Canada: The Latest On Poison Pills, Duties Of The Board And Securities Commissions

Three recent cases addressing the duties of the board of directors and the treatment of shareholder rights plans may signify a change in the law or its application. On the surface, these cases all point to less interference by Courts and Securities Commissions in the decisions of boards of directors relating to take-overs, and in particular, the use of a shareholder rights plan.

The Supreme Court Of Canada's Decision In BCE Inc.

In Re: BCE Inc., debentureholders of BCE Inc. claimed that the board of directors had unfairly disregarded their interests in approving a potential acquisition of the company under the arrangement provisions of the Canada Business Corporations Act (the "CBCA"). The increased debt from the acquisition would have resulted in lowering the rating of the debentures below investment grade and significantly decreased their market value. The Supreme Court of Canada reviewed the obligations of the directors under the CBCA, reviewed the oppression remedy, and the "reasonable expectations" doctrine associated with it, and reviewed the role of the court in the approval of an arrangement. In this discussion, the Supreme Court emphasised the primacy of the directors in considering and balancing the interests of various stakeholders of the corporation, while exercising their fiduciary duty to act in the best interest of the corporation. The Supreme Court specifically endorsed the application of the business judgment rule to a board of directors' decision to take account of ancillary interests of stakeholders in considering the best interests of the Corporation.

The board, the trial judge and the Supreme Court all concluded that the debentureholders' contractual rights did not include protection against the change of control and they could not reasonably expect BCE to reject the transaction on the basis of its negative impact on their market value. The Supreme Court appeared relatively easily satisfied that the directors had considered the interest of the debentureholders, and reluctant to interfere with their judgment in the result of that consideration.

The Alberta Securities Commission's Decision On The Canadian Hydro Developers, Inc. Rights Plan

In Re: 1468860 Alberta Ltd., the Alberta Securities Commission refused to issue a cease trade order with respect to a shareholder rights plan implemented by Canadian Hydro Developers Inc. 1468860 Alberta Ltd., a wholly-owned subsidiary of TransAlta Corporation, had issued a take-over bid for Canadian Hydro on July 22, 2009, with expiry set for August 27, 2009, a period of 35 days, and applied to cease trade the shareholder rights plan. The hearing took place August 24, 31 days after the bid.

The Alberta Securities Commission applied the usual test to determine that it was not yet time to cease trade the plan. They referred to the Royal Host case, a joint decision of the British Columbia, Alberta and Ontario securities commissions which set out 11 factors for determining whether to cease trade a shareholder rights plan, including the length of time since the bid was announced, the steps taken to find an alternative transaction, and the likelihood of a better offer emerging. They concluded that the Canadian Hydro board had been diligent, and that there was a "real and substantial probability" of a better offer emerging. They refused to cease trade the plan although the bid was scheduled to expire. They were clear; however, that in different circumstances or at a later date they might deliver a different decision.

TransAlta extended its bid. The Alberta Securities Commission cease traded the Canadian Hydro plan, with effect as of September 21, 2009, pursuant to an order made on the consent of the parties on September 9, 2009. Canadian Hydro claimed to have received many better expressions of interest from its auction process (but did not announce an alternative transaction) and the parties ultimately agreed on a friendly transaction at a higher price on October 5, 2009.

The Ontario Securities Commission's Decision On The Neo Material Technologies Inc. Rights Plan

In Re: Neo Material Technologies Inc., the Ontario Securities Commission refused to issue a cease trade order against a shareholder rights plan introduced by Neo Material Technologies, Inc. Pala Investments Holdings Limited had bid for 20% (later reduced to 10%) of the shares of Neo Material. At the time of the offer, Pala already held approximately 20% of the shares. Also at the time of the bid, Neo Material had a shareholder rights plan in place. However, it introduced a second rights plan in the face of the bid and the shareholders approved the adoption of the second rights plan by a substantial majority.

If the bid had been successful, it would have given the bidder an approximately 30% shareholding, which Neo Material alleged would be a practical veto over subsequent transactions. However, if all shareholders had been inclined to accept the bid, a shareholder would have been able to sell only approximately 1/8 of his or her shares. The significant difference between the plan implemented in the face of the bid and the company's pre-existing plan, was that the new one did not allow partial bids to be "permitted bids". The parties both agreed that the Pala offer had been structured to fit the "permitted bid" definition of the pre-existing plan.

The Ontario Securities Commission quoted from the decision in the Royal Host case, including the factors noted by the Alberta Commission in the Canadian Hydro decision, but also referred to a section that characterized the role of the Commissions in these circumstances as:

"finding the appropriate balance between permitting the directors to fulfil their duty to maximize shareholder value in the manner they see fit and protecting the right of the shareholders to decide whether to tender their shares to the bid".

The Commission spent some time emphasising the fact that the rights plan had been recently approved by the shareholders. They noted that the new plan was adopted by the Neo Material board in response to the Pala offer and overwhelmingly approved by the shareholders, also in the face of the offer, on a sufficiently informed basis. The Commission did not discuss whether subsequent changes to the terms of an offer would affect the finding that the shareholder approval was sufficiently informed. In this case, the price of the Pala bid was increased following the shareholder vote on the new plan; however, the increase was arguably not a substantial change to the bid.

The Commission then examined the board's process to determine that the board had properly considered its duties. They stated:

"We acknowledge that in many instances, a primary purpose for adopting a shareholders rights plan is to allow the board to pursue alternative value- enhancing transactions, which includes seeking an alternate bid. In fact, we recognize that in the circumstances of many of the cases referred to, and considered by us, that obligation may have crystallized. However, we do not see this as the only legitimate purpose for a shareholders rights plan.... The so-called "business judgment" rule properly permits directors to make appropriate decisions sufficient to fulfill their fiduciary obligations". [emphasis in the original]

They then went on to quote from the Supreme Court in BCE stating that:

"The fiduciary duty of the directors to the Corporation is a broad, contextual concept. It is not confined to short-term profit or share value. Where the corporation is an ongoing concern, it looks to the long-term interests of the corporation...." [emphasis added by the Commission]

The Ontario Securities Commission concluded that the decision of the Neo Material board that avoiding an auction at this time, in view of economic circumstances and the circumstances of the corporation, was in the long term best interests of the corporation and the shareholders and was arrived at using reasonable business judgement. "This decision reflects the business judgement of the Neo Board, and there is no evidence to suggest that it was made in any manner other than in furtherance of its fiduciary obligations to the corporation."

Is this a new approach? None of the above is new law. However, its application is at least a bit novel. The previous actions on cease trading rights plans were based on an analysis of the public interest, not of fiduciary duties. Despite the Ontario Securities Commission's statement in Neo Material, previous decisions to cease trade shareholder rights plans did not rely on a determination that the board of the target was derelict in its fiduciary duty. At least not expressly.

Implications For The Future

Although the Alberta Securities Commission's decision to allow the Canadian Hydro plan to stand in the face of the expiry of the TransAlta bid could be viewed as giving the Canadian Hydro board of directors more latitude to potentially prevent the shareholders from determining the outcome of the bid, the reasons of the Commission and their comments at the time of denying the initial cease trade request are all consistent with the traditional rights plan analysis. The Commission was clear that it was a question of when, not if, the rights plan should be cease traded.

The Ontario Securities Commission's decision in Neo Material, however, opens the door to a more flexible analysis. The expansive discussion of the board's fiduciary duty and the application of the business judgment rule, potentially signal some deference to the board of directors regarding whether an unsolicited offer should be put to the shareholders. The fact that the rights plan was being used to prevent the bid, not provide the board with additional time to solicit a superior offer, is clearly a departure from the norm.

The real question is, if the bid for Neo Material had in fact been a bid to acquire the corporation, and not a partial bid, would the Commission have come to the same conclusion? Arguably, since the bidder was not seeking to acquire control or replace the board, there is a stronger justification for the Commission to defer to the judgment of the board. However, the Commission's reasons do not focus on the nature of the Pala bid and could potentially apply to a change of control transaction. The broad application of the business judgment rule to defensive tactics in the context of a change of control transaction, which is generally regarded as presenting inherent conflicts of interest for the incumbent board and management, would be a significant change.

The Canadian take-over bid regime is often described as very bidder friendly. National Policy 62-202 Take-Over Bids – Defensive Tactics includes specific recognition to the role of take-over bids in providing discipline on corporate management and reallocating economic resources to their best uses, as well as the right of the shareholders to decide the outcome of a bid. The limitations on defensive tactics that may be employed by target boards under this policy have generated considerable debate.1 It is clear that advocates for more board discretion to reject unsolicited offers will argue that the Neo Material decision represents a shift away from the current policy. However, the extent to which this proves to be the case will have to wait for another day.


1. See for example the discussion and recommendations under "Strengthening the Role of Directors in Mergers and Acquisitions" in the June 2008 Final Report of the Government of Canada's Competition Policy Review Panel, Compete to Win, at pages 76-8.

About BLG

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