After a few years on hiatus, the Ontario Securities Commission hosted its "Dialogue" conference once again on November 1, 2011. OSC Dialogue opened with a speech from the Chair of the Ontario Securities Commission, Howard Wetston, and filled the morning with two panel discussions, one on market infrastructure and another on strategic issues in investor protection.
The OSC Dialogue's lunch hour was scheduled with a speech from The Honourable Dwight Duncan, Ontario's Minister of Finance, as well as a speech from Ian Russell, President and CEO of the Investment Industry Association of Canada.
Of particular interest though for this blog was a break-out session on M&A trends and outlook held in the afternoon featuring panellists James Turner, Vice-Chair of the Ontario Securities Commission, Naizam Kanji, Deputy Director, Corporate Finance, and head of the M&A team of the Ontario Securities Commission and Bill Braithwaite, a senior partner from Stikeman Elliott. The panellists discussed the impact of certain recent decisions of the OSC on M&A transactions and also addressed certain OSC policy initiatives on M&A matters.
Specifically, the panellists discussed the following topics:
- the Mosaid decision and OSC Staff's views on defensive tactics including the future National Policy 62-202 – Take-over Bids – Defensive Tactics;
- the Magna decision and OSC Staff's views on possible future changes to Multi-lateral Instrument 61-101 – Protection of Minority Securityholders in Special Transactions;
- the impact of the GrowthWorks decision with respect to unsolicited transactions structured as plans of arrangement; and
- possible future regulation of proxy advisory firms.
This post focuses on the panellists' comments on the Mosaid decision and future posts will comment on key points made with respect to other topics including the fact that it was disclosed that OSC Staff is currently studying possible amendments to MI-61-101 with could see the lowering of the threshold of an exemption from the minority approval requirement in respect of related party transactions where the fair market value of the consideration for the related party transaction is not more than 25 per cent of the market capitalization – specifically a possible proposal to lower the threshold to 10 per cent of market capitalization.
In one panellist's view, Mosaid, as the most recent OSC decision on shareholder rights plans, is the best place to look to see where the OSC currently stands regarding its approach to defensive tactics. The Mosaid decision demonstrates that the OSC has followed the classic poison pill analysis from such often-cited cases as the Royal Host decision from 1999. It was noted that while there was talk for a limited period of time with respect to the effect of the decisions in the cases of Pulse Data and Neo Materials as to whether a shareholder rights plan may, in certain circumstances, be able to be maintained for extended periods of time in the face of hostile offers, perhaps indefinitely, it is becoming increasingly clear following decisions in Lions Gate, Baffinland and now Mosaid that "we are where we used to be."
The Panel discussed whether a shareholder vote approving a shareholder rights plan in the face of a hostile bid – where the target does not wish to shop the company – is determinative of whether the plan should be allowed to remain in place or, merely a factor to be taken into account by regulators. Mr. Kanji noted that the decisions in Neo Materials, Pulse Data and Lions Gate lean towards fact-based decisions, and thought there would need to be a case with a particular set of facts in order to provide a clear answer to the issue. Another issue that Mr. Kanji raised was whether a change to a bid, such as an increase in the offer price, would require a further shareholder vote on whether or not the rights plan should stay in place, and if so, what were the implications of requiring multiple shareholder votes where there were multiple changes in a hostile bid over time.
Mr. Kanji further addressed the timing of shareholder votes with respect to shareholder rights plans by noting that it was his view that OSC Staff would at a minimum consider the receipt of shareholder approval of a rights plan in the face of a hostile bid as providing the target board with a "huge advantage" if the issue came before the Commission in the context of a pill simply being used to extend the time for an auction. It's not clear to this observer if it was such a "huge advantage" for Mosaid in that very context but it does appear to have been an important factor at least in Staff's position. The reasons of the Commission panel have not yet been released on the Mosaid order. According to Mr. Kanji, the OSC would prefer to base their decision with respect to the maintenance of shareholder rights plans on shareholder approval, rather than coming up with a "God-like" answer to determine how long a shareholder rights plan may stay in place.
Mr. Kanji went on to state that it was his view that the current case-by-case approach to regulating shareholder rights plans is problematic and that more predictability and transparency is required. It was his opinion that it would be preferable to have securities regulators regulate shareholder rights plans rather than the courts since the regulator is better equipped to balance policy considerations. He further noted however that as shareholders have become more influential and active in M&A transactions, it would be advantageous to allow boards and shareholders to decide for themselves how much latitude to give boards of directors with respect to shareholder rights plans.
Mr. Kanji went further on the topic of the regulation of shareholder rights plans by outlining a potential new framework for regulating shareholder rights plans, in which shareholder rights plans would be removed from the current defensive tactic policy (NP 62-202). The potential new Shareholder Rights Plan regulation will allow such plans to remain as long as they are approved by shareholders at each annual general meeting. If a company with a Shareholder Rights Plan became the target of an unsolicited bid, the plan would be permitted to remain until the next AGM, where the hostile bidder would have the opportunity to launch a proxy battle.
These potential new regulations would provide for minimal regulation regarding the terms of a Shareholder Rights Plan, allowing the market to decide how shareholder rights plans may be used by target boards of directors. Mr. Kanji noted that this proposal was at a very preliminary stage of discussion by OSC Staff members but that it had been taken for discussion to the Canadian securities administrators – in effect discussed with the Staff members responsible for M&A matters at all other Canadian securities commissions.
He went on to note that it would be important to ensure that there would be sufficient protection in place to ensure shareholders had the ability to remove the plan if the majority of shareholders voted to do so. If shareholder rights plans were removed from the current defensive tactics policy, the rest of the policy would need to be revisited to determine if the regulatory approach for other defensive tactics should also be revised at the same time. Mr. Braithwaite commented that this policy would, as revised, fall in between the current Delaware and Ontario approaches. It is interesting to note the comments of Vice Chancellor Travis Laster as noted in my earlier post when he visited Toronto in September and made his own strong case for Ontario to find better balance between the shareholder-centric model and the board-centric models.
Vice-Chair Turner and Deputy Director Kanji noted that the views expressed by them as panellists were their personal opinions only and did not necessarily reflect the views of the Ontario Securities Commission. It was also noted that there would be a full consultation process in the normal manner before any of the potential changes to OSC policies discussed would be brought into effect.
The full audio recordings of each session are available on the OSC's website.