Poison Pills: Should they stay or should they go?

The Ontario Securities Commission is still saying no to just-say-no defenses against hostile bids.

There has been much speculation that recent rulings on poison pill cases would open the door to boards of target companies putting in a shareholder rights plan to thwart a hostile bidder indefinitely, in a U.S. style just-say-no attempt. But a recent decision helps to clear the air, and says that no, only in certain cases can a pill stay in place for any longer than necessary.

For years, the rules on poison pills in Canada were pretty clear: they gave a board of directors of a company facing a hostile bid about two months to find a white knight.

After that, the bidder would apply to the relevant provincial securities regulator to have the pill thrown out, and it would be. The logic was shareholders should have the right to decide on a hostile bid, and pills prevented that from happening.

Those rules on pills have been thrown into confusion by divergent regulatory rulings in some recent takeovers, ranging from BCE Inc. to Neo Materials. Last week's little-watched Ontario Securities Commission decision on the poison pill at Baffinland Iron Ore, however, helps to clear up some of the mess.

The Neo case was a watershed in pill law, because the Ontario Securities Commission refused to throw out the defence, arguing that shareholders had approved it in the face of the hostile bid. In essence, they had their chance to vote, so they were not disenfranchised by the pill.

The decision in Neo went a step further, pointing to the BCE Inc. decision by the Supreme Court of Canada, which talked about a board of directors' duty being not just to shareholders but to the whole corporation. This reference suggested a much-more U.S. style regime that would be open to a just-say-no defense, often premised on the notion that a bid might be good for shareholders but bad for other parties like bondholders or employees.

However, in the Baffinland decision, the OSC took the opportunity to explain itself a little better, saying that the Neo decision is a narrow one that doesn't free directors up to try to keep pills in place forever.

"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 take-over bid."

The key remains that shareholders vote on the pill, and do so knowing that there is a takeover bid out there.

"In Neo, the Commission concluded that it would defer to the wishes of shareholders who had overwhelmingly voted to keep the relevant rights plan in place in the face of the specific bid that was before shareholders at the time of the vote," the OSC in its decision. (Click here to read the full ruling.)

Still, there are some open questions out there, the biggest being who does a board serve, noted Torys partner Thomas Yeo in a recent bulletin on securities law.

"Baffinland also does nothing to reconcile the Supreme Court of Canada’s view of directors’ duties – which focuses on the long-term best interests of the corporation, having regard to the interests of all stakeholders – with the securities regulators’ insistence on shareholder value maximization and shareholder choice as the governing principles in evaluating takeover bid defensive tactics," Mr. Yeo wrote.

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