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 Technologies Inc.
The Transaction
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 shares.
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.
The Application
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 remained outstanding;
- 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.
Potential Implications
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 Plan.
The OSC's decision is available on its website.
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