On August 25, 2009, the Alberta Securities Commission dismissed an application by TransAlta Corporation to cease trade the shareholder rights plan of Canadian Hydro Developers Inc. The TransAlta take-over bid for Canadian Hydro Developers was scheduled to expire, unless extended, on August 27, 2009 and was effectively blocked by the rights plan. Although the impact of this decision will not be clear until the ASC releases its written reasons, it may be further evidence of a shift by the Canadian securities regulators towards providing boards of directors with greater deference in resisting unsolicited take-over bids.
Shareholder Rights Plans
Shareholder rights plans, or poison pills, are adopted by public issuers to defend against an outside party acquiring control of the issuer through an unsolicited take-over bid or continued market or private share purchases that are exempt from the take-over bid rules. If a shareholder rights plan is triggered, additional securities are issued to all shareholders, other than the potential acquirer, for nominal consideration. As a result the ownership position of the potential acquirer is diluted relative to all other shareholder.
The Canadian Regulatory Approach
As set out in National Instrument 62-202 Take-Over Bids – Defensive Tactics, the guiding policy in Canada is that the outcome of a take-over bid should be decided by the shareholders of the issuer, not the board of directors or management. Accordingly, shareholder rights plans are generally only permitted to operate for a limited time to provide the incumbent board and management with sufficient time to pursue alternatives to maximize the return to shareholders and to fully inform shareholder regarding their options. Accordingly, the securities regulatory authorities in Canada will generally exercise their public interest jurisdiction to cease trade and prevent the operation of a shareholder rights plan. The central question is when the regulators should intervene.
Increased Deference to Boards of Directors?
As discussed above, it is too soon to tell whether the ASC’s decision in Canadian Hydro Developers is a departure from the generally approach to shareholder rights plans. It has been reported that the chair of the ASC panel expressed the view that if TransAlta extends the expiry of the bid, the shareholder rights plan should come to an end. However, dismissing the TransAlta application where it was not clear that the bid would be extended, may suggest a willingness to allow the board of directors, rather than the shareholders, to determine the outcome of a take-over bid. If this is the case, the decision, when viewed together with the ASC’s 2007 decision in Pulse Data Inc. and the Ontario Securities Commission’s May decision in Neo Material Technologies Inc., may constituted a trend towards greater deference to boards of directors.
In Pulse Data the ASC declined to exercise its public interest jurisdiction to cease trade a shareholder rights plan, primarily because a large majority of the shareholders of the issuer had voted to adopt the plan at a time where the take-over bid was pending with full disclosure of the implications of the shareholder rights plan. The ASC was:
“reluctant to interfere with a decision of the Pulse Board that has a fiduciary duty to act in the best interests of Pulse Shareholders, particularly when that decision had very recently been approved by informed Shareholders.”
Informed shareholder approval was also the key issue in the Ontario Securities Commission’s May 11, 2009 decision to allow the Neo Material Technologies Inc. shareholder rights plan to continue in force.
In that decision, an existing shareholder of Neo Materials that controlled approximately 20% of the outstanding common shares was bidding to acquire up to an additional 9.9% of the shares. Neo Materials adopted a shareholders rights categorically precluded any take-over bid for less than all of the outstanding shares. The adoption of this rights plan was approved by a large majority the shareholders while the bid was outstanding.
The OSC has not yet issued the full reasons for its decision. However, the OSC panel did indicate that its decision was influenced similar considerations as outlined in the ASC’s Pulse Data Decision.
The implications of the Canadian Hydro Developers and Neo Material Technologies decisions will not be clear until the regulators release their full reasons. However, these decisions may indicate a trend towards greater deference to boards of directors in resisting take-over bids. Canada’s take-over bid regime is considered to be very bidder friendly, particularly in comparison to the United States. The recent shareholder rights plan decisions could demonstrate a shift in this position.