With the release of the Ontario Securities Commission’s reasons in the Baffinland Iron Mines Corp. matter earlier this month, Ontario and Canadian law on the use of poison pills certainly become less murky.
But that’s not to say that the jurisprudence or the advice mergers-and-acquisitions lawyers should be giving their clients is crystal clear.
The phrase poison pill finds its origins in the medication spies throughout history would carry to avoid interrogation by an enemy. In the world of corporate law, the term has come to refer to any strategy that will produce negative results for an entity attempting to take over a company.
A common poison-pill strategy is a shareholder rights plan. A company using this approach to defend against a hostile takeover issues rights to existing shareholders to acquire a large number of new securities should anyone obtain more than a predetermined amount of its stock.
This dilutes the acquirer’s holdings and makes it prohibitively expensive to buy the company by vastly increasing the number of shares it will have to buy in order to gain control.
But Canada’s securities regulators have long cast a skeptical eye on such tactics. National policy 62-202 of the Canadian Securities Administrators provides that the interests of the shareholders of a target corporation lie in being “free to make a fully informed decision” about the bid.
Implementing a poison pill, then, could well be contrary to those interests unless the defensive tactic is tied to a “genuine attempt to obtain a better bid.”
The policy allows regulators to intervene in cases in which a shareholder rights plan would likely “deny or limit severely the ability of shareholders to respond to a bid.” To this end, regulators have consistently held that shareholder rights plans must end at some point.
The rationale is that the ability to dispose of shares freely is a fundamental right attached to owning them. When rather than whether a plan will terminate becomes the issue.
“By 2007, there was a fairly well-developed body of case law on how to deal with a poison pill,” says Mark Gelowitz of Osler Hoskin & Harcourt LLP. “Generally speaking, if a panel was satisfied that there was a reasonable possibility of a better bid coming along, it might allow the poison pill to continue for a period.”
In September 2007, however, the Alberta Securities Commission released its surprising decision in the matter of Pulse Data Inc. that permitted the shareholder rights plan adopted in response to an unsolicited takeover bid to remain in place indefinitely.
Given what it regarded as the unique circumstances of the case - most importantly the fact that there was no realistic possibility that another bid was in the offing and that the shareholders had approved the plan by an overwhelming margin - the panel ruled it wouldn’t interfere with “a decision of the Pulse board that has a fiduciary duty to act in the best interests of Pulse shareholders.”
The law became even murkier with the OSC’s 2009 decision in the Neo Material Technologies Inc. matter in which the board stated that rights plans approved by shareholders during the currency of a bid may be used for “the broader purpose of protecting the long-term interests of shareholders” so long as the decision to implement the plan was a reasonable one.
The decision specifically cited the business judgment rule and the Supreme Court of Canada’s 2008 ruling in BCE Inc. v. 1976 Debentureholders, which stands for the proposition that directors exercising their fiduciary duties should act in the long-term interests of a corporation.
In the OSC’s view, then, the Neo Material Technologies vote approving the plan could be seen as ratifying the board’s decision to consider the long-term interests of the corporation, including the option of pursuing its business plan.
In the panel’s view, the board had made a reasonable judgment that economic conditions had depressed share prices to the point that a sale by way of auction or control of the company by a single shareholder wouldn’t be in the long-term interests of the corporation.
Recognizing the long-term interests of the corporation in a bid situation, however, may run afoul of national policy 62-202, which arguably takes a short-term perspective compared to BCE.
“The difficulty with Pulse and Neo was that these cases afforded more deference than may be due to a board that just says no to a bid where it reasonably believes that existing management represents the best bet and the best vision for running the company, particularly where there has been a shareholder vote approving the poison pill,” Gelowitz says.
“And what that raises is the fundamental philosophical question about whether it’s legitimate to allow a majority to prevent a minority from selling to a buyer who wants to buy and to whom the minority wants to sell.”
Indeed, in July, the British Columbia Securities Commission’s reasons in the Lions Gate Entertainment Corp. matter rejected the notion that the Neo and Pulse matters had altered the traditional approach. How the OSC dealt with the issue remained to be seen, but it wasn’t long before it got the opportunity to clarify its position.
The Baffinland matter arose when Nunavut Iron Ore Acquisition Inc. challenged the rights plan Baffinland put in place after Nunavut made an unsolicited bid for the company. Baffinland proposed to continue its rights plan despite having already solicited a higher bid from ArcelorMittal, a white knight.
Although the facts differed substantially from those in the Neo matter, the OSC took the occasion to clarify its position on poison pills. The panel explained that the Neo case hadn’t altered the law and that the deciding factor was shareholder approval of the rights plan in the face of the hostile bid.
“Neo does not stand for the proposition that the commission will defer to the business judgment of a board of directors in considering whether to cease trade a rights plan or that a board of directors in the exercise of its fiduciary duties may ‘just say no’ to a takeover bid,” the panel wrote.
In its view, whether the board was acting within its fiduciary duties was a secondary matter relevant only after the OSC had determined that leaving the rights plan in place was consistent with shareholders’ wishes.
“Baffinland brings the thinking of Ontario and B.C. regulators closer but does not fully reconcile their views because in Ontario the question remains open as to whether continued deployment of a rights plan is justified on the basis of a shareholder vote when the board is not seeking an alternative bid,” says Thomas Yeo of Torys LLP. “Lions Gate said that a vote was irrelevant in those circumstances, but the OSC did not.”
Still, Graham Gow of McCarthy Tétrault LLP believes the OSC will eventually close the door on the “just say no” defence.
“Baffinland shuts the opening three-quarters of the way,” he tells Law Times. “So when I’m advising boards, I’m a lot less excited about the possibilities than I was after Neo.
“Still, the whole thing leaves you scratching your head and wondering just who is the boss - the Supreme Court of Canada or the OSC?”
It could be that eventually the Supreme Court will have to decide just that.