Pressure for a single national securities commission could increase in light of the confusion created by contradictory rulings in different provinces over the use of “poison pills” in hostile takeover bids.

“What we now face in Canada is a rather perplexing situation in which the success or failure of a hostile takeover bid may well depend largely on the province in which the head office of the target company is located,” says Kevin Thomson, senior partner in the Toronto office of Davies Ward Phillips & Vineberg LLP.

“Does this provide support for the need for a national regulator?” asks Allan Coleman, partner with Osler Hoskin & Harcourt LLP in Toronto. “If you have a single securities regulator, you’re not going to have these cross-jurisdictional disputes concerning what the policy is.”

Both lawyers are pondering the implications of what Thomson calls “a dichotomy in the regulatory system in Canada with respect to the regulation of hostile change-of-control transactions.”

It’s an issue that pits the rights of individual investors against the responsibilities of corporate boards, raising questions about whether the short-term interests of those seeking a quick boost in stock prices should trump the long-term interests of investors looking for future growth.

It also highlights the vulnerability of Canadian companies to hostile takeover bids, particularly at a time when these bids are expected to increase as a result of the improving economy, favourable borrowing conditions and a renewed appetite in the corporate sector for acquisitions.

Concerns over the use of poison pills are rising because of the inconsistent responses of several securities commissions to shareholders’ rights plans, the formal name for poison pills. These rights plans are generally set up by corporate boards to stop or stall hostile takeover bids.

Until three years ago, the prevailing trend was for securities commissions to allow these barriers to remain in place for short periods (usually about 70 days) to give boards of directors time to hold an auction, look for an alternative buyer or get a better offer from the original bidder. Once that period had elapsed, the various provincial securities commissions, in line with precedents and a national poison pill policy established in 1997 by the Canadian Securities Administrators, would usually suspend the poison pill to protect the rights of individual shareholders to tender their shares as they wish.

This practice differs from that in the U.S., where boards are viewed as having the right to “just say no” to unwanted takeover bids by erecting poison pills that are not removed in most cases.

Over the past three years, two decisions by the securities commissions in Alberta and Ontario reversed the previous practice of severely limiting the use of poison pills and appeared to open the door to a U.S.-style “just say no” defence for takeover targets.

The first of these decisions was a 2007 ruling by the Alberta Securities Commission not to block a poison pill put in place by Pulse Data Inc., a Calgary-based company providing seismic data to the oil and gas sector. The company was responding to what it described as a “creeping and coercive” takeover bid from U.S.-based competitor Seitel Inc. Pulse Data shareholders had voted overwhelmingly in favour of the poison pill. The ASC took that as an indication that the plan was in the best interests of shareholders. Even though there was no plan in place to seek out alternative bidders, the ASC ruled in favour of Pulse Data’s board of directors.

The Ontario Se-curities Commission made a similar decision in a 2009 case involving an attempted hostile takeover of Neo Technologies Inc., a Toronto-based producer of high-value metals. Neo already had a shareholders’ rights plan in place when the company’s largest shareholder — Pala Investments Holding Ltd., which already held 20% of Neo’s shares — announced a partial takeover bid for a further 20% of Neo’s shares. Neo’s existing poison pill allowed partial bids, but its board responded with a second shareholders’ rights plan that blocked partial bids, a policy that was approved by 81% of non-Pala shareholders. The OSC rejected Pala’s application to block the poison pill on the grounds that shareholders’ rights plans may be used for “the broader purpose of protecting the long-term interests of shareholders.”@page_break@The OSC decision referred to the Supreme Court of Canada’s December 2008 decision in BCE Inc. which affirmed the “business judgment” rule. That rule says that boards are permitted to make appropriate decisions — in keeping with their fiduciary duties — that are not confined to maximizing short-term profit and share value.

Earlier this year, however, while many lawyers and members of the investing community were celebrating what they saw as a positive shift in Canadian securities regulation, the B.C. Securities Commission was asked to block a poison pill employed by Vancouver-based film production company Lions Gate Entertainment Corp. against a hostile bid from billionaire Carl Icahn, a shareholders’ rights activist who is often described as a “corporate raider.” The Lions Gate board was not looking for an alternative bidder and was using the poison pill simply to block what it described as an “opportunistic and coercive” takeover bid.

In deciding to block the poison pill, the BCSC relied on earlier case law and the 1997 national poison pill policy to assert the rights of individual shareholders. It was significant to the BCSC panel that Lions Gate was not seeking alternative bidders.

The BCSC also observed that the Neo and Pulse Data decisions did not provide any guidance as to when or in what circumstances a poison pill should be lifted, stating: “This, in our opinion, limits their usefulness as authorities.”

The fact that the Neo and Pulse Data poison pills won the overwhelming support of those companies’ shareholders was a key consideration for the securities commissioners in those cases, according to Coleman. In the Lions Gate case, on the other hand, the BCSC, which conducted its hearing prior to a scheduled shareholder vote on the poison pill plan, concluded that there was no basis for allowing the poison pill to continue because the board was not intending to use it to buy time to seek an improved or alternative transaction and shareholder approval of the Lions Gate poison pill “was therefore not relevant.”

Thomson sees the BCSC decision as being a “staggering” and “ill-advised” decision that went strongly in the opposite direction of the position taken by the Alberta and Ontario commissions, which had upheld the poison pills in the Pulse Data and Neo cases. In asserting the rights of individual shareholders, Thomson says, the BCSC ignored the practical reality that any shareholder who prefers the hostile bid to the board’s plan will usually be able to sell his or her shares on the market at a rate close to that offered by the hostile bidder.

(Coleman, however, says this may not always be the case, as someone with a large block of shares may not be able to sell without triggering a drop in the share price.)

Thomson says the BCSC decision makes Canadian firms more vulnerable to foreign takeovers, and makes any company vulnerable at low points in their business cycle or in other situations in which their share prices dip — if, for example, a CEO has a sudden heart attack or a resources company has an accident in one of its mines.

Coleman sees a national regulator as one possible solution. An alternative, he adds, could be an amendment to the CSA’s national poison pill policy.
IE