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CCCA_V4No4_Col-MillerThom-FIN.qxd:CCCA_V1No2_Col-LabrEmpl-V1.qxd 10/27/10 3:50 PM Page 45 Legal Update – Miller Thomson LLP New directions in shareholders rights plans — but which way? Recent decisions of securities regulators in Ontario and British Columbia have cast doubt on the question of when shareholders rights plans should be terminated. istorically, Canadian regulators have corporation to run an auction for the Lions Gate,the BCSC affirmed that share- Hadopted the approach that rights plans company at that precise point in time. holder rights plans are only temporary are temporary defensive measures only “Fully informed” shareholder approval of defensive measures and rights plans and can’t be used as part of an indefinite a tactical shareholders’ rights plan is an should not continue if the target board is “just say no” takeover bid defence. The important consideration in determining not actively seeking alternatives or decision of the Ontario Securities whether to allow a plan to continue. improvements to the bid. Commission (OSC) in Neo Materials However, shareholder approval will not According to the BCSC majority, Technologies Inc. signalled what many necessarily prevail in circumstances where shareholder approval of a shareholder observers at the time thought was a major it can be shown that the target directors rights plan is not determinative in decid- change in direction. failed to carry out their duties in the best ing whether the plan should remain in In Neo, the OSC rejected the tradition- interests of the corporation and the body place. A plan cannot be used to deprive al analysis described above with the of the target shareholders, or there is evi- shareholders of the opportunity to decide proposition that as long as the rights plan dence of undue pressure on target share- whether or not to tender to the bid. continues to allow the target board to ful- holders by management or the board to Interestingly, the minority decision, which fil its fiduciary duty, then the plan has a approve the plan. concurred with the majority in the result, purpose and should be allowed to contin- The OSC concluded that the Neo leaves the door open to a broader Neo- ue. In Neo, prior to the expiry of a hostile shareholders were “informed” and that style interpretation of the public interest. partial bid, the Neo board adopted a “tac- the board’s decision to implement the The Lions Gate minority reasons, in tical” rights plan, which was approved by plan was a product of its bona fide business attempting to come to grips with Neo, Neo’s shareholders.The new rights plan judgment. Neo confirms that regulators suggest that there can be circumstances did not include a partial bid within the will defer to the decision of a target board where the collective long-term interests definition of a “permitted bid”. Pala to continue a rights plan in the face of a of shareholders supersede the individual requested that the OSC cease trade the bid, provided that the board has demon- right of a shareholder to decide to tender Neo rights plan in order to allow its bid strably carried out an appropriate process to a bid, but that those reasons must be to proceed. and that a tactical rights plan can be very compelling to justify placing the The OSC declined to issue a cease adopted for a broader purpose than facil- rights of a collective group of sharehold- trade order. The OSC emphasized that itating an auction run by the target board ers over the right of individual sharehold- directors’ fiduciary duties are broad and — it can be utilized to protect the “long- ers to decide with respect to a bid. must be considered in the context of the term interests” of the target and its share- It will be interesting to see how the particular situation.The Neo decision sug- holders. In other words, it is not necessar- Ontario regulators approach the next gests that the duty of directors in the con- ily the case that a rights plan should be application to cease trade a rights plan in text of a change of corporate control is terminated at some point in order to view of the BCSC decision in Lions Gate. not merely confined to short-term profits allow individual shareholders to deter- In the meantime, we are left with some- or share values and it is appropriate for mine whether to tender to a bid. what of a patchwork of contradictory directors to look to the long term inter- Subsequently, the British Columbia decisions. ests of the corporation where the corpo- Securities Commission (BCSC) cease- ration is operating as a going concern. traded the Lions Gate Entertainment Corp. David Judson is a partner who practises in the A board may legitimately determine shareholder rights plan. The decision areas of corporate finance, corporate restructur- that, in the face of an unsolicited bid, it is appears to revert to the traditional posi- ing, mergers and acquisitions and securities reg- not necessarily in the best interests of the tion of Canadian securities regulators. In ulatory matters.(djudson@millerthomson.com) HIVER 2010 CCCA Canadian Corporate Counsel Association 45