Canada: M&A Developments Re: Defensive Measures

Developments in 2012 with respect to defensive measures in the M&A context highlight the tension that can exist between the corporate laws that a target board must comply with in the M&A context and the requirements of securities laws as administered by the securities regulators, who approach change of control transactions from a very specific policy orientation.

Regulation of Rights Plans

Since the implementation of Canada's national securities regulatory policy on defensive tactics in the late 1980s (now our National Policy 62-202 – Take-Over Bids – Defensive Tactics), the prevailing approach to rights plans and other defensive tactics has been that they cannot be used to prevent shareholders from deciding for themselves whether to tender to a take-over bid. Any action that denies or limits their ability to do so is likely to result in action by our securities regulatory authorities. As such, it has generally been a question of "when" and not "if" a rights plan will be cease-traded by a securities regulator. This generally occurs after a target has had a period of time deemed ample to identify a better alternative transaction (usually 45-75 days).

However, in recent years, market participants have begun to question whether this "shareholder centric" approach is correct or whether target boards should be given greater powers, particularly in light of the contrasting approach adopted by Canadian courts, which have shown a willingness to defer to the business judgment of target boards in decisions like the 2008 decision of the Supreme Court of Canada in the BCE Inc. matter. This change in tide and sentiment was arguably reflected in two notable securities regulatory decisions – Pulse Data (Alberta Securities Commission, 2007) and Neo Materials (Ontario Securities Commission, 2009) – where target boards were permitted to maintain rights plans which received current, informed and overwhelming shareholder support of the company's shareholders. Indeed, in Neo Materials, the Ontario Securities Commission panel found that the determination by a target board not to seek alternative offers at the time of a hostile bid, and to opt for the status quo, was valid, and that "a rights plan can be adopted for the broader purpose of protecting long-term interests of shareholders where, in the directors' reasonable business judgment, the implementation of the rights plan would be in the best interests of the corporation". However, more recent decisions such as Lions Gate (BCSC, 2010), Baffinland (OSC, 2011), Mosaid (OSC, 2011), Afexa (ASC, 2011) and Inmet Mining (BCSC, 2012) have reflected a reversion to the pre-Pulse Data/Neo status quo.

Nevertheless, questions concerning the appropriate approach persist, as do questions concerning the relevance and likely impact of recent, informed shareholder approval of a target rights plan. For these and other reasons, staff of the Canadian Securities Administrators have been working on a new approach to poison pills that they hope to publish for comment during 2013. Instead of a 45–75 day "it is time for the pill to go" approach, which has arguably made Canadian target companies some of the most defenceless in the world, the new approach would enable rights plans that have been recently approved by a majority of "disinterested" shareholders to remain in place so long as they are similarly terminable by a shareholder vote. The suggested approach thereby attempts to strike a balance between the historical Canadian approach and a U.S.-style approach that is prepared to defer to the decision of a target board, provided that such board can withstand enhanced judicial scrutiny of its actions. However, the new proposal is complex, and it is unclear whether it will receive enough buy-in to ever see the light of day. Even if it does, there will certainly be a number of issues with respect to the proposal that will need to be addressed, which tends to beg the question as to whether there isn't a more direct and efficient way to address the perceived issues with our current securities regulatory approach. For example, the restrictions on defensive tactics mandated by National Policy 62- 202 could be removed, which would allow our Canadian courts, rather than securities tribunals, to evaluate whether the use of a defensive tactic is appropriate in the face of a particular bid. In Delaware, where over half of US listed issuers are incorporated, the conduct of boards in reaction to a hostile takeover bid is reviewed by courts alone, and a sophisticated body of jurisprudence has evolved to evaluate and address these situations. Adopting a similar approach in Canada would not only put the boards of directors of Canadian companies on the same footing as those of their U.S. counterparts, but it would also allow the evolution of the law and policy governing change of control transactions in Canada to continue on a harmonized basis.

Private Placements by Acquisition Targets

Another hot topic in Canadian M&A in 2012 was private placements in the M&A context post the AbitibiBowater vs. Fibrek decision out of Quebec and the decision of the British Columbia Securities Commission in Petaquilla/Inmet Mining.

In Fibrek, the target board found itself in a situation where it was subject to a unsolicited bid by a party (Resolute) that had entered into hard lock-up agreements with Fibrek shareholders owning approximately 46% of the company (one of whom was also a large shareholder of Resolute). In response to the Resolute bid, the Fibrek board procured a valuation which valued the shares at a price that was a significant premium to the price per share offered by Resolute. Moreover, Fibrek canvassed for alternatives and ultimately managed to find a "white knight" (Mercer) which was prepared to make a friendly bid at a 30% premium to the Resolute bid (later increased to a 40% premium). In order to facilitate the Mercer transaction in the face of the hard lock-ups, Fibrek agreed to issue Mercer special warrants for 19.9% of its shares, thereby reducing the percentage of locked-up shares to the bid from 46% to about 37%. The special warrants could not be exercised for 21 days and the holder was required to tender all of its shares to any "superior proposal" accepted by 50.1% of the Fibrek shareholders. In such circumstances, the holder would have to surrender to Fibrek either the break fee or its profit on tendering to the superior proposal.

Resolute complained to the independent administrative tribunal of the Quebec securities regulator (the AMF) about the action taken by the Fibrek board, and in a decision that was surprising to many and against the opinion of the staff of the AMF, the tribunal exercised its "public interest" discretionary power to cease trade the issuance of shares by Fibrek to Mercer, concluding that the issuance of warrants in connection with a control contest should only be allowed where there is an immediate need for capital, and not to neutralize the effect of lock-up agreements, thereby depriving the minority shareholders of Fibrek of a 40% premium to the Resolute bid. The decision was upheld on appeal to the Quebec Court of Appeal, largely on the basis of deference to the expertise of the tribunal. Leave to appeal that ruling to the Supreme Court of Canada was denied.

Similarly, in response to an application by Inmet Mining for certain relief in connection with an unsolicited take-over bid it was making for Petaquilla Minerals, the British Columbia Securities Commission decided to issue an order (among other things) "cease trading" a proposed note offering by Petaquilla unless Inmet acquired none of Petaquilla's shares under the bid. What was particularly surprising about the decision was the lack of evidence that the proposed financing was intended as a defensive mechanism. In fact, the proposed financing had been announced several weeks before the announcement of Inmet's unsolicited bid, and the BCSC found that the financing "was in the ordinary course of business" and "no evidence that it was an artificial transaction created as a purely defensive measure". Nevertheless, there were a number of details concerning the proposed note offering that had yet to be determined, and the BCSC determined that its order would not have a negative impact on Petaquilla during the short time frame to the expiry of Inmet's bid. Moreover, there existed the possibility for warrants to be issued as part of the note offering, the exercise of which would have a dilutive effect on Inmet. In addition, in his testimony, Petaquilla's Chief Executive Officer did not rule out the possibility of the financing being used as a defensive mechanism. Nevertheless, the primary impetus for the BCSC order appears to have been the potential for the proposed financing to disrupt the Inmet bid which was conditional upon it not proceeding, irrespective of the motivation of the Petaquilla Board. In this respect, the decision seems to go beyond the existing principles of our National Policy on defensive tactics, and creates the risk that actions taken by a board in good faith with the view to the best interests of the company prior to an unsolicited take-over bid can be subsequently successfully challenged should a hostile bid for the company conditional upon the failure of the proposed conduct in question emerge.

These controversial decisions are inconsistent with judicial decisions in similar contexts including the 2011 decision of the British Columbia Court of Appeal in Icahn Partners v. Lions Gate Entertainment Corp., where a willingness to give deference to the business judgement of the target board was expressed. Accordingly, they again highlight the discrepancy between the policy biases of the securities regulators, who use their "public interest" jurisdiction to intervene in board conduct in order to protect shareholder interests, and the approach taken by courts, who focus on the board's conduct and whether they have complied with the duties imposed on them under corporate law, and make it clear that securities regulators can intervene on "public interest" grounds even where a board's conduct complies with applicable fiduciary duties. The tension is exacerbated by the growing scope of the public interest powers of our securities regulators and their "right to be wrong" when their decisions are judicially reviewed. As such, the decisions give rise to important policy questions concerning the appropriate circumstances in which a securities regulator should legitimately be entitled to intervene, and more broadly concerning the appropriate balance of power between Canadian courts versus securities regulators in the M&A context and the extent to which it is necessary to reconcile varying approaches to ensure consistency and predictability for all market participants.

Potential Enactment of Anti-Takeover Laws in Quebec

A final interesting development in 2012 was the strong negative reaction that an unsolicited approach by U.S. hardware-chain Lowes Companies, Inc. attracted when it sought to acquire RONA Inc. just as the Province of Quebec was headed for an election. After RONA made the $1.8 billion unsolicited approach by Lowes public and rejected it in early July, Quebec's then-Liberal finance minister released a statement opposing the proposed take-over due to the importance of RONA to the Province of Quebec, where half its +30,000 employees are based.

Election hyperbole aside, in November 2012, the new Quebec minority government formed by the Parti Québécois (PQ) reiterated its intention to preserve and strengthen Quebec companies. According to statements made by Nicolas Marceau, Quebec Finance Minister, part of the plan would give the board of directors of a Quebec company that is subject to a hostile take-over bid the power to consider not only the interests of its shareholders but also those of a broad range of stakeholders, including the host community and the company's employees and retirees. Reports have also surfaced that another part of the plan would permit the board of directors of a Quebec company faced with a hostile take-over bid to use other defensive tactics, including the power to make the bid unavailable to the company's shareholders if the board of directors believes that the bid is inadequate.

The government has not yet officially articulated the precise form these initiatives would take, and given the government's expressed intention to consult the business community beforehand, no bill is expected to be introduced for several months. However, concern is already being expressed about the implementation of these potential plans. To some extent, these concerns may be exaggerated for a number of reasons. First, it is not clear that any legislation seeking to implement these plans would pass through the National Assembly where the PQ does not hold the majority of the seats. Second, these plans are assumed to be directed to corporations governed by Quebec's Business Corporations Act, which represent less than 2.45% of the companies listed on the TSX as at December 7, 2012. Third, to some degree at least, these initiatives could merely amount to a codification of principles established by the 2008 decision of the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders. Moreover, in the United States, numerous states, such as New York and Massachusetts, have codified the power of directors to consider the interests of other stakeholders and to have a long term view of the company, including during a potential take-over of the company. Nevertheless, any firm action of this nature will clearly add a layer of complexity for any potential buyer of a Quebec-based company to address and contribute further to the unlevel M&A playing field in Canada. As such, query again whether it would be more advisable for the restrictions on defensive tactics mandated by National Policy 62-202 to be removed, and to allow Canadian courts, rather than securities tribunals, to examine whether the use of a defensive tactic is appropriate in the face of a particular bid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions