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Barbara Shourounis, director of securities of the Saskatchewan Financial Services Commission
Barbara Shourounis, director of securities of the Saskatchewan Financial Services Commission

Potash poison pill a placebo? Add to ...

The staff of 20 that oversees securities regulation in Saskatchewan - which has only seven Toronto Stock Exchange-listed companies in its purview - has its hands full.

Barbara Shourounis, the lawyer who is the director of securities for the Saskatchewan Financial Services Commission, is preparing for what could be the province's first hearing on a "poison pill," a defence tactic used by companies targeted for hostile takeovers.

The case has received a bit of press. The pill in question belongs to Potash in its high-stakes takeover fight with Australian mining giant BHP Billiton which has offered $38.6-billion (U.S.) for Potash Corp., the largest such deal on the table in the world at the moment.

Ms. Shourounis said her staff will be ready for prime time if BHP does as many expect and challenges the poison pill, likely prompting a hearing in Regina the week before the company's takeover offer expires Oct. 19.

The Ontario Securities Commission has offered to help, and Ms. Shourounis said she is contemplating hiring external counsel as well. So far, she said, the biggest challenge has been finding a room big enough to hold all the expected lawyers and reporters: "It's harder than you'd think in Regina. We're renting a conference room at a hotel. You'd be surprised at how booked up they are."

That hotel conference room could set the scene for more than just the outcome of the multibillion-dollar battle for Saskatoon-based Potash Corp., which extracts millions of tonnes of the highly sought-after fertilizer component each year. Legal observers will also be watching for hints on the overall future of the poison pill in Canada.

Also known as a "shareholder rights plan," a poison pill is an option extended to existing shareholders that allows them to buy more shares at bargain-basement prices, aimed at making any takeover prohibitively expensive.

Criticism that Canada's corporate takeover rules are too friendly to bidders and have abetted the "hollowing out" of Canadian industry is not new. Since the 1980s, securities regulators have allowed poison pills to stand for limited time periods, usually 40 to 70 days, to give boards time to seek alternative buyers.

In the United States, courts have allowed poison pills to create what lawyers call a "just say no" defence for boards of directors trying to resist a takeover bid. But even there, the poison pill is falling from favour. Many say that allowing poison pills to deny shareholders the right to tender their shares serves only to entrench a company's current - and possibly substandard - leadership.

Speculation among some Bay Street lawyers that Canada was moving a little closer to allowing U.S.-style takeover defences grew last year, thanks to a much-cited Ontario Securities Commission decision.

In that case, involving a hostile bid for Toronto-based Neo Material Technologies Inc., the OSC allowed a poison pill to stand indefinitely. The Alberta Securities Commission made a similar move in a decision in 2007 on an attempted takeover of Calgary-based Pulse Data Inc.

But in May, the British Columbia Securities Commission quickly quashed a poison pill put in place by Vancouver-based Lions Gate Entertainment Corp., as it was trying to fend off a hostile bid from U.S. billionaire Carl Icahn. In its ruling, the BCSC rejected the OSC and ASC decisions, saying it had "reservations" about them.

Regardless, poison pill experts say the legal murkiness may have little impact on Potash Corp.'s fight. On Aug. 17, the company announced a poison pill that would allow each shareholder the right to buy another share - a right triggered if any entity acquires 20 per cent of the company's stock.

BHP, eager to close its deal before other bidders get involved, is widely expected to ask regulators to strike down the pill if it looks as though its takeover offer has cleared the foreign-investment scrutiny of Investment Canada.

Veteran Toronto securities lawyer Philip Anisman said too much was made of the recent OSC and ASC poison pill decisions. Both the Pulse Data and Neo cases, he said, rested on the unusual fact that shareholders had actually voted to approve poison pills directly in the face of hostile bids.

"The only inference that can be drawn from the shareholder vote, given the context and timing, is that they were voting to reject the offer," Mr. Anisman said. "That distinguishes those cases from all of the others."

Potash Corp. says it has no shareholder vote scheduled. If its pill is challenged in October, it will have to show that it has other real offers in the wings and that the poison pill is needed to give them time to come forward. (The company has already said it has attracted interest from many others, possibly including Chinese state-owned firms.) Otherwise, Potash Corp.'s poison pill - without the endorsement of shareholders - will likely be washed down the drain, Mr. Anisman said.

This would be consistent with Canada's long-established national policy on takeover defences, Mr. Anisman said, in which shareholders are supposed to decide the fate of the company, not the board.

"The people who should decide on whether a takeover bid is acceptable are the people to whom it is made, the shareholders - because it's their company," Mr. Anisman said. "The board cannot just say no. And that's basic policy in Canada, always has been, and in my view, it's the correct one."

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POISON PILLS PAST

Neo Material Technologies Inc.

In what some saw as a groundbreaking move, the Ontario Securities Commission quashed the hostile partial takeover of Toronto-based Neo Material Technologies Inc. in 2009. The takeover bid came from Pala Investments Holdings Ltd., an activist fund controlled by Swiss-based Russian billionaire Vladimir Iorich.

Pala tried to increase its stake in Neo to 40 per cent from 20 per cent, and take de facto control. Neo, which makes metals and magnetic powders used in electronics, fought off the bid with a poison pill. The pill, drawn up by the company's board to restrict partial bids, was overwhelmingly approved by its shareholders. Pala then took its case against the pill to the OSC, which allowed it to stand.

But James Turner, the vice-chairman of the OSC, played down Neo's significance in a speech at a Conference Board of Canada gathering last December, arguing that it did not change the OSC's policy on poison pills, as it hinged on the fact that Neo shareholders had approved the pill.

Pulse Data Inc.

In 2007, the Alberta Securities Commission refused to "cease trade" a poison pill put in place by Calgary-based Pulse Data Inc., which was faced with what the company called a "creeping" and "coercive" hostile takeover from U.S. competitor Seitel Inc.

Pulse Data, which sells seismic information to energy companies, put its poison pill to a vote of its shareholders. Of those who voted, 77 per cent were in favour, a number that jumped to 98 per cent when shares owned by affiliates of Seitel were excluded.

The ASC sided with Pulse Data, citing the shareholder vote, despite the fact that no other bidders had emerged.

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