Note: The following is adapted from the Introduction to the author's in-depth article "Defensive Tactics and Deal Protection Techniques: The Canadian Perspective", which is available from the author or by sending a request to firstname.lastname@example.org.
In a change of control transaction involving a Canadian publicly-listed target (whether by way of take-over bid, plan of arrangement, amalgamation or otherwise), the role of the board of directors of the target is critical. Such board's response in employing defensive tactics or providing deal protection to a potential acquiror is guided and limited by a number of factors. The author's extended paper, "Defensive Tactics and Deal Protection Techniques: The Canadian Perspective", considers these issues in detail. The following "Top Ten" list, drawn from the Introduction to that paper, illustrates some of the key defensive tactics/deal protection points that arise in a Canadian context:
- The fiduciary duties of directors and the other related duty of care and duty to manage the corporation are imposed by statute and, in some instances, are broader than those imposed under the common law or by equity.
- Because of the foregoing point, and because Canadian securities regulators have clearly stated that securities legislation has as its primary objective the protection of the bona fide interests of the shareholders of the target company, the directors of a Canadian target company are limited both in the defensive tactics they can employ to fend off an unwanted suitor and the deal protection devices they can provide to a potential acquiror.
- The "just say no" defense is very difficult to rely upon in Canada and once a Canadian target is "put in play" it is highly likely a transaction will result, often with a "white knight".
- As in the U.S., the "process" adopted by the board is extremely important in establishing whether the members of the board have satisfied their fiduciary and other statutory duties. Such process would include, inter alia, the possible formation of a special committee, the timing of establishing such a committee, the independence of committee members, the timelines of responses to bidders and the control and use of company assets, such as confidential information.
- Although hostile take-over bids may be making a comeback, for a variety of reasons a significant number of change of control transactions are effected in Canada by way of a statutory plan of arrangement. Such a plan of arrangement requires, among other things, a fairness hearing as an integral part of obtaining court approval.
- Although the Canadian courts have expressly rejected the U.S. Revlon duty (the duty on a board to maximize shareholder value in a change of control transaction), the Canadian approach may best be described as a modified-Revlon duty whereby the board of a Canadian target has a duty to achieve the best value reasonably available to shareholders in the circumstances.
- The Canadian courts have endorsed the U.S. "business judgement" doctrine such that the courts will generally defer to the decision of an informed board made honestly, prudently, in good faith and on reasonable grounds.
- Canadian corporate legislation provides for the very broad "oppression remedy" whereby a security holder, creditor or other complainant can seek redress through the courts for acts or omissions of a corporation that are "oppressive or unfairly prejudicial to or that unfairly disregard" their interests. The fairness hearing required to approve a plan of arrangement noted above often provides the perfect setting for an oppression claim.
- For the reasons noted above, other than negotiated standstill agreements, structural techniques (such as shareholder rights plans and charter and bylaw restrictions) either are not used or are relatively benign. Tactical defenses (such as "just say no", capital restructuring, "Crown jewel" options and similar techniques) are not widely used in view of the fact they must have a demonstrable business purpose and may open the action to claims by shareholders and/or regulators. A negotiated support (or "merger") agreement with a white knight is a much more common response.
- Deal protection devices employed in Canada would be more in line with U.S. practice and would include break fees, non-solicitation covenants and lock-up agreements with key shareholders.