Copyright 2012, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Mergers & Acquisitions, January 2012
In a recent public forum addressing current developments in Canadian securities law, the deputy director of the Ontario Securities Commission indicated that OSC staff is considering proposing two significant regulatory changes relevant to Canadian M&A transactions.
The first proposal would permit a target board to employ a shareholder rights plan (poison pill), which has been approved by the target's shareholders, to defend indefinitely against an unsolicited take-over bid, extending a view espoused by the OSC and the Alberta Securities Commission in certain recent poison pill decisions.
The second proposal, an apparent response to Magna International Inc.'s controversial termination of its multiple voting share structure at a significant premium for its controlling shareholder, would implement changes to tighten the rules governing related party transactions.
Both proposals are at a preliminary stage. Before formal implementation nationally, the OSC would be required to present draft rules to the other provincial and territorial securities regulators and undertake a public consultation process.
Proposal on Poison Pills: "Just Say No" Available if Target Shareholders Approve Pill
Boards of Canadian public companies have historically been unable to implement permanent structural defenses against unsolicited take-over bids. Historically, Canadian securities regulators have been of the view that unrestricted auctions produce the most desirable outcome for target shareholders. This position is reflected in National Policy 62-202 – Take-Over Bids – Defensive Tactics. While a target board may use a shareholder rights plan to delay an unsolicited bid for a reasonable period of time as it seeks alternative offers, it has typically been a question of when, not if, a pill must go.
The possible OSC proposal, if implemented, would represent a significant departure from the current regulatory regime. The proposal would permit a target board to rely on a shareholder rights plan to block an unsolicited bid indefinitely, provided that the issuer's shareholders have approved the plan either at the most recent annual general meeting or following the announcement of the bid. This would eliminate the need for securities regulators to decide on a case-by-case basis whether to cease trade a rights plan that had received such approval. Disinterested shareholders would, in turn, have the ability to remove a pill with a "majority of the minority" vote in favour of such action.
In the 2007 decision of the ASC in Pulse Data, as well as the subsequent OSC decision in Neo Material Technologies, the securities regulatory authorities determined not to cease trade shareholder rights plans, notwithstanding the absence of an ongoing auction for the target company, where shareholders, who were fully informed of the relevant facts, approved the rights plans in the face of an unsolicited bid, and the target board was able to demonstrate the exercise of reasonable business judgment in determining that the unsolicited bid was not in the best interests of the corporation.
The new regime as postulated would represent a more significant change in approach than was reflected in the Pulse Data and Neo decisions, as both of those cases involved relatively unusual situations in which target company shareholders had approved a rights plan in the face of an unsolicited offer. The new regime would go further, and would allow a rights plan to remain in place indefinitely following an unsolicited offer provided that the plan had been approved at the target's most recent annual general meeting, even if such approval was not granted in the face of the unsolicited offer.
Proposal on Related Party Transactions: Special Committee Oversight and Lower Threshold
The OSC's second possible proposal would amend the existing related party transaction rules to introduce additional protections for minority shareholders. The proposal addresses some of the concerns raised by regulators and certain institutional shareholders in connection with Magna International's plan of arrangement in 2010 that eliminated the company's multiple voting share structure. The concerns had included:
- that the special committee established by Magna's board of directors failed to play a sufficiently active role in the negotiation of the arrangement, and that the mandate of the special committee was too narrow;
- that neither the board nor the special committee made any recommendation to shareholders as to whether to vote in favour of the arrangement, or as to their view of the fairness of the transaction; and
- considering the circumstances of the arrangement and the absence of a board recommendation and fairness opinion, that the disclosure provided in the proxy circular was insufficient to permit shareholders to make an informed decision.
The Magna arrangement had been exempt from the existing
requirements applicable to related party transactions because the
aggregate value of the transaction fell below the 25% market
capitalization threshold. Magna did, however, voluntarily make the
arrangement conditional upon approval by a majority of votes cast
by disinterested shareholders at its special meeting.
When the arrangement was challenged, the OSC determined that, while the transaction was not abusive to shareholders or the capital markets, the disclosure provided in the information circular was inadequate. Magna amended its information circular accordingly and the arrangement proceeded. Subsequent court challenges of the arrangement by shareholders similarly failed. Please see our September 2010 Blakes Bulletin: Appeal of Magna's Plan of Arrangement Dismissed by Ontario Divisional Court.
The possible OSC proposal, if implemented, would address some, but not all, of the concerns raised regarding the Magna arrangement. Under the new regime, related party transactions would be required to be completed under the supervision of a special committee of independent directors. The special committee would further be required to negotiate or oversee the negotiation of transaction terms and either (i) recommend that the board support the transaction and that shareholders vote in favour of it, or (ii) determine that the transaction is fair to minority shareholders, but provide no recommendation. The changes would also lower the size threshold at which shareholder approval of a related party transaction would be required from 25% of the market capitalization of the issuer to 10% of market capitalization. There would be no obligation for the special committee to obtain a fairness opinion, but the requirement to obtain a formal valuation would continue to apply to related party transactions with a value in excess of 25% of the market capitalization of the issuer.
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