The decision of the Ontario Securities Commission (the “OSC”) in Neo Materials Technologies Inc. may signal a change in the regulatory approach to shareholder rights plans. Regulators may now be showing more deference to the actions of target boards in adopting and continuing shareholder rights plans, particularly where the facts demonstrate that the board adhered to a proper process in implementing the plan and shareholders have approved the plan on an informed basis.
In Neo, the target (“Neo”) was the subject of a hostile partial take-over by Pala Investment Holdings Limited (“Pala”). The Pala bid was a “permitted bid” under Neo’s existing rights plan since the Pala bid was open for acceptance for 60 days rather than the statutory minimum of 35 days. Prior to its expiry, the Neo board adopted a “tactical” rights plan, which was approved by Neo’s shareholders. The new rights plan did not include a partial bid within the definition of a “permitted bid”. Pala requested that the OSC cease trade the Neo rights plans in order to allow its bid to proceed.
The OSC declined to issue a cease trade order. Pala argued that the only legitimate purpose of a rights plan is to provide a target board with additional time to seek alternative transactions to enhance shareholder value as part of an auction process. The OSC stated that, in considering whether to exercise its public interest jurisdiction to cease trade a rights plan, it will carefully assess all circumstances surrounding implementation of the plan, including whether “informed shareholder approval” was given. The OSC stated that, while it would not decline to exercise its jurisdiction to cease trade a rights plan in appropriate circumstances, deference should be given to legitimate decisions of the board of directors of target companies. While “fully informed” shareholder approval of a tactical shareholders’ rights plan is an important consideration in determining whether to allow a plan to continue, the OSC noted that shareholder approval will not necessarily prevail in circumstances where it can be shown that the target directors failed to carry out their duties in the best interests of the corporation and the body of the target shareholders, or there is evidence of undue pressure on target shareholders by management or the board to approve the plan. The OSC concluded that the Neo shareholders were “informed” and that the board’s decision to implement the plan was a product of its bona fide business judgment. The OSC found no evidence of coercion of Neo shareholders by the board or management.
The Neo reasons are interesting in terms of the OSC’s acknowledgment of the “business judgment rule” (which is largely a product of US jurisprudence). The OSC emphasized that directors’ fiduciary duties are broad and must be considered in the context of the particular situation. The Neo decision suggests that the duty of directors in the context of a change of corporate control is not merely confined to short term profits or share values and it is appropriate for directors to look to the long term interests of the corporation where the corporation is operating as a going concern. The decision is fairly clear that the purpose of a shareholder rights plan (including a tactical plan) is not limited to simply providing sufficient time to the target board to conduct an auction for the company or to seek alternative bidders. A rights plan (including a tactical plan) may be implemented by a target board to protect the long term interests of its shareholders. A board may legitimately determine that, in the face of an unsolicited bid, it is not necessarily in the best interests of the corporation to run an auction for the company at that precise point in time.
Canadian securities regulators have historically approached rights plans from the perspective of considering not if, but when, a rights plan should be terminated by a cease trade order. In Neo, the OSC rejected that analysis with the proposition that as long as the rights plan continues to allow the target board to fulfil its fiduciary duty, then the plan has a purpose and should be allowed to continue. Neo may, however, be factually different than most typical rights plan cases which do not always involve shareholder approval of a tactical rights plan during an unsolicited bid.