Recent decisions of the Alberta, Ontario and British Columbia securities commissions on applications to set aside shareholder rights plans or “poison pills” adopted in response to a hostile take-over bid have called into question whether Canadian securities regulators now hold a consistent view as to when it will be appropriate for a commission to intervene to remove a shareholder rights plan as an obstacle to individual shareholders deciding for themselves whether to tender their shares to the bid. At its heart, the public policy issue is whether shareholders, as a collective, ought to be permitted to prevent individual shareholders from making that decision for themselves and, if so, for what period of time.
Previously, the public interest policy principles informing the decisions of Canadian securities regulators on applications to cease trade shareholder rights plan were clear – a poison pill was an appropriate defensive tactic that the board of directors of a target corporation could use to provide the board with a reasonable period of additional time to seek to maximize shareholder value by soliciting an alternative bid or transaction or improvements to the existing bid. However, if after a reasonable period of time had elapsed, there was no reasonable prospect of an alternative bid or transaction emerging, absent extenuating circumstances, the time would have come for the poison pill to go. Accordingly, unlike the Delaware “just say no” defence, the accepted practice in the Canadian take-over bid regime had been when, and not whether, the pill will go. The primary source for these overarching policy principles was National Policy 62-202 – Take-Over Bids - Defensive Tactics (NP 62-202), where the Canadian securities regulators set out their collective view that, while they appreciated that defensive tactics such as a poison pill may be taken by a board of directors in a genuine attempt to obtain a better bid, tactics that were likely to deny or limit severely the ability of shareholders to respond to a take-over bid may result in action on the part of the regulators to remove the defensive tactic.
Of course, the inherent tension in the application of these principles to the circumstances of any particular case was finding the appropriate balance between permitting the board of directors to fulfill their fiduciary duties to maximize shareholder value in the manner they deemed to be appropriate while seeking to preserve the ability of individual shareholders to ultimately decide for themselves whether to tender their shares to an outstanding bid.
However, in two recent decisions, Pulse Data and Neo Material Technologies Inc., the Alberta Securities Commission (ASC) and the Ontario Securities Commission (OSC) arguably broke away from the traditional application of the principles described above, instead tipping the scales in favour of permitting the board of directors to “just say no” to a hostile bid even in the absence of a potential alternative bid or transaction provided that the board’s decision was ratified by a substantial or overwhelming majority of the company’s shareholders. Depending on how broadly these decisions are interpreted and applied, they may have the effect of severely restricting individual shareholders’ ability to decide for themselves whether or not to tender their shares to an outstanding bid. In its recent decision in Lions Gate Entertainment Corp., however, the majority of a panel of the British Columbia Securities Commission (BCSC) took issue with the reasoning in Pulse Data and Neo and instead relied on an application of the traditional policy principles embodied in NP 62-202 to cease trade a poison pill where the board of directors of the target corporation was attempting to “just say no” to an outstanding hostile bid.
Pulse Data involved a hostile bid for up to all the shares of the company. In response, the board of directors of Pulse Data adopted a tactical shareholder rights plan. Ultimately, the board was unsuccessful in its attempts to put the company in play in order to seek a superior transaction for its shareholders. Therefore, at the time the bidder brought its application before the ASC to cease trade the Pulse Data poison pill, there was no reasonable prospect that an alternative bid or transaction would emerge in the foreseeable future. However, despite such facts, the panel declined to set aside the poison pill. The panel appears to have been most influenced by the fact that an overwhelming majority of Pulse Data shareholders had approved the poison pill at a special shareholders’ meeting held to ratify the rights plan after the hostile take-over bid had been announced. In particular, the panel was satisfied that this recent and fully informed decision of shareholders served as a proxy for the shareholders’ collective response to the offer and therefore it was not in the public interest for the pill to be set aside at that time.
Similarly, in Neo, the OSC allowed a tactical shareholder rights plan adopted by Neo’s board of directors in response to an unsolicited partial take-over bid to continue to operate for an indefinite period of time notwithstanding that the board of directors of Neo had no intention of seeking an alternative bid or transaction. As in Pulse Data, Neo had called a special meeting of the shareholders to ratify the poison pill after the take-over bid had been announced but prior to the hearing of the application to cease trade the pill. Much like Pulse Data, the panel was of the view that the shareholders’ recent, informed and overwhelming approval of the pill could be viewed as an express rejection by shareholders of the offer.
In addition, focusing on the Supreme Court of Canada’s formulation of the business judgment rule in its recent decision in BCE Inc., the panel also noted that the fiduciary duties of a board of directors in the face of a hostile bid are not limited solely to maximizing short-term profit or share value and could instead be exercised for the broader purpose of protecting the long-term interests of shareholders. As a result, under the panel’s reasoning, it may not be appropriate for the commission to intervene if the target board considers the option of maintaining the status quo and continuing to pursue its existing business plan as being in the best interests of the corporation, provided that the decision of the board is within a “range of reasonableness”. This line of reasoning appeared to be particularly compelling to the panel in light of the particular facts before them in Neo, as that partial bid had been launched in the middle of an unprecedented worldwide financial crisis and the short-term value of Neo shares had been dramatically reduced as a result. Indeed, the panel accepted the evidence of the Neo board that, because of these unique market conditions, it would not have been an opportune time for Neo to seek an alternative transaction in response to the bid.
On April 27, 2010, a panel of the BCSC cease-traded a tactical poison pill adopted by Lions Gate in response to an unsolicited take-over bid from companies affiliated with Carl Icahn. That decision was affirmed by the British Columbia Court of Appeal on May 7, 2010.
Reasons of the Majority
On July 26, 2010, the BCSC released its reasons for the majority decision in Lions Gate. The principal basis for the decision of the majority of the BCSC to cease trade the Lions Gate poison pill was the application of the traditional public interest policy principles expressed in NP 62-202 that, ultimately, each individual shareholder must be given the opportunity to respond to an offer by deciding whether to tender their shares, irrespective of the views of the board of directors of the company that maintaining the status quo would be in the best interests of the corporation and irrespective of any vote by the shareholders as a collective to ratify the rights plan. Indeed, the majority reasons referred approvingly back to one of the first decisions by a Canadian securities regulator on a poison pill, Re Canadian Jorex Ltd.,in which the OSC stated that “there comes a time when the pill has to go”. In delivering the reasons of the majority, Vice-Chair Aitken and Commissioner Hanna cited the following non-exhaustive list of factors that have traditionally been considered to be relevant to the determination by a commission of the period of time that a target board will be permitted to leave a rights plan in place: (i) the number of potential, viable offerors, what the target company board has done to find alternatives to the bid and whether the board is likely to succeed in finding an alternative; (ii) when the rights plan was adopted and whether the shareholders approved the rights plan or there is other evidence of broad shareholder support for it; and (iii) whether the bid is coercive or unfair.
Of central importance to the majority’s decision in Lions Gate was that the board did not seek, and admitted to have no intention of seeking, any competitive bids or alternative transactions for Lions Gate shareholders. Relying on the public interest policy principles expressed in NP 62-202 and the long line of jurisprudence interpreting this policy, the majority took issue with how these principles had been applied in Neo and Pulse Data and affirmed that, in the absence of any attempts by the target board to take steps to increase shareholder value through an improvement of the bid or the presentation of an alternative transaction, there can be no basis for allowing a rights plan to stay in place for any additional period of time. Any shareholder ratification of the rights plan (which had not yet occurred in Lions Gate) was seen by the majority of the panel as being irrelevant. Even if ratified, the poison pill could no longer serve the only purpose for which it could be justified – to buy additional time for the target board to solicit a competing bid or other superior proposal. Under such circumstances, leaving the poison pill in place would run contrary to the public interest since it would no longer be accomplishing a legitimate purpose and would deprive Lions Gate shareholders of the ability to decide for themselves whether to tender their shares to the Icahn offer.
Reasons of the Minority
On September 1, 2010 the British Columbia Securities Commission released Commissioner Williams’ minority reasons. While Commissioner Williams agreed with the majority that the Lions Gate poison pill should be cease-traded, her reasons for so deciding were more closely aligned with those of the ASC and the OSC in the Pulse Data and Neo decisions. In particular, Commissioner Williams endorsed the view expressed in those decisions that the public interest ought to consider the long term interests of shareholders collectively. According to the minority decision, “when a target board adopts a rights plan aimed specifically at a particular bid, provides its shareholders with full information regarding the rights plan and the effects of the bid, and receives overwhelming support from its shareholders in the face of the bid, it may be appropriate to conclude that the continuance of the rights plan is in the public interest, notwithstanding the fact here may be no alternative offers forthcoming.”
Commissioner Williams noted, however, that several factors should be considered in deciding whether there is a compelling case for favouring the collective view of shareholders over the ability of individual shareholders to respond to the outstanding bid: (i) the level of shareholder support or opposition to a rights plan, (ii) the extent to which a rights plan protects shareholders’ rights and conforms to their expectations, and (iii) the degree to which shareholders require protection from an expiring offer. On the facts in Lions Gate, the minority did not view the level of shareholder support in favour of the rights plan as being overwhelming. Moreover, the level of shareholder opposition was much higher than in Pulse Data and Neo. Other mitigating factors that persuaded the minority that the rights plan ought to be cease-traded included the fact that the rights plan was structured to give the Lions Gate board too much discretion and that the required minimum tender condition for a permitted bid was seen as an unreasonable impediment to a fair tender process.
From this high-level overview of the decisions in Pulse Data, Neo and Lions Gate, it is clear that there is a tension between the decisions that will need to be resolved to avoid inconsistent results on applications to cease trade shareholder rights plans. This resolution can occur in a number of ways.
One possible solution would be for the Canadian securities regulators to re-examine NP 62-202 and determine whether it would be appropriate for further guidance to be provided in that statement of policy principles. Another would be for a subsequent panel of a commission to determine whether the Pulse Data and Neo decisions can be reconciled with the majority reasons in Lions Gate; however, given the fundamental differences in the approaches adopted by the panels in those decisions, this seems unlikely. Essentially, what the Canadian securities regulators must agree on is whether a majority of shareholders, overwhelming or otherwise, can ratify the decision of a board of directors to adopt or rely on a poison pill to “just say no” to a hostile bid and, if so, for how long.