With last month's announcement by Finance Minister Jim Flaherty that Parliament proposes to enact legislation to provide for a federal securities regulator in Canada, federal securities regulation in Canada cannot come soon enough. Sizeable securities transactions and take-over bids of Canadian companies often involve cross-border trades of shares that are listed on stock exchanges both inside and outside of Canada, involve international participants and leave investors subject to the vagaries of inconsistent provincial regulation in Canada where it is not always clear which provincial regulator has jurisdiction. The need for federal regulation recently became all the more apparent in the take-over battle by Icahn for Lions Gate via a ruling coming from the British Columbia Securities Commission, which took a "shot across the bow" at the "poison pill" policies of the Alberta and Ontario Securities Commissions. The time for federal securities regulation in Canada is now.
For many years, Canadian securities lawyers practicing in the field of hostile take-over bids had a remarkably uniform understanding of the legal principles at play thanks, in large part, to the rulings and policies coming from the Alberta and Ontario Securities Commissions, as recently reflected in their decisions in Pulse Data Inc. (2007) and Neo Material Technologies Inc. (2009), respectively. In both of these jurisdictions, the Alberta and Ontario Securities Commissions upheld rights offering plans (commonly known as “poison pills”) adopted by Boards of Directors as a defensive tactic to an unsolicited take-over bid (even if the rights offering plan was not designed to trigger an auction) where:
- the Board or a Special Committee of the Board was comprised of independent members with independent legal and financial advice to consider the merits of the bid in question; and
- independent and fully-informed shareholders had voted in favour of maintaining or adopting the rights plan after having received balanced and detailed information circulars to consider the bid.
In Pulse Data Inc. and Neo Material Technologies Inc., the Alberta and Ontario Securities Commissions were asked by the hostile bidders to exercise their “public interest” jurisdiction to set aside or cease trade the securities to be issued pursuant to a shareholders rights plan, and in both cases, the Commissions expressed their view that public policy favoured deferring to the business judgment of the Board of Directors and the shareholders in implementing a poison pill provided that there was no evidence to undermine the bona fides of their judgment (or the procedure by which that judgment was exercised). In short, securities lawyers in Canada had a fairly consistent appreciation of the “public interest” rule book from which to “call the plays.”
However and in May of 2010, the British Columbia Securities Commission seemingly threw out the rule book and took a drastically different view of the propriety of shareholders rights plans adopted in defence of a hostile take-over bid. More specifically and in the Icahn Partners LP decision, the BCSC cease-traded a rights plan adopted by the Lions Gate Board of Directors to respond to a hostile take-over bid by Icahn. Like Pulse Data Inc. and Neo Material Technologies Inc., the rights plan was not implemented to effectively trigger an auction for the target company’s shares and there was no suggestion that the Board of Directors was acting out of self-interest; however and despite citing the same legal authorities applied in Pulse Data Inc. and Neo Material Technologies Inc., including National Policy 62-202, the paramount policy influencing the BCSC seemed to be one that viewed a shareholder rights plan as an illegitimate mechanism to frustrate the rights and opportunity of the shareholders of the target company to either accept or reject the hostile take-over bid. While one could easily distinguish the Icahn Partners LP decision on the basis that the rights plan had not yet been approved by the shareholders of the target company (although Lions Gate shareholder approval of the rights plan in fact later occurred), the BCSC apparently did not base its decision on this or any other distinguishing factors. As the BCSC said in its ruling with respect to the cases from Alberta and Ontario:
“Those cases may be distinguishable on the facts, but we also have reservations about them. Our reservations center around their apparent departure from the Canadian securities regulators’ view of the public interest as it relates to (shareholders rights plans) prior to those decisions.”
The BCSC has promised to “elaborate further” on its reservations at a later date. In any event, an inconsistent provincial policy approach to the propriety of rights offering plans in defence of hostile take-over bids highlights one of the expected benefits of a federal regulatory system. Considering the resistance, ambivalence and uncertainty now being experienced at large while Parliament seeks to enact federal legislation to govern securities regulation in Canada, this “poison pill” controversy may be just what the doctor ordered!