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Putting the poison back in the pill Add to ...

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.

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