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CCCA_V4No1_Col-MillerThom-FIN.qxd:CCCA_V1No2_Col-LabrEmpl-V1.qxd 2/3/10 1:38 PM Page 38 Legal Update – Miller Thomson LLP A new regulatory approach to shareholders rights plans? he decision of the Ontario Securities holder approval of a tactical shareholders’rights Canadian securities regulators have histor- TCommission (OSC) in Neo Materials plan is an important consideration in deter- ically approached rights plans from the per- Technologies Inc. may signal a change in the mining whether to allow a plan to continue, spective of considering not if, but when, a regulatory approach to shareholders rights the OSC noted that shareholder approval will rights plan should be terminated by a cease plans.Regulators may now be showing more not necessarily prevail in circumstances where trade order. In Neo, the OSC rejected that deference to the actions of target boards in it can be shown that the target directors failed analysis with the proposition that as long as adopting and continuing shareholders rights to carry out their duties in the best interests of the rights plan continues to allow the target plans, particularly where the facts demon- the corporation and the body of the target board to fulfill its fiduciary duty, then the strate that the board adhered to a proper shareholders, or there is evidence of undue plan has a purpose and should be allowed to process in implementing the plan and share- pressure on target shareholders by manage- continue.Neo may,however,be factually dif- holders have approved the plan on an ment or the board to approve the plan.The ferent than most typical rights plan cases informed basis. OSC concluded that the Neo shareholders which do not always involve shareholder In Neo,the target (“Neo”) was the subject were“informed”and that the board’s decision approval of a tactical rights plan during an of a hostile partial takeover by Pala to implement the plan was a product of its unsolicited bid. Investment Holdings Limited (“Pala”). The bona fide business judgment.The OSC found The following points can be drawn from Pala bid was a “permitted bid” under Neo’s no evidence of coercion of Neo shareholders the Neo decision: existing rights plan since the Pala bid was by the board or management. • the OSC will defer to the decision of a open for acceptance for 60 days rather than The Neo reasons are interesting in terms target board to continue a rights plan in the statutory minimum of 35 days. Prior to of the OSC’s acknowledgment of the “busi- the face of a bid, provided that the board its expiry,the Neo board adopted a“tactical” ness judgment rule”(which is largely a prod- has demonstrably carried out an appropri- rights plan, which was approved by Neo’s uct of U.S.jurisprudence).The OSC empha- ate process; shareholders. The new rights plan did not sized that directors’fiduciary duties are broad • a tactical rights plan can be adopted for a include a partial bid within the definition of and must be considered in the context of the broader purpose than facilitating an auction a “permitted bid.” Pala requested that the particular situation. The Neo decision sug- run by the target board — it can be utilized OSC cease trade the Neo rights plans in gests that the duty of directors in the context to protect the “long-term interests” of the order to allow its bid to proceed. of a change of corporate control is not mere- target and its shareholders; and The OSC declined to issue a cease trade ly confined to short-term profits or share val- • recent shareholder approval of a tactical order.Pala argued that the only legitimate pur- ues and it is appropriate for directors to look plan that is “informed” and free of coer- pose of a rights plan is to provide a target board to the long-term interests of the corporation cion may be a critical factor. with additional time to seek alternative trans- where the corporation is operating as a going Jay Hoffman is the National Chair of the firm's actions to enhance shareholder value as part of concern. The decision is fairly clear that the Securities and Capital Markets Group. His prac- an auction process. The OSC stated that, in purpose of a shareholder rights plan (includ- tice focuses on cross-border and domestic merger considering whether to exercise its public ing a tactical plan) is not limited to simply and acquisition and corporate finance transactions interest jurisdiction to cease trade a rights plan, providing sufficient time to the target board as well as providing advice to clients on securities it will carefully assess all circumstances sur- to conduct an auction for the company or to compliance and corporate governance matters. rounding implementation of the plan, includ- seek alternative bidders.A rights plan (includ- David Judson is a partner who practises in ing whether “informed shareholder approval” ing a tactical plan) may be implemented by a the areas of corporate finance, corporate restructur- was given.The OSC stated that,while it would target board to protect the long-term inter- ing, mergers and acquisitions and securities regula- not decline to exercise its jurisdiction to cease ests of its shareholders. A board may legiti- tory matters. (jhoffman@millerthomson.com, trade a rights plan in appropriate circum- mately determine that,in the face of an unso- djudson@millerthomson.com) stances, deference should be given to legiti- licited bid, it is not necessarily in the best Reprinted in abridged form with permission from the mate decisions of the board of directors of tar- interests of the corporation to run an auction 2010 Lexpert®/American Lawyer Guide to the Leading 500 Lawyers in Canada.©Thomson Reuters Canada Limited. get companies.While “fully informed” share- for the company at that precise point in time. All rights reserved. 38 CCCA Canadian Corporate Counsel Association SPRING 2010