Canada: OSC Opens The Door To "Just Say No" Defence: Shareholder Rights Plan Maintained In The Face Of A Hostile Partial Bid

Last Updated: October 9 2009
Article by Graham P.C. Gow and Robert O. Hansen

Most Read Contributor in Canada, September 2018

For many years, Canadian securities commissions have been saying that a shareholder rights plan cannot be used by a target company's board of directors to block indefinitely a hostile take-over bid. It has been the view of the securities regulators that shareholders, not the board of directors, are ultimately entitled to decide whether or not the company will be sold. Shareholder rights plans have been effective to allow a target company's board more time than a bidder might prefer to seek out white knights or other value-maximizing alternatives, but, at some point, the time will come for the board to waive the rights plan and allow the offer to go to the shareholders, or the securities commissions will order the rights plan removed.

In the Matter of Neo Material Technologies Inc. et al is a recent decision of the Ontario Securities Commission (OSC) dismissing an application by a hostile bidder seeking to cease trade a target company's tactical shareholder rights plan that had been adopted by the target's board in the face of an unsolicited partial bid and that had been approved by the shareholders.

This decision is of significant interest to boards of directors of potential targets because it represents a marked departure from earlier decisions in which securities commissions have primarily focused on whether the time had come in the circumstances to set aside the shareholder rights plan. With this decision, the OSC may have opened the door for a target's board to utilize effectively a rights plan as a tool to defend a hostile bid where the board determines that it would be in the best interests of the corporation to do so. However, it remains to be seen whether the circumstances of the Neo case — a partial bid by a significant shareholder and overwhelming shareholder support for the shareholder rights plan — will limit its application to other cases with similar facts or will lead to its extension to other cases with different facts.

Neo Material Technologies Inc. (Neo) is a Canadian public corporation carrying on business in the mining and resources sector. Pala Investments Holdings Limited (Pala), an investment company, held approximately 20 per cent of Neo's outstanding common shares and had been an investor in Neo since July 2007. On February 9, 2009, Pala announced its intention to commence a partial bid to acquire up to an additional 20 per cent of Neo's outstanding common shares at a price of $1.40 per share (the offer was subsequently varied by Pala to increase the offer price, reduce the number of shares subject to the offer to approximately 10 per cent and extend the expiry time).

Neo had two shareholder rights plans in effect. The first shareholder rights plan was approved by Neo's shareholders in June 2004 and subsequently reconfirmed in April 2007. Pala's offer was structured to comply with the "permitted bid" provisions of the first shareholder rights plan, which included a minimum tender condition, so as not to trigger the issuance of rights under the plan. The second shareholder rights plan was adopted by Neo's board of directors on February 12, 2009 in response to Pala's offer, and was subsequently approved by Neo's independent shareholders at a meeting held on April 24, 2009. Approximately 83 per cent of Neo's outstanding shares were represented at the meeting and, excluding Pala's holdings, approximately 81 per cent of those shares were voted in favour of adoption of the second shareholder rights plan. The second shareholder rights plan was substantially similar to the first shareholder rights plan except that it prohibited partial bids. The focus of the OSC was on this second shareholder rights plan.

In dismissing Pala's application and refusing to exercise its public interest jurisdiction to cease trade Neo's second shareholder rights plan, the OSC took note of the key facts that Pala's offer was not for 100 per cent of Neo's outstanding shares and that Neo's shareholders overwhelmingly approved the adoption of the second shareholder rights plan. Presumably, the OSC could have stopped there and relied on these circumstances to decline to cease trade the rights plan. Instead, the OSC observed that allowing the board to seek alternative value-enhancing transactions is not the only legitimate purpose for a shareholder rights plan and that the directors of a target company are entitled to take steps that they conclude are in the long-term best interests of the company.

The OSC relied on the recent decision of the Supreme Court of Canada in BCE Inc., Re, [2008] 3 S.C.R. 560 and stated:

"Consistent with the Supreme Court's statements in BCE and the established body of corporate case law it is our view that, shareholder rights plans may be adopted for the broader purpose of protecting the long-term interests of the shareholders, where, in the directors' reasonable business judgment, the implementation of a rights plan would be in the best interests of the corporation."

The OSC deferred to the business judgment of the Neo board and its determination that avoiding an auction at this time was in the long-term best interests of the corporation and the shareholders, as a whole. The OSC found that the Neo board undertook a well-structured evaluation process in response to Pala's offer and concluded that the integrity of the board process had not been compromised. As a result, the OSC concluded that there was no evidence that the adoption of the second shareholder rights plan was not carried out in the best interest of the corporation and the shareholders and the Commission was not prepared to conclude that, even though the bid had been outstanding for more than 70 days, "the time had come for the rights plan to go."

McCarthy Tétrault Notes:

Armed with the OSC's decision in Neo and the Supreme Court of Canada's decision in BCE, a target company's board of directors that undertakes a thorough and uncompromised evaluation process and then concludes that a sale of the company at this time is not in the long-term best interests of the company may be entitled to use a shareholder rights plan to defend against a hostile take-over bid, perhaps indefinitely. It remains to be seen whether the Neo decision will open the door for a target's board to implement a "just say no" defence to an unsolicited bid or whether the decision will be limited to scenarios involving a partial bid and/or a tactical shareholder rights plan with significant shareholder support.

We expect that the Neo decision will cause a hostile bidder to seriously consider structuring its offer as a "permitted bid" under the target's shareholder rights plan. Most Canadian rights plans have a concept of "permitted bids," which must be open for 60 days and have certain other attributes. That, in turn, may lead to target boards considering the adoption of US-style shareholder rights plans that do not have the concept of permitted bids and so prevent bidders from buying shares of the target company while the rights plan remains in effect.

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 Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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