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One proposal the OSC is considering would put new rules in place to deal with transactions such as Magna International Inc.'s controversial buyout of founder Frank Stronach's multiple-voting shares, a deal pension funds challenged in court and before the OSC, calling it 'offensive.' (Fred Lum/The Globe and Mail/Fred Lum/The Globe and Mail)
One proposal the OSC is considering would put new rules in place to deal with transactions such as Magna International Inc.'s controversial buyout of founder Frank Stronach's multiple-voting shares, a deal pension funds challenged in court and before the OSC, calling it 'offensive.' (Fred Lum/The Globe and Mail/Fred Lum/The Globe and Mail)

THE LAW PAGE

OSC looks to rewrite rule book on poison pills Add to ...

Hostile corporate takeovers and “related-party transactions,” such as Magna International Inc.’s 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.

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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.

“I would prefer not to have that vote, and to say, ‘The directors have a fiduciary duty. And if you don’t like what they do, you can sue them or you can have a proxy battle and replace them,’” said Mr. Reiter, a board member of Ottawa-based Mosaid Technologies Inc., which was subject to an attempted hostile takeover itself. The OSC declined to extend Mosaid’s poison pill for as long a period as the company requested.

Karrin Powys-Lybbe, co-head of corporate and capital markets practice at Torys LLP in Toronto, said the OSC’s newest proposal is meant to clarify the confusion around poison pills and to get the regulator out of the business of having to oversee so many hostile-takeover disputes.

On the proposed to change to the related-party transaction rules, she said the move could end up being “disproportionate,” by subjecting many more transactions to greater scrutiny, even if the problems identified by critics of the Magna deal are not present.

The current poison-pill policy, which generally puts the right of shareholders to vote on a takeover deal above the board’s longer-term view of the company’s best interests, also ignores the fact that different shareholders have different interests, Ms. Powys-Lybbe said.

“Not all shareholders are created equal. … Is it the guy who’s trying to flip the shares for a quick profit, or is it the person who’s there for a long-term hold?” she said. “The board I think should be in a position where it is thinking not just about individual shareholders and what their desires might be, but what is in the best interests of the company.”

POISON PILLS AND MIXED SIGNALS

For a while, Bay Street was talking as though recent rulings by regulators on poison pills were the beginnings of U.S.-style “just say no” defences to fend off hostile takeovers here. But then, other rulings that went the other way dampened that enthusiasm.

Poison pills, or “shareholder rights plans,” usually involve the issuing of rights to shareholders to buy many new shares at rock-bottom prices. The move is an attempt to dilute the holdings of a hostile bidder and make a takeover prohibitively expensive.

Canadian securities watchdogs generally disallow poison pills after a short time period (40 to 70 days), in order to allow target companies to seek other bidders, and to ensure that shareholders get a chance to vote on any offer.

But in 2007, the Alberta Securities Commission allowed a poison pill to stand in an attempted takeover of Calgary-based Pulse Data Inc. In 2009, the OSC allowed a poison pill to stand indefinitely in the case of Toronto based Neo Material Technologies Inc.

The pendulum swung back last year, as the British Columbia Securities Commission knocked down a poison pill put in place by the board of nominally Vancouver-based Lions Gate Entertainment Corp., which was trying to fend off a hostile takeover by Carl Icahn, the American corporate raider-turned-activist.

The OSC then killed a poison pill in case of Baffinland Iron Mines Corp. And last month, the regulator told Ottawa-based Mosaid Technologies Inc. that it could not extend its poison pill for as long as the company had asked.

Jeff Gray

Follow on Twitter: @jeffreybgray

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