In Neo Material Technologies Inc., the Ontario Securities Commission (OSC) was asked to set aside a shareholder rights plan established by the board of directors of the target of a hostile take-over bid. In refusing to set aside the "poison pill," the Commission re-visited the range of factors to be considered in deciding whether or not to interfere with a board’s decision to establish such a plan.
Neo Material Technologies Inc. (Neo) is publicly traded on the TSX. Pala Investments Holdings Limited (Pala) is an investment company which, prior to the events at issue, already controlled 20% of Neo.
On February 9, 2009, Pala announced its intention to acquire an additional 20% of the outstanding common shares of Neo. On February 12, 2009, Neo’s Board of Directors adopted a defensive Shareholder Rights Plan that, in effect, prohibited partial bids such as that proposed by Pala. In April 2009, Pala amended its offer by raising the offer price and decreasing the number of shares to be taken up. At a special meeting held on April 24, 2009, Neo’s shareholders approved the Shareholder Rights Plan by a majority of 81% of the shares voted (excluding Pala’s existing holdings).
Not content to have its bid stymied, Pala applied to the OSC, pursuant to s. 127 of the Securities Act, for an order to set aside the Shareholder Rights Plan as an unlawful impediment to the target shareholders’ ability to tender to Pala’s offer. Pala argued that Neo’s "poison pill must go" and urged the OSC to exercise its public interest jurisdiction to "cease trade" the Shareholder Rights Plan.
The Key Determinations
In deciding to allow the "poison pill" to stand, the Commission focused on two key factors:
- That the target shareholders’ approval of the defensive plan was sufficiently informed and non-coerced.
- That the board’s refusal to seek out alternative bids was, in the circumstances, an acceptable exercise of the board’s business judgment and in keeping with its fiduciary obligations to the company.
1. Informed Approval
The Commission has consistently expressed the view that shareholder support of a rights plan, while not necessarily determinative, will in most instances be a critical consideration in evaluating whether or not to allow (or alternatively to "cease trade") such a plan. However, in order for this factor to be afforded such importance in the analysis, the shareholders’ approval of the plan must be informed, must be provided freely and fairly, and must be provided in the absence of coercion or undue pressure from the board.
In Neo Materials, and having examined the circumstances surrounding the establishment of the plan, the OSC found that the target shareholders, in voting to approve the "poison pill," had had the benefit of sufficient disclosure and, as importantly, sufficient time to review the relevant information such that they "knew or ought to have known, that they were voting against the Pala Offer…". In the result, and though not determinative of the matter, such informed and non-coerced approval continued, as it had in the past, to be a factor which weighed heavily in the Commission’s ultimate decision to allow the defensive plan to stand. Following on this decision, corporate boards, and those who counsel them, will be well advised to remember the old maxim "haste makes waste" – while ensuring that, in the rush to obtain shareholder approval, those same shareholders are provided with a reasonable opportunity to become sufficiently informed regarding the rights plan in question.
2. Circumstances Matter – the target board is NOT obliged to seek out an alternative offer
Not surprisingly, the Commission also found that the board’s decision to implement a defensive plan in the face of a hostile take-over bid must be carried out in the best interest of the corporation. However, and of particular interest to the reader, the Commission went on to hold that the "best interest of the corporation" does not always require the board to seek alternative bids in order to maximize shareholder value at the time of a take-over bid.
In this regard, the OSC applied a permissive interpretation to section 1.1(6) of National Policy 62-202 – Take-Over Bids – Defensive Tactics – which provides that, "defensive tactics... may be taken by a board of directors of a target company in a genuine attempt to obtain a better bid." – holding that there is no duty upon a target board to maximize, in all cases, value for the shareholders by putting the corporation "in play" in the face of a hostile take-over bid. This interpretation recognizes that the fiduciary duty of the directors is not confined to short-term profit or share value but is, instead and where the corporation is a going concern, often a function of the directors applying their reasonable business judgment to the question of what is in the best long-term interests of the company.
With these principles in mind, the OSC found that, having assessed Pala’s offer, Neo’s board reasonably exercised its business judgment in concluding that: (i) current economic conditions would not allow Neo to obtain an offer accurately reflecting the company’s true value, (ii) Neo had strong potential for further development, and (iii) the effect of a bid by a financial investor such as Pala would not be advantageous at the time for either Neo as an enterprise or for the collectivity of Neo’s shareholders. In short, the Commission refused to force Neo into play in favour of providing "the Neo board [with] the opportunity to act in a manner which, based on the reasonable business judgment of the [board] and management, protect[ed] the long-term interests of Neo and the shareholders as a whole."