Election puffery or real issue? First the Parti Québécois, and now Quebec’s governing Liberal party are promising better tools to allow Quebec-based companies to reject unsolicited foreign take-overs.
To put things in perspectives, one must step back. Quebeckers have been called to vote for their next government on September 4. They are in the middle of an electoral campaign; where one can expect all sorts of promises from all parties in their effort to cajole votes in their favour. Nothing new here. But wait; there is something else.
Quebec-based home improvement retailer RONA Inc. (RONA) has rejected an unsolicited, non-binding acquisition proposal recently received from U.S.-based Lowe’s Companies, Inc. (Lowe’s) on the basis that it is not in the best interests of RONA and its stakeholders. In its statement, RONA indicated that,“…its Board believes that in the best interests of RONA and its stakeholders, the Corporation should remain focused on executing its business plan with a view to capturing significant opportunities that it sees for its business.”
Critics of Lowe’s proposal fear job losses and less business for local suppliers if Lowe’s buys the Quebecbased retailer, and indeed, the Quebec government has suggested that the proposed transaction may not be in the “best interests” of the province, in what appears to be a signal aimed at the federal government as it reviews the deal under Canada’s federal foreign investment legislation.
Takeovers in Canada
In Canada, takeovers, be they by foreigners or not, involve issues of both corporate and securities laws that bring to the forefront the determination of whom, between the shareholders and the directors of a Canadian corporation, gets to decide when and if a corporation should be sold.
The 2008 Supreme Court of Canada ruling in BCE expressly stated that the directors’ statutory fiduciary duty under the Canada Business Corporations Act (that are substantially the same duties under the Business Corporations Act (Quebec)) are owed to the corporation, which can involve a consideration of the interests of more than just shareholders and requires a long-term view of the corporation. More broadly, this duty requires directors to act honestly and in good faith, to avoid self-dealing, and to consider the interests of shareholders and other stakeholder groups, as appropriate. This is in contrast to what is generally understood to be the duties of directors of companies in the United States, that is, to maximize shareholder value.
Canadian securities regulators (the CSA) have taken the position in National Policy 62-202 Take-Over Bids – Defensive Tactics (NP 62-202) that the primary objective of take-over bid laws is to protect the bona fide interests of the target’s shareholders. NP 62-202 provides that the decision on whether a bid succeeds should ultimately rest with the target company’s shareholders rather than with its board of directors.
The Ontario Securities Commission (the OSC) has made it known that it is considering adopting a standalone rule on shareholder rights plans (also known as “poison pills,” the quintessential defensive tactic) that would allow such plans to remain unchallenged if approved by shareholders. Such a rule would mark a substantial shift from the current situation.
We understand that the contemplated rule would minimally regulate the content of a shareholder rights plan. However, shareholders would need to be able to remove the rights plan on a “majority of the minority” vote (effectively, requiring a bidder to launch a proxy battle or proceed with a permitted bid as defined under the shareholder rights plan). The introduction of such a rule would mitigate some of the concerns in trying to apply the currently diametrically opposed dicta of corporate and securities legislations in Canada. The OSC has not yet made public any such proposed rule.
The “Liberal Party’s” Proposal
At this point in time, there is not much clarity as to what the proposals would entail. One can find on the Liberal party’s web site a statement to the effect that,“…[the] government will adopt measures allowing Quebec-based companies to assess purchase offers and have the right to refuse them if they choose to do so. Similar to several American states that recognize a vast range of legal defences against hostile purchase offers, we will give them the means to make the best decisions while keeping the Quebec economy in mind.”
How would that be accomplished? By changing the corporate regulatory landscape, the securities regulatory landscape or, maybe, both? Practically, it most likely would be done by modifying Quebec’s Business Corporations Act to extend the directors’ fiduciary duties owed to the corporation to others stakeholders such as non-shareholder groups. Statutes that provide for those extended fiduciary duties are often referred to as “constituency statutes”.
Constituency statutes have been adopted by a majority of the states in the United States to address the concerns of groups other than shareholders that often have a meaningful economic stake in the welfare of corporations.
While the specific language of the constituency statutes varies, most statutes contain the following typical factors that a board of directors of a corporation may consider:
- the interests and effects of any action upon non-shareholders, including employees, suppliers, customers, creditors, and communities;
- both long-term and short-term interests of the corporation;
- local and national economies;
- any other relevant community and societal considerations; and
- the continued independence of the corporation.
Most United States state constituency statutes are permissive, not mandatory, meaning that directors have the authority to consider other constituencies, but the discretion to focus solely on shareholder returns if they choose to do so (which is in line with the generally understood duty of American directors to maximize shareholder value in the context of change in control transactions).
Given the formulation of the Canadian directors’ fiduciary duty in the BCE decision and the fact that boards may already be factoring in various stakeholders’ interest when analyzing change of control transactions, the enactment of a constituency statute may, at best, have only a marginal effect on decision-making. Furthermore, a constituency statute alone does not address the conflicting perspectives of Canadian corporate and securities legislations (i.e., corporate law’s focus on the best interests of the corporation versus the shareholder-centric approach of NP 62-202).
To truly allow a “just say no” defence or the “protection” of constituents other than the corporation, NP 62-202 must be reformulated with a view to refocus its underlying results-oriented approach of unrestricted auctions to take into consideration director compliance with statutory fiduciary duties (which, according to the Supreme Court in the BCE decision, require directors to consider the interests of all stakeholders and are not driven by an overriding duty to maximize shareholder value).
From this perspective, the introduction of constituency considerations in Quebec corporate law may merely be window dressing reflecting the fact that politicians may be engaging in credit-claiming behaviour towards their own constituents, the voters.