On May 11, 2009, the OSC released a decision dismissing an
application by Pala Investments Holdings Limited and its subsidiary
to cease trade two shareholder rights plans of Neo Material
Pala, which currently controls approximately 20% of the
outstanding common shares of Neo, made a formal take-over bid to
acquire up to an additional 9.9% of the outstanding common
The board of directors of Neo recommended that shareholders
reject the Pala offer. Neo, which already had an existing
shareholder rights plan, put in place a new shareholder rights plan
that categorically precludes any take-over bid for less than all of
the outstanding shares of Neo (the Second Shareholder Rights Plan).
The Second Shareholder Rights Plan was approved by Neo shareholders
while the Pala offer was outstanding.
Pala applied to the OSC to cease trade both shareholder rights
plans on the grounds that the individual shareholders have the
fundamental right to decide whether to tender to the Pala offer.
Pala also argued that the legitimate purposes of a shareholder
rights plan, to provide more time for the target to obtain a
superior offer and ensure that shareholders have adequate
information to assess the offer, were not applicable in this case
because Neo was not attempting to solicit other offers and the
choice before the shareholders was clear.
The OSC Decision
The OSC dismissed the Pala application with reasons to follow at
a later date. However, the OSC panel did indicate that its decision
was influenced by the following considerations:
the Second Shareholder Rights Plan was adopted by the Neo Board
in the context of, and in response to the Pala Offer;
there is no evidence that the process undertaken by the Neo
Board to evaluate and respond to the Pala Offer, including the
decision to implement the Second Shareholder Rights Plan, was not
carried out in what the Neo Board determined to be the best of the
corporation and of the Neo shareholders, as a whole;
an overwhelming majority of the Neo shareholders (excluding
Pala) approved the Shareholder Rights Plan while the Pala Offer
the evidence supports a finding that the Neo shareholders were
sufficiently informed about the Second Shareholder Rights Plan
prior to casting their votes; and
there is no evidence to suggest that management or the Neo
Board coerced or pressured the Neo shareholders to approve the
Second Shareholder Rights Plan.
The implications of the OSC's decision will not be clear
until its full reasons are released. However, this decision
potentially indicates a shift to providing boards of directors with
more flexibility in resisting take-over attempts. Taken together
with the 2007 decision of the Alberta Securities Commission in
Pulse Data, this decision may change the common view of rights
plans as a strictly temporary defensive tactic to allow a board
additional time to respond to an unsolicited offer. On the other
hand, the decision can also be read as being consistent with the
OSC's past practice of letting shareholders have their say,
since the shareholder vote, held in the face of the Pala offer,
clearly supported maintaining the Second Shareholder Rights
The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
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