M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, September 7, 2011

Canadians to reconsider the poison pill?

It seems Canadians are starting to rethink their approach to the shareholder rights plan.  The Globe and Mail report on a paper published by former Ontario Securities Commission chief Edward Waitzer (now at Osgoode Hall Law School) and his colleague at Strikeman Elliot, Sean Vanderpol.  They think it might be time for Canada to take a more US approach to regulating the pill:

Traditionally, Canadian regulators have tended to toss aside the poison pills and other defences used by corporate boards to fend off hostile takeovers – an approach long criticized for leaving domestic companies too vulnerable to foreign predators, resulting in what some call a “hollowing out” of Corporate Canada. ...

In Canada, securities regulators have generally allowed poison pills to stand for limited time periods, usually 40 to 70 days, long enough only to give boards time to seek alternative buyers, not to “just say no” to an unwanted takeover bid. 

This seems like a replay of the debate that has gone here for years about the "defining tension" in the corporate law. From former Justice Veasey's piece:

The defining tension in corporate governance today is the tension between deference to directors' decisions and the scope of judicial review. Decisions of directors which can be attributed to any rational business purpose will be respected if they are made by directors who are independent and act with due care and in good faith. Otherwise, courts may becalled upon to apply some form of enhanced scrutiny.

Indeed, in Airgas, the Chancery Court drew the line on the side of deference to the board in the context of unsolicited bids.  Boards are permitted, even required, to be active in the defense of the corporation from an unwanted bid.  

Canadians are looking around now and, I guess, taking stock of where their current hands off approach leaves them. The hollowing out of corporate Canada has led Waitzer and Vanderpol to weigh in that courts, rather than the securities regulators, are better positioned to determine whether or not a board must pull its pill in the face of an unwanted bid.

This new paper, Mediating Rights and Responsibilities in Control Transaction, is now appearing in the current issue of the Osgoode Hall Law Journal.  The paper provides a good overview of current Canadian jurisprudence on the pill for those of us uninitiated in the ways of The Great White North.

Abstract: There is a growing debate as to the relative merits and consequences of a shift to a more shareholder-centric corporate governance framework. How much “direct democracy” makes sense in corporate decision making? If power is to be transferred to shareholders, should responsibilities be imposed (and, if so, how)? These issues have long been addressed by courts and regulators in the context of unsolicited control transactions. In its recent Air Products & Chemicals v. Airgas decision, the Delaware Chancery Court canvassed the evolution of its law on this point and concluded that implicit in the power (and responsibility) of the board of directors to manage the business and affairs of the corporation is the power to determine the long-term strategy of the corporation, including when and if a sale of control of the corporation should be pursued. By contrast, Canadian securities regulation has consistently adopted a shareholder-centric approach to unsolicited change of control transactions. This is an approach that is increasingly difficult to reconcile with Canadian corporate law as it has evolved since these issues were first considered by securities regulators. The answer to this growing inconsistency,  we  suggest,  is  for  Canadian  securities regulators to repeal their “defensive tactics” policy in the recognition that our courts have become better equipped to adjudicate such matters.  [I won't include the abstract in French.  It seemed a bit much.]



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