Canada: Neo Material Technologies Inc. And Pala Investments Holdings Limited -- "Just Say No" Comes To Canadian M&A (Maybe)

The two seminal U.S. M&A cases are Revlon v. MacAndrews & Forbes Holdings and Paramount Communications Inc. and KDS Acquisitions Corp. v. Time Incorporated decided in 1986 and 1989, respectively, both by the Delaware Supreme Court.

In Revlon, the court held that, at the point when the break-up of Revlon became inevitable, the duty of the board changed from preservation of Revlon as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit. Baldly stated by the court, the directors role changed from defenders of the corporate bastion to auctioneers charged with getting the best price. The case has subsequently given its name to the proposition that, once a company is for sale, the directors must fulfill their "Revlon duties".

In the Time Warner case, Paramount Communications made an unsolicited all cash offer for Time at a price significantly above the price at which Time had negotiated a merger with Warner Communications. Time responded by revising the merger such that it no longer required shareholder approval. Paramount Communications applied for an injunction to restrain the transaction on the basis that, by entering into the proposed merger, Time had put itself up for sale and thereby triggered Revlon duties to obtain the highest price. The court refused the injunction and held that there are two circumstances which trigger Revlon duties:

  1. when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization; and
  2. in response to a bidder's offer, when a target abandons its long term strategy and seeks an alternative transaction also involving a break-up of the company.

The Time Warner case has subsequently become universally known for its justification of the "just say no" defence.

In the intervening years, the Revlon case has greatly overshadowed the Time Warner case, to the point where U.S. commentators have been questioning whether the "just say no" defence continues to exist (although no one seems to consider the possibility that, in the evolving M&A environment particularly of the past decade, there are very few companies which would be in a position to credibly argue that they have the kind of long term strategy put forward by Time).

What does either the Revlon case or the Time Warner case have to do with the Reasons for Decision issued by the Ontario Securities Commission ("OSC") on September 1, 2009 involving the unsolicited offer by Pala Investments Holdings Limited ("Pala") for Neo Material Technologies Inc. ("Neo")? The answer is that it is the first M&A decision in which the tension between the two legal principles is raised, if not resolved, in a Canadian context.


The facts are straightforward:

  1. Pala owned just over 20% of the issued shares of Neo, a company listed on the Toronto Stock Exchange.
  2. Neo had a shareholder approved shareholder rights plan (the "First Plan"). The First Plan contained a permitted bid exception which applied, among other conditions, where at least 50% of the independently held shares were tendered into an offer (the "Minimum Tender Condition").
  3. On February 25, 2009, Pala made a take-over bid for Neo which complied with all of the permitted bid requirements of the First Plan except the Minimum Tender Condition.
  4. Previously, on February 9, 2009, Pala had written to Neo requesting that the Minimum Tender Condition be waived.
  5. On February 12, 2009, Neo's board adopted a second shareholder rights plan (the "Second Plan"). The Second Plan was the same as the First Plan except that the permitted bid exception required a take-over bid to be made for all of the Neo shares.
  6. On April 24, 2009, the Neo shareholders approved the adoption of the Second Plan by a vote of 81% (of the 83% of the issued Neo shares which were represented at the meeting).
  7. Pala applied to the OSC for an order cease trading the Second Plan. A hearing was held on May 7, 2009 and the OSC issued its decision on May 11, 2009 which denied the requested relief.


The May 11, 2009 decision took into consideration the following factors:

"(a) the Second Shareholder Rights Plan was adopted by the Neo Board in the context of, and in response to, the Pala Offer;

(b) 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 interests of the corporation and of Neo's shareholders, as a whole;

(c) an overwhelming majority of Neo's shareholders (excluding Pala) approved the Second Shareholder Rights Plan while the Pala Offer remained outstanding;

(d) the evidence supports a finding that Neo's shareholders were, or were provided with a reasonable opportunity to be, sufficiently informed about the Second Shareholder Rights Plan prior to casting their votes, and there is no evidence that Neo's shareholders were insufficiently informed; and

(e) there is no evidence to suggest that management or the Neo Board coerced or unduly pressured Neo's shareholders to approve the Second Shareholder Rights Plan."

Reasons for Decision

The OSC's Reasons for Decision reiterate and expand upon the factors that influenced its decision rendered on May 11, 2009. As well, the OSC retraces the factors set out in earlier cases involving the decision whether to cease trade a shareholder rights plan and examines the circumstances under which the OSC should exercise its public interest jurisdiction to cease trade a shareholder rights plan. The OSC concludes that it should examine all of the circumstances surrounding the establishment of the plan, including whether informed shareholder approval was given, and the context of such shareholder approval. In this case, the OSC found that there was ample evidence that shareholder approval was informed. However, with respect to a rights plan implemented in the face of a hostile bid, the OSC held that fully informed shareholder approval would not be determinative where: (a) there was evidence that the board's process in dealing with a bid, including the decision to implement a shareholder rights plan, was not carried out in the best interests of the target and its shareholders as a whole; or (b) there was evidence that management or the board coerced or pressured shareholders to approve the rights plan. In this case, the OSC held that the evidence on both questions supported Neo.

Having found that there was no evidence of impropriety in the conduct of the Neo board and that the shareholders of Neo had overwhelmingly voted to confirm the Second Plan despite the Pala offer, the OSC was still faced with a dilemma. Canadian M&A law has been built on the proposition that, at some point in time, a rights plan must go - the only question is, under the facts of any particular case, when that time should be. That being understood to be a general principle, Pala specifically argued that Canadian law does not permit a board to permanently "just say no". In support, Pala referred to the frequently quoted passage from the Ontario Court of Appeal decision in Maple Leaf Foods Inc. v. Schneider Corp. as follows:

"When it becomes clear that a company is for sale and there are several bidders, an auction is an appropriate mechanism to ensure that the board of a target company acts in a neutral manner to achieve the best value reasonably available to shareholders in the circumstances. When the board has received a single offer and has no reliable grounds upon which to judge its adequacy, a canvass of the market to determine if higher bids may be elicited is appropriate, and may be necessary... [emphasis added.]"

Pala argued that, in the face of a take-over bid, the duty of directors is to "achieve the best value available to shareholders in the circumstances", that at the very least the Neo board should be canvassing the market to determine whether higher bids could be elicited and that, by failing to take any such steps, the Neo board failed to discharge its fiduciary duties.

The OSC did not agree with Pala's arguments. Instead, the OSC agreed with Neo and OSC staff that in the past, the OSC has recognized that at least two underlying and animating principles emerge from the rules, policies and cases in the context of take-over bids: (a) the principle of procedural fairness for all; and (2) the principle of the fiduciary duty of directors, members of a special committee of directors, and their advisors. The OSC states in its Reasons for Decision that it flows from these principles that the process of implementing a shareholder rights plan in the face of a hostile take-over bid must be carried out in accordance with the fiduciary obligations of the directors, which, under Canadian corporate law, are owed to the corporation and not to the shareholders of the corporation.

A review of the Canadian case law supported the proposition that the determination of whether a board has discharged its fiduciary obligations is governed by the business judgment rule - that means the board must have acted reasonably and fairly and that they have made a reasonable decision, not a perfect decision. In that context, although in many instances a primary purpose for adopting a shareholder rights plan is to allow the board to pursue alternative value-enhancing transactions, the OSC did not see this as the only legitimate purpose for a rights plan. Relying on the Supreme Court of Canada in the BCE and Peoples cases, the OSC stated that "there is no specific formula to apply on directors in every case, including an obligation to permit and facilitate an auction of company shares each and every time an offeror makes a bid". To the contrary, the Ontario Court of Appeal in Schneider clearly stated that Revlon is not the law in Ontario and an auction need not be held every time there is a change of control of a company. Again, relying on established Canadian case law, the OSC held that a shareholder rights plan may be adopted for the broader purpose of protecting the long-term interests of shareholders, where, in the directors' reasonable business judgment, the implementation of a rights plan would be in the best interests of the corporation. Here it was evident that, in the view of the Neo board, avoiding an auction at this time was in the long-term best interests of the corporation and of the shareholders, as a whole. That decision reflected the business judgment of the Neo board and there was no evidence to suggest that it was made in any manner other than in furtherance of its fiduciary obligations to the corporation. Put another way, although the OSC did not use the expression, the OSC recognized a board's right, in a proper case, to "just say no".

That left the OSC with only one more question. If the Second Plan was allowed to stand, had the time come for it to be terminated? Pala argued that, despite a considerable amount of time having passed since its offer was launched, the Neo board had not identified any alternative transaction or made any attempt to attract a competing bid. Accordingly, the Second Plan served no purpose and should be terminated. The OSC agreed with Pala that "there comes a time when a rights plan must go". However, so long as the rights plan continued to allow management and the board the opportunity to fulfill their fiduciary duties, the plan continued to serve a purpose. In light of all of its other findings, the OSC was not convinced that the time had come to cease trade the Second Plan and gave no indication of when it might be convinced otherwise.


It is probably now clear that, given an unconflicted board, a fair and informed process, and a reasonable result, the business judgment rule trumps Revlon duties under Canadian law. It is also possible that, given the foregoing circumstances, the board of a target corporation can employ defensive tactics which have an effect similar to the "just say no" defence under the Time Warner case, although it is premature at this point to say for how long.

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.

Events from this Firm
16 Jan 2018, Seminar, Birmingham, UK

Join Gowling WLG's pensions team as they explain some of the biggest challenges facing trustees and employers in the coming year and provide practical ways of dealing with them.

23 Jan 2018, Seminar, London, UK

Join Gowling WLG's pensions team as they explain some of the biggest challenges facing trustees and employers in the coming year and provide practical ways of dealing with them.

25 Jan 2018, Seminar, Birmingham, UK

2018 is set to be another big year in employment, with employers set to face new challenges and responsibilities. At our event, looking ahead to next year, we will be discussing four key issues you might face in 2018, providing useful tips and answering your questions.

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