On May 6, 2010, the British Columbia Securities Commission ("BCSC") released summary reasons for its April 27, 2010 decision to invalidate the shareholder rights plan ("SRP") or "poison pill" that had been adopted by Lions Gate Entertainment Corp. in response to the unsolicited take-over bid made by Icahn Partners LP and its related funds ("Icahn"). The summary reasons were released to facilitate Lions Gate's appeal of the BCSC decision. That appeal was heard and dismissed by the British Columbia Court of Appeal on May 7, 2010.
No "Just Say No"
The principal basis for the decision cited in the majority's reasons1 was the view that shareholders rights plans should not deprive shareholders of the opportunity to respond to a bid by tendering into it. The commission also stated the following principles regarding the public interest as it relates to the adoption of SRPs by target companies as a defensive strategy:
- It is in the public interest that each shareholder of the target company be allowed to decide whether or not to accept or reject the bid.
- The reluctance of regulators to interfere with the target directors' discharge of their fiduciary duty is tempered by the need to ensure that the shareholder ultimately has the opportunity to decide whether or not to tender into the bid.
- SRPs are not contrary to the public interest when used to buy time for the target to respond to the bid. However, SRPs are acceptable only as a temporary defence.
- Whether the time has come for a SRP to go is assessed in terms of what the SRP has accomplished, or is likely to accomplish, in terms of providing alternatives to the bid for shareholders to consider before deciding whether to tender.
The decision signals a departure by the BCSC from two recent decisions on poison pills by rejecting the proposition that shareholders may exercise their right to accept or reject a take-over bid by way of a vote on a shareholder rights plan that effectively prevents the bid from proceeding.
Lions Gate had adopted the SRP in response to a partial take-over bid commenced by Icahn on March 1, 2010. Under the initial terms of the bid, Icahn sought to increase its shareholding from 19% to 29.9% of the outstanding shares. The SRP prevented any person from exceeding 20% share ownership other than through a "Permitted Bid". In order to qualify as a Permitted Bid under the SRP, a bid was required to include typical terms including (i) a non-waivable minimum tender condition of more than 50% of the shares not already owned by the bidder, (ii) an irrevocable commitment to extend the offer for ten business days in the event that the bid is successful, and (iii) a deposit period of at least 60 days. Icahn's bid did not satisfy any of these requirements of a Permitted Bid. In addition, the SRP did not permit partial bids (i.e., a bid for less than all outstanding shares).
The Lions Gate board adopted the SRP on March 11, 2010 and the next day sent notice of a shareholders meeting to be held on May 4 to consider the SRP. Following adoption of the SRP, Icahn amended its bid to make it an offer to purchase up to all outstanding Lions Gate shares and to extend the expiry date to April 30, 2010, prior to the Lions Gate shareholders meeting.
In response to Icahn's application to cease trade the SRP, the BCSC scheduled its hearing for April 26, 2010, prior to the expiration of Icahn's bid and one week ahead of the Lions Gate shareholders meeting to consider the SRP. At the hearing, Lions Gate argued that Icahn was likely to extend its offer and that accordingly the BCSC should delay its decision until it had the benefit of knowing to what extent Lions Gate shareholders supported the SRP. However, the BCSC decided that, on the facts before it, it could not conclude with enough confidence that Icahn was likely to extend its bid to risk denying shareholders the ability to accept Icahn's offer.
Lions Gate argued that the SRP was designed to protect Lions Gate shareholders from coercive elements of Icahn's bid and that shareholders should be given an opportunity to decide at the shareholders meeting if they wished to keep the SRP in place to prevent a bid that is not a Permitted Bid. However, the BCSC rejected the characterization of Icahn's bid as coercive. The BCSC noted that if Icahn waived the minimum tender condition, under U.S. securities law which also governed the bid, the bid would have to be extended, giving shareholders the opportunity to tender or withdraw with knowledge that the condition has been waived.
Shareholder Approval Not Relevant Unless Target Pursuing Alternatives
Moreover, the BCSC stated that although shareholder approval is a factor that is to be considered in determining whether it is time for a rights plan to go, under prior cases shareholder approval or other evidence of shareholder support for the continuation of an SRP has only been relevant in determining whether the SRP should be permitted to continue for a further temporary period in order that the board may generate other alternatives (such as superior offers) for shareholders. The BCSC noted that in Lions Gate's case the board was not pursuing any competing bid or alternative transaction for shareholders and that the only effect of continuing the SRP would be to deny Lions Gate shareholders the opportunity to accept or reject the Icahn offer.
Reservations about Neo Technologies and Pulse Data
The BCSC noted that its discussion of prior securities commissions decisions on SRPs would not include references to the Ontario Securities Commission decision in Neo Material Technologies or the Alberta Securities Commission decision in Pulse Data Inc. In these cases, the securities commissions allowed a shareholder rights plan to stand in the face of a bid where there was overwhelming shareholder support for the plans to remain in place, even though the target board was not pursuing any alternative transaction for shareholders. The BCSC in Lions Gate stated that these decisions were distinguishable on their facts, and, importantly, that it had reservations about the Pulse Data and Neo Materials decisions centered on "their apparent departure from the Canadian securities regulators' view of the public interest as it relates to SRPs prior to those decisions." The BCSC will elaborate further on its reservations in its final reasons. The final reasons may lay to rest the debate that followed the OSC's Neo decision as to whether Neo reflected a change in the regulatory approach to poison pills.
1. The BCSC's decision noted that one panel member did not agree with all of the majority's reasoning and will write separate reasons.
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