In its recent decision in Neo Material Technologies Inc., the Ontario Securities Commission has signalled that it may be changing its approach to poison pills and takeover bids. The result of the Neo decision is that the board of a target company may now be able to "just say no" to a hostile takeover bid that the target board concludes, on reasonable grounds, is not in the long-term best interests of the target corporation.
Neo concerned a partial offer by a 20% shareholder to acquire additional shares of the target. If completed, the partial offer would have taken the bidder to a block of approximately 30%. The target board viewed the bid as undervalued and opportunistic. However, the board did not initiate a process to seek out any alternative transaction, given depressed market conditions that the board believed made the timing inopportune for selling the company. The target board implemented a tactical rights plan to obstruct the offer; the plan was ratified in a shareholder vote by 81% of the shares, exclusive of the bidder's block. The bidder applied to the OSC to cease trade the rights plan 50 days from the launch of the bid. The OSC dismissed the application and imposed no deadline on the continued operation of the rights plan.
The legal position on poison pills in Ontario before the Neo decision was well-settled. A poison pill was a permitted defensive measure only while it served the purpose of allowing the board of a target company to pursue a better transaction for shareholders in the short term. The applicable principles before Neo may be summarized as follows:
- The OSC viewed its primary role in regulating takeover bids as
protecting the interests of target company shareholders.
- The fundamental interest to be protected was the right of
target shareholders to make a fully informed decision on whether to
accept or reject the offer for their shares.
- A pill would be tolerated to the extent that it was being used
to assist the target board to attain a better bid.
- However, a pill could not continue to be deployed if the effect
would be to deprive shareholders of access to an offer.
- Accordingly, when a pill was challenged, the question for the
OSC was simply when the pill should be cease-traded, not
whether it should be cease-traded.
The Neo decision, in dismissing the bidder's application to cease trade the rights plan, signals a change from the historical focus of securities regulators in the context of takeover bids on protecting shareholder interests. The OSC held that the duty of a target board in the face of an unsolicited bid is to protect the long-term best interests of the corporation (as opposed to the short-term best interests of target company shareholders); the target board is permitted to maintain a pill in the face of an unsolicited bid as long as the pill continues to serve the purpose of allowing the board to fulfill its fiduciary duties; and the corporation is not required to pursue an immediate alternative value-enhancing transaction as a precondition to maintaining a pill in the face of an unsolicited offer. In adopting this approach, the OSC relied on the Supreme Court of Canada's decision in BCE Inc. in which the Court rejected shareholder primacy and held that the duty of the target board in the takeover bid context is not limited to short-term maximization of shareholder value.
Neo further echoes the Supreme Court of Canada's decision in BCE in its deference to target board decision making, despite what the Delaware courts have described as the "omnipresent specter of self interest" that pervades target board decisions in the context of hostile takeover bids. According to Neo, determining how to respond to an unsolicited bid, including whether to deploy and maintain a pill, is a matter of business judgment for the target board; the OSC will not second-guess that business judgment as long as the board's decision as to the best interests of the corporation was made through a proper process and falls within a range of reasonableness. Consequently, shareholders do not have an absolute right to sell their shares; the fact that a rights plan is interfering with shareholders' ability to tender to an offer is not, alone, a basis for a cease trade order.
In Neo, the OSC concluded that the board's decision that it was in the long-term best interests of the target to deploy and maintain a pill in the face of the unsolicited bid was reasonable in the circumstances, on the basis of the following factors:
- the strong vote of shareholders' ratifying the pill
following the unsolicited bid;
- the bid undervalued the assets and business prospects of the
- the bid would provide the bidder with effective control without
paying a premium;
- the bid would have an adverse effect on liquidity; and
- the bidder was a financial (not strategic) buyer whose
intentions for the business were unclear.
The effect of Neo is to give target boards more latitude than they formerly had to maintain a poison pill in the face of an unsolicited takeover bid. The board of a target company may be permitted to maintain a pill and "just say no" to a hostile bid in circumstances in which the board reasonably concludes that such a transaction is not in the long-term best interests of the corporation.
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