Just Say No May be Coming to Rights Plans in Canada

"Just say no" may soon be a reality for shareholders rights plans (also known as poison pills) in Canada. We understand that OSC Staff is contemplating proposing changes to the OSCs policies and decisions now governing the Canadian approach to rights plans. The approach under consideration is to allow shareholders to vote, either at the time a shareholder rights plan is adopted without any bid on the horizon, or at the time of a hostile bid, to authorize the Board to "just say no" to a bid rather than conducting a process leading to the eventual sale of the company to the hostile bidder or a white knight.

We welcome this initiative by the OSC but hope that that Staff will also consider adopting the US approach to hostile bids. That approach allows the Board to take actions in response to a hostile bid that it believes to be in the best interests of the company, including implementing a rights plan, without any intervention by the SEC to cease trade the plan. Instead of regulatory intervention, the US approach relies on the ability of shareholders to challenge Board decisions in court for breach of fiduciary duty or by waging a proxy contest to remove the Board, both of which avenues are available to shareholders in Canada.

We have noted previously that the Board can "just say no" to a change of control by sale of all of the company's assets but in the context of a change of control by share sale, the Board's role under current Canadian law seems to be limited to running a process to effect the eventual sale should a sufficient number of shareholders accept the offer. We think that distinction is illogical, especially where the public company is simply a holding company.

We also think that the OSCs new approach of leaving the decision to shareholders does not seem to recognize that frequently a substantial number of the shares of a company subject to a bid are quickly acquired by traders who are not interested in the long term prospects of the company and are simply looking to make a quick profit on the sale. As a result, a vote of those shareholders in the face of a bid may not help a company protect itself from hostile activity (and maybe it shouldn't if most shareholders have sold out to traders).

We are also of the view that the ease with which Canadian public companies can be acquired, relative to the US in particular, makes it difficult to grow large Canadian public companies. It may be in the national interest to offer a playing field that does not disadvantage Canadian companies against their international counterparts.

While the issues are complex and depend on the facts in each case, we continue to believe that leaving the Board to control the company's destiny is what we think directors are elected to do.

We look forward to a healthy public debate about some of these broader issues as the OSC addresses what has become an opaque area of securities regulation and director fiduciary duty.