights plans in the face of an unsolicited take-over bid so long as they have the support of a majority of shareholders who have been sufficiently informed about the new rights plan.