Hostile corporate takeovers and “related-party transactions,” such as Magna International Inc.’s MG-T controversial buyout of founder Frank Stronach’s multiple-voting shares last year, may soon become more difficult to do in Ontario.
Securities lawyers on Bay Street have been buzzing about remarks made at an event earlier this month by Naizam Kanji, the Ontario Securities Commission’s deputy director of corporate finance, who laid out two key policy changes the OSC is considering in the wake of recent high-profile cases.
On a panel discussion at the Toronto Board of Trade, Mr. Kanji said the OSC is considering two significant rule changes, both of which must be formalized, go through a consultation process, and be scrutinized by other Canadian securities regulators before they become a reality.
One proposal would make it possible for companies facing hostile takeovers to use “poison pills” to block unwanted bids, provided their shareholders had approved the idea, either in the face of the bid or at the most recent annual general meeting. Poison pills typically allow existing shareholders to buy new shares at bargain prices, diluting the bidder's holdings and making a takeover more expensive.
The current rules, which usually see the OSC and other Canadian securities regulators strike down poison pills within a short time period, to allow other bidders to surface, would be scrapped.
The other proposal would put new rules in place to deal with the kind of situation that arose in the Magna deal, which pension funds challenged before the OSC and in court, calling it “offensive.”
Magna allowed shareholders to vote on a proposal to buy Mr. Stronach’s small number of powerful controlling shares at a massive premium, in a deal worth about $863-million (U.S.). But a special committee of its board that was supposed to evaluate the deal declined to endorse it.
In such related-party transactions, under the OSC’s proposal, a special committee of the company’s board of directors would be required to evaluate the deal, and either recommend it, or at least deem it fair to minority shareholders and then have it put to a vote without a recommendation.
The OSC would also lower the threshold for demanding such a vote to deals worth 10 per cent of a company’s market capitalization, down from the current 25 per cent.
Former OSC chairman Ed Waitzer, a partner with Stikeman Elliott LLP in Toronto, said the OSC should largely leave battles over poison pills and related-party transactions to the courts. And he said any new OSC rules would soon be bent by creative lawyers.
“By its nature, when you try to draft a rule that says, ‘Here’s where we are going to intervene, here’s where we are not going to intervene,’ people are going to game the rule,” said Mr. Waitzer, who acted for Mr. Stronach on the Magna deal. “It’s naive to think [the OSC] can kind of draw a line and say, ‘If you do this, you’re fine.’”
The proposed poison pill change is meant to address the confusion created in part by a 2009 OSC decision about a hostile partial bid for Toronto-based Neo Material Technologies Ltd., for whom Mr. Waitzer acted. In that case, the OSC allowed a poison pill that had been approved by shareholders to stand indefinitely. But in other, subsequent cases, the OSC and other securities regulators returned to striking down poison pills after 40 to 70 days.
Barry Reiter, a partner with Bennett Jones LLP in Toronto, said the possibility of a “just say no” takeover defence is a positive move. But he said he like to see a full U.S.-style system, which allows boards of directors to run companies as they see fit, exercising what is known as their fiduciary duty to act in the best interest of the company, not just its shareholders.
