Canada’s securities watchdogs should get out of the business of policing the “poison pills” companies use to fight off hostile corporate takeovers, former Ontario Securities Commission chief Edward Waitzer says.
The current rules, which are quick to strike down poison pills, have left Canadian companies largely helpless in the face of U.S. activist investors and hedge funds, Mr. Waitzer argues. His proposed solution would see the OSC and the other provincial securities regulators walk away from the job and leave the issue up to Canada’s courts.
Traditionally, Canadian regulators have tended to toss aside the poison pills and other defences used by corporate boards to fend off hostile takeovers – an approach long criticized for leaving domestic companies too vulnerable to foreign predators, resulting in what some call a “hollowing out” of Corporate Canada.
Mr. Waitzer, a partner at Stikeman Elliott LLP in Toronto and director of the Hennick Centre for Business and Law at York University, says it is time to have a debate about whether the securities commissions should let the country’s courts scrutinize the actions of companies under siege. That’s what happens in the United States, where hostile takeovers are much more difficult.
“Canada has become a playground for activist investors who are looking to make money quickly by putting companies into play,” Mr. Waitzer , who was OSC chairman in the mid-1990s, said in an interview. “So from a ‘hollowing out’ point of view, this [the status quo]doesn’t make any sense at all.”
His controversial idea is not new: it was recommended by Ottawa’s blue-ribbon panel on boosting Canada’s international competitiveness in 2008, and, as Mr. Waitzer points out, largely ignored. But if it were implemented, it would entail a dramatic rewrite of the rules governing the takeover of Canadian companies, making hostile bids less likely to succeed.
Mr. Waitzer makes the case for the change in a recent paper co-written with Stikeman colleague Sean Vanderpol in the Osgoode Hall Law Journal.
The pair argue that Canada’s policy that largely forbids boards to “just say no” to hostile takeover bids can come into conflict with responsibilities assigned to directors under Canadian corporate law, which demands that they act in the long-term interests of the corporation. The courts, the two acknowledge, would be much more likely to defer to the judgment of a board fighting a takeover than to the securities commissions.
“We conclude that Canadian securities regulators should vacate the field,” the pair write.
The result of such a shift would largely mimic the way things are done in the United States, where many takeover battles come before the courts in Delaware, the state where many major companies are officially domiciled.
At the centre of the debate is the poison pill, a defensive trick developed in the U.S. in the 1980s era of corporate raiders. Poison pills are generally rights issued to existing shareholders that allow them to buy new shares at bargain prices, diluting the bidder’s holdings and making a takeover more expensive.
In the U.S., courts have traditionally been extremely reluctant to interfere with a board’s decision to use a poison pill to fend off a hostile takeover. In Canada, securities regulators have generally allowed poison pills to stand for limited time periods, usually 40 to 70 days, long enough only to give boards time to seek alternative buyers, not to “just say no” to an unwanted takeover bid.
With the securities commissions butting out, takeovers would not be impossible, Mr. Waitzer and Mr. Vanderpol caution, as there are plenty of takeovers in the United States. Before expecting a court to intervene, bidders would have to convince a judge that a board of directors using a poison pill was in a conflict of interest, or was failing in its duties to serve the company’s long-term interest.
Mr. Waitzer said courtrooms, rather than an OSC hearing room, are now the best place for these disputes to play out. In the 1980s when corporate takeovers and poison pills came on to the scene, securities regulators were a preferred venue because they could act quickly and were more familiar with business than Canadian courts. But Mr. Waitzer said this is no longer the case.
“With all due respect to the [OSC] the commission does the best it can in a quickly convened informal process that doesn’t have the same evidentiary discipline as a court hearing,” Mr. Waitzer said.
Not everyone thinks it is such a good idea, however. Prominent Toronto securities lawyer Philip Anisman said securities commissions are supposed to protect investors and put shareholders first – by ensuring they get a chance to vote on an offer for their shares. The courts, by contrast, tend to defer to the judgment of boards of directors – potentially denying shareholders a vote and leaving inefficient managers of a company entrenched.
Mr. Anisman said the argument that changing the takeover rules is necessary to address concerns that Corporate Canada is being “hollowed out” doesn’t wash. Boards might still decide to sell their companies, regardless of what the takeover rules are, he said. Addressing this issue would require new legislation, he said, not simply shifting takeover battles from securities commissions to the courts.
“If you want to deal with protection of Canadian businesses, you should deal with it head on, rather than by giving the directors the ability to make that decision,” Mr. Anisman said. “Because it does not accomplish it unless you assume … that the directors are always going to do one of two things: They are always going to oppose bids or they’re always going to make the right decisions. And neither is the case.”
The OSC’s deputy director of corporate finance, Naizam Kanji, said the country’s securities regulators are in the midst of reviewing the current rules around poison pills. But the OSC doesn’t believe walking away altogether is the answer.
“We continue to believe there is an important role for securities regulators in reviewing defensive tactics,” Mr. Kanji said in an e-mail.
Still, recent decisions by securities commissions have suggested to some that the ground might be shifting. Mr. Waitzer said the series of contradictory rulings has put a confusing spotlight on the issue of how the system handles poison pills.
“You have inconsistent decisions, so nobody really knows what the law is now, at the securities commission level,” he said.
Mr. Waitzer acknowledges that any sweeping reform will be a long time coming, especially given the slow march of Ottawa’s plan for a national securities regulator, now before the Supreme Court of Canada. “All we are saying is, you know what? It is time to have a debate on this issue.”
POISON PILL DECISIONS
A string of recent, and contradictory, rulings by Canadian securities regulators have some securities law experts wondering if the ground rules on corporate takeovers are shifting.
At issue is the “poison pill,” a defensive tactic used by boards of directors trying to fight off a hostile takeover.
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. But in two recent rulings, securities regulators actually allowed poison pills to be used to defeat hostile bids.
In 2007, the Alberta Securities Commission allowed a poison pill to stand in a decision about an attempted takeover of Calgary-based Pulse Data Inc.
In 2009, the OSC allowed a poison pill to stand indefinitely. Toronto-based Neo Material Technologies Inc. used a poison pill to block a hostile partial takeover by Pala Investments Holdings Ltd., an activist fund controlled by Swiss-based Russian billionaire Vladimir Iorich. Mr. Waitzer was on the case for Neo, which makes metals and magnetic powders used in electronics.
While some speculated that the Neo ruling could mean an open door to a “just say no” defence, OSC vice-chairman James Turner was quick to play down the decision in a 2009 speech, saying it did not change the OSC’s policy on poison pills because it hinged on the fact that Neo shareholders had actually, and unusually, voted to approve the poison pill.
More recently, the OSC “cease-traded” a poison pill put in place by the board of Baffinland Iron Mines Corp. in the face of an initial takeover bid by Nunavut Iron Ore Acquisition Inc., to allow shareholders the right to vote.
And last year, 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.
Mr. Icahn, who eventually abandoned his bid for the Hollywood studio, even accused Lions Gate of contemplating moving its corporate listing to the United States, where a poison pill would have a better chance of survival, to keep him at bay.