Canada: Neo And Canadian Hydro Decisions Provide New Perspective On Poison Pills In Canada

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Mergers & Acquisitions, October 2009

It is a longstanding proposition of Canadian securities laws that, unlike in Delaware, boards of Canadian public companies cannot implement permanent structural defences to ward off unsolicited acquisition proposals. Until recently, Canadian securities regulators have expressed the view that unrestricted auctions in the face of change of control offers produce the most desirable results and that they will take action if defensive tactics, such as a shareholder rights plan (poison pill), are employed by a target board to deny shareholders the ability to respond to an offer. While a target board may use a poison pill to delay an unsolicited bid for a reasonable period of time as it seeks out competing offers, in Canada it has always been a question of when, not if, a pill must go.

However, over the past several years, in response to a number of high-profile unsolicited acquisitions of Canadian public companies by foreign buyers, there has been significant discussion among regulators, market participants and practitioners regarding the limitations inherent in this approach and the impact on corporate Canada. In June 2008, the Competition Policy Review Panel, which had been mandated to review Canada's competition and foreign investment policies and to develop recommendations to make Canada more compe-titive, released its final report. The report identified the involvement of Canadian securities regulators in the review of defensive tactics adopted by Canadian target boards as relegating boards to the role of "auctioneer". The Review Panel referred to the defences available to directors of Delaware companies and indicated that Canadian directors should be placed on the same footing. Delaware target boards may generally adopt poison pills and other defences that will survive court review if they are within the range of reasonableness and proportionate to the perceived hostile threat, and not coercive or preclusive.

A few recent decisions of Canadian securities regulators on the use of shareholder rights plans appear to reflect a move towards the Delaware approach, as regulators may be recognizing that target boards need better tools to defend against unsolicited bids. The first cracks in the longstanding approach occurred in 2007 when the Alberta Securities Commission (ASC) in Pulse Data Inc. (Pulse Data) refused to cease-trade (i.e., render inoperative) a shareholder rights plan in the face of an unsolicited bid, notwithstanding the absence of a higher offer or a viable auction process for the target, after the target's shareholders overwhelmingly approved the rights plan shortly before the cease-trade application was made. Please see our December 2007 Blakes Bulletin on Mergers & Acquisitions: Alberta Securities Commission Declines to Cease-Trade Poison Pill Following Timely Shareholder Approval. The Pulse Data decision gave new teeth to rights plans and opened the door for shareholders to respond to an offer as a class through a vote, rather than individually by electing not to tender. It also opened the door to an evolution in the Canadian regulators' views on the established Canadian principle that the board of a target company cannot "just say no" to an unwelcome bid.

Now, two new decisions, one by the Ontario Securities Commission (OSC) in Neo Material Technologies Inc. (Neo) and the second from the ASC in Canadian Hydro Developers, Inc. (Canadian Hydro), have provided further guidance on the use of rights plans. Notably, the Neo decision also provides an indication of the impact the Supreme Court of Canada's decision in BCE may ultimately have on Canadian securities regulators, particularly in respect of showing deference to the decisions of a well-informed board of directors and affirmation of the business judgment rule.

THE NEO DECISION

Background

Neo Material Technologies Inc. (Neo) is a TSX-listed company that produces, processes and develops high value metals. At the relevant times, Pala Investments Holding Limited (Pala) was Neo's largest shareholder, holding approximately 20.5% of Neo's common shares. The chronology of events leading to the Neo decision is as follows:

  • On February 9, 2009, Pala announced an unsolicited partial take-over bid for up to 20% of Neo's common shares at $1.40 per share, which would have increased Pala's interest to approximately 40%. The offer was structured as a "permitted bid" under the terms of Neo's existing rights plan, which did not prohibit partial bids but would have required 50% of the independent shares to be tendered.
  • On February 12, 2009, in direct response to Pala's announcement, Neo's board adopted a second shareholder rights plan under which partial bids were not "permitted bids".
  • On April 16, 2009, Pala applied to the OSC for an order to cease-trade both of Neo's rights plans pursuant to the OSC's public interest jurisdiction under Section 127(1) of the Securities Act (Ontario).
  • Pala subsequently extended and varied its offer, including increasing the offer price to $1.70 per share and decreasing the maximum number of shares subject to the bid to 9.5%, which would have given Pala an approximate 29.9% interest in Neo.
  • On April 24, 2009, with the Pala offer outstanding, Neo held an annual and special meeting with over 82% of Neo's shares represented (the highest voter turnout in five years). Over 81% of the shares held by disinterested shareholders were voted in favour of the second rights plan.
  • On May 7, 2009, the OSC heard Pala's application to cease-trade both rights plans. On May 11, 2009, the OSC issued its decision refusing to cease-trade the rights plan. Its reasons for the decision were subsequently released on September 1, 2009.

Shareholder Approval

The Neo decision is significant as the OSC declined to invoke its public interest jurisdiction to cease-trade a pill for a reason other than to give a target board additional time to solicit competing bids in the face of an unsolicited offer.

The OSC reviewed the history of its public interest jurisdiction and the use of that power to cease trade rights plans, noting that Canadian securities regulators have historically balanced the rights of shareholders to tender their shares to the bidder of their choice against the perceived duties of the target board to maximize shareholder value.

The OSC then adopted the reasoning of the ASC in Pulse Data, finding that the timely, informed shareholder approval of the second rights plan in the face of Pala's partial bid was "suggestive of a finding that the continuation of the rights plan is in the bona fide interest of a target's shareholders". As in Pulse Data, Neo's shareholders were provided with significant information regarding the second rights plan and Pala's offer in both the take-over bid and meeting materials. Accordingly, the OSC determined that Neo's shareholders were not deprived of their right to respond to the bid since they knew, or ought reasonably to have known, that a vote approving the second rights plan was the same as a vote against Pala's offer.

Despite the finding, the OSC cautioned that shareholder approval of a rights plan will not be determinative if there is any evidence to suggest that (i) the target board's response to a bid, including its decision to implement a tactical rights plan, is not carried out in the best interest of the corporation, or (ii) management or the board of directors coerces or unduly pressures shareholders to approve the rights plan. The OSC found no evidence of undue coercion or managerial pressure imposed on Neo's shareholders to ratify the second rights plan.

Best Interest of the Corporation

Pala argued that shareholder approval should not be determinative as the Neo board's decision to implement the tactical rights plan could not have been carried out in the best interest of the corporation as the board chose not to canvas the market for higher competing bids. In what is arguably a departure from past decisions (or at the very least an evolution of the law), the OSC stated that, while the traditional purpose of adopting a tactical rights plan is to provide the target board with additional time to seek out competing offers, that is not the only legitimate purpose. Rights plans may also be used for "the broader purpose of protecting the long-term interests of shareholders".

Relying on the Supreme Court of Canada's decision in BCE, the OSC invoked the business judgment rule and noted that the fiduciary duties of a target board are not confined to maximizing short-term profit or share value in a change of control context. Instead, the Neo board was entitled to consider the long-term interests of the corporation, including the option of maintaining the status quo and continuing to pursue its business plan, provided the decision taken was within a "range of reasonableness". The OSC accepted the business judgment of the Neo board that neither an auction nor allowing effective control of Neo to be acquired by one shareholder would, at that time, be in the long-term best interest of the corporation. The OSC was clearly influenced by the facts that current economic conditions had depressed the market prices of shares in a broad range of companies, including Neo, that Neo argued it was well-positioned to emerge from the economic downturn as a stronger, more valuable enterprise, and that Pala's partial bid would have given Pala effective control over Neo without delivering a significant control premium to all shareholders.

The OSC found that the Neo board undertook a well-structured evaluation process in responding to the Pala offer, which included (i) establishing a special committee of independent directors, (ii) obtaining legal advice before implementing the second rights plan, (iii) obtaining an opinion from financial advisors that the Pala offer was inadequate, (iv) considering alternatives, including continued pursuit of Neo's current business strategy, to maximize shareholder value and (v) seeking shareholder support of the second rights plan. Accordingly, with no evidence that the evaluation process had been compromised or that the Neo board or management were trying to entrench themselves, the OSC refused to second guess the board's decision that implementing the second rights plan was in the best interest of the corporation.

THE CANADIAN HYDRO DECISION

Background

Canadian Hydro Developers, Inc. (Canadian Hydro) is a TSX-listed company that develops, owns and operates renewable energy facilities. TransAlta Corporation (TransAlta) is one of Canada's largest non-regulated electricity generation and energy marketing companies. The chronology of events leading to the Canadian Hydro decision is as follows:

  • At Canadian Hydro's annual and special meeting held on April 24, 2008, shareholders approved a rights plan, the terms of which provided that any "permitted bid" must have a minimum duration of 60 days.
  • Almost 50% of the outstanding Canadian Hydro shares were represented at the meeting, with over 72% of the votes cast being in favour of the rights plan.
  • From December 2008 through the spring of 2009, TransAlta attempted to engage Canadian Hydro in discussions about a possible combination of the two companies, including making a non-binding proposal. These advances were rejected by Canadian Hydro.
  • On July 20, 2009, TransAlta announced its intention to launch a take-over bid for Canadian Hydro, which bid would remain open for the statutory minimum of 35 days. Accordingly, TransAlta's bid did not constitute a "permitted bid" under Canadian Hydro's rights plan.
  • On August 17, 2009, with its bid still outstanding, TransAlta applied to the ASC to have the rights plan cease-traded. The hearing was held on August 24, 2009 and the ASC's decision declining to cease trade the rights plan was issued on August 25, 2009. Its reasons for decision were released on September 3, 2009.

Shareholder Approval

The facts of the Canadian Hydro case are distinct from the Neo decision discussed above as the target board did not adopt a tactical rights plan in the face of TransAlta's unsolicited bid. Instead, the Canadian Hydro board relied on its existing rights plan to delay take-up under the bid and provide the board with additional time to solicit competing offers. TransAlta's bid was for 100% of the outstanding shares of Canadian Hydro and not a partial bid as in Neo.

In determining whether to intervene and cease-trade the existing rights plan, the ASC attached "considerable importance" to the fact that the plan had been approved by Canadian Hydro's shareholders in advance of the bid. The shareholders "had, and exercised (to the extent they wished to), the opportunity to make a decision, in advance, relating to take-over bids". The ASC concluded that the shareholders approved the plan knowing its key terms, including the 60-day minimum duration for a permitted bid. Canadian Hydro shareholders therefore knew and accepted the risk that a potential non-conforming permitted bid, even a highly attractive one, might be blocked by the rights plan. Furthermore, TransAlta, being aware of the Canadian Hydro rights plan, should have known the risk it was running when it launched an offer that did not qualify as a "permitted bid".

As the rights plan approved by shareholders was intended to give the Canadian Hydro board 60 days in which to respond to a bid (and solicit competing offers), the ASC commented in its decision that an extension of the TransAlta bid to 60 days would substantially serve that same purpose.

Following the release of the ASC's decision, TransAlta extended its bid to 60 days. Upon a second application by TransAlta on September 9, 2009, the ASC issued the requested cease-trade order, effective as of the 60th day of TransAlta's extended bid.

CONCLUSIONS

It now appears that where a target board is able to demonstrate the exercise of reasonable business judgment in reaching a decision that a bid is not in the best interest of the corporation, and that decision is backed by broad shareholder support, Canadian securities regulators are now showing a greater reluctance to interfere in unsolicited change of control situations. The decisions in Neo and Canadian Hydro indicate that regulators will not readily, in the words of the ASC in Pulse Data, "override the clear expression of shareholder democracy" expressed by significant shareholder approval. Where informed and timely approval or affirmation of a rights plan by a strong majority of well-informed and disinterested shareholders can be obtained, Neo provides additional precedent that such approval may be considered by regulators to be a rejection of an offer by all shareholders as a class. For a board attempting to delay an unsolicited offer with an existing shareholder-approved rights plan, Canadian Hydro provides additional precedent that a regulator may show deference to the intentions of the shareholders and enforce the substance of the particular terms of that plan. An unsolicited bidder facing a rights plan may now give greater consideration to structuring its offer as a "permitted bid" to avoid the need for a cease-trade application.

The Pulse Data, Neo, and Canadian Hydro decisions collectively appear to reflect an evolution of the regulators' views on the role and responsibilities of a target board in a change of control context. The impact of the BCE decision on the OSC's reasoning in Neo is interesting, particularly in respect of showing deference to the decisions of Neo's board and affirmation of the business judgment rule. The Neo decision suggests that, in a change of control context, it is not inappropriate for target boards to consider the long-term best interest of the corporation. As a result, target boards, in some circumstances, may not necessarily be confined to actions that maximize shareholder value in the near term. This may mean that a target board, given the right facts, may be able to reject a coercive and opportunistic bid without undertaking an auction, especially if there is strong shareholder support for this decision. However, in other cases, it may continue to be appropriate for a target board to take a more traditional course of action and seek out competing offers.

Highlights

  • Target boards use shareholder-approved rights plans to defeat or delay bids
  • OSC influenced by BCE decision, invokes business judgment rule

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 Mondaq.com.

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

Authors
Events from this Firm
12 Sep 2017, Seminar, Toronto, Canada

Please join us as we take an in-depth look at the legislation and the impact on the industry.

14 Sep 2017, Seminar, Toronto, Canada

Change, stress and uncertainty are ever]present factors in todayfs legal environment, and specific aspects about the practice of law make it difficult to thrive in the profession long term. Luckily, there are specific research]based strategies that have been shown to help lawyers thrive and lead to more effective ways to manage stress and pressure.

5 Oct 2017, Seminar, Toronto, Canada

Blakes is proud to host our New to In-House Series, designed to bring together junior and mid-level in-house counsel for a candid exchange of insights to highlight and address some of the challenges and opportunities facing in-house lawyers in their roles today.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 by clicking here .

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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