Law Times

PAGE 8 NEW An online resource tool 1.800.263.3269 Bestcase earlug.indd 1 3/26/08 11:52:01 AM Focus On MERGERS AND ACQUISITIONS Poison pill gets green light Courts, regulators continue to grapple with thorny issue BY JULIUS MELNITZER For Law Times and other structural defences to ward off unsolicited takeover bids. "The tension has always been to find H the correct balance between the rights of shareholders to tender their shares to their bidder of choice and a board's du- ties to maximize shareholder value," says Ed Waitzer of Stikeman Elliott LLP. Regulators have sought to strike this balance by allowing rights plans to continue for a period of time in order to give boards a reasonable chance to flesh out competing offers. But in its recent ruling in Neo Material Technolo- gies Inc. and Pala Investments Holdings Ltd. and its wholly-owned subsidiary 0833824 B.C. Ltd., the Ontario Se- curities Commission 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" as long as the board's decision to imple- ment them was reasonable. Indeed, the decision specifically cited the business judgment rule and the Su- preme Court of Canada's ruling in BCE Inc. v. 1976 Debentureholders, which em- phasized the notion that directors exercis- ing their fiduciary duties should act in the istorically, Canadian securi- ties regulators have prevented boards from using poison pills long-term interests of a corporation. "The OSC may have raised the busi- ness judgment rule in order to bridge the gap between the principles underly- ing corporate governance and the theory underlying defensive tactics in securities law," Waitzer says. In the commission's view, then, the vote could be seen as ratifying the board's de- cision to consider the long-term interests of the corporation, including the option of pursuing its business plan. Here, 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 would not be in its long-term interests. The difficulty, however, is that rec- ognizing those interests in a bid situa- tion may run afoul of the OSC's own defensive tactics policy. That policy, which focuses on shareholders' rights to tender their holdings, arguably takes a short-term perspective compared to the Supreme Court's decision in BCE. "The problem with the OSC deci- sion is that the commission recognized that it was bound by BCE but it didn't conclude that its own policy had to go out the window," says Ralph Shay of Fraser Milner Casgrain LLP. But securities lawyer Philip Anisman says that the Neo ruling doesn't mean the OSC will defer to boards on poison pills. "Read in isolation, the OSC's Regulators have struggled to find the balance between shareholders' rights and a board's duties to maximize value, says Ed Waitzer. comments regarding the business judg- ment rule could lead to that conclu- sion," he says. "But read in its entirety, most of that discussion is not applicable to poison pills." Indeed, OSC vice chairman Jim Turn- er, who didn't sit on the case, has opined publicly that Neo turned on the fact that the company had obtained overwhelm- ing shareholder approval to keep the poi- son pill in place to prevent the comple- tion of a bid that was still on the table. "On the basis of that shareholder ap- proval, the commission decided that it would not, at that time, cease trade the poison pill," Turner said. "In my view, that conclusion is consistent with the com- mission's defensive tactics policy which recognizes that shareholder approval of a defensive tactic may allay the concerns that securities regulators may have with respect to a particular defensive tactic." Untitled-4 1 www.lawtimesnews.com 1/11/10 2:48:10 PM According to Turner, the discussion about the business judgment rule came in the context of "the legitimate ques- tion" of whether there were any addi- tional considerations that might lead the commission to decide otherwise. In this regard, the OSC asked two questions: whether the board was act- ing in the best interests of the corpo- ration in implementing the poison pill and in not soliciting competing offers and whether the shareholder vote had been coerced. "On my reading of the reasons, those two questions were addressed in consid- ering whether there was any reason not to defer to the views of the shareholders represented by the shareholder vote," Turner said. In other words, the OSC wasn't sug- gesting that whether or not the board had complied with its fiduciary duties should determine the fate of a poison pill. "That approach would, in my view, be inconsistent with the provisions of our defensive tactics policy," Turner said. "I recognize, however, that differ- ent views have been expressed by others with respect to their reading of the deci- sion in Neo." His overall conclusion, then, was that Neo has clarified that the OSC will apply three different lines of analysis in consid- ering whether to nix a poison pill: • The traditional analysis of whether the pill should remain in place for a limited time to permit further efforts by the target to solicit competing bids. • The Neo analysis that asks whether the commission should defer to shareholders who have overwhelm- ingly voted to maintain a pill in the face of an actual bid. • The OSC's analysis in the Falcon- bridge deal that recognizes the use of poison pills for other purposes within the takeover bid framework. LT January 25, 2010 • Law Times

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