On July 27, 2010, the British Columbia Securities Commission (“BCSC”) issued its full majority reasons for its April 2010 decision to cease-trade the Lions Gate Entertainment Corp. shareholder rights plan (the “SRP”) adopted in response to a hostile bid made by a group of companies led by Carl Icahn. The reasons of the dissenting panel member, who concurred in the decision of the majority to cease trade the plan but not with the majority’s reasons, have not yet been released. The majority decision has brought into question the current position of Canadian securities regulators on the purpose and use of poison pills.
Until the recent decisions of the Ontario Securities Commission (the “OSC”) in Neo Materials Technologies and the Alberta Securities Commission (the “ASC”) in Pulse Data Inc., the established position of Canadian securities regulators was that the purpose of a shareholder rights plan is limited to simply providing sufficient time for a target board to seek an enhanced offer or to enter into an alternative transaction. Once this time has passed, a shareholder rights plan challenged by a bidder is typically cease-traded by Canadian securities regulators.
Pulse and Neo appeared to signify a substantial departure from this traditional approach. In those cases, the securities regulators dismissed challenges to rights plans and concluded that even where a target board is not seeking an enhanced bid or an alternative transaction, regulators may allow a pill to continue in place where the facts demonstrate that the target board is acting reasonably in the exercise of its business judgment, has adhered to a proper process in implementing the plan and shareholders approved the plan on an informed basis. The Neo reasons rely on the December 2008 reasons of the Supreme Court of Canada in Re BCE Inc., and emphasize that directors’ fiduciary duties are broad and must be considered in the context of the particular situation. In Neo, the OSC defers to the business judgment of a target board exercising its fiduciary duties and suggests that, in the right circumstances, a rights plan can be properly used by a target board to protect the long-term interests of its shareholders by not seeking to maximize short-term profit or share value at the time of a hostile bid and allowing a rights plan to continue to operate. Neo also accepts that approval of a plan by an informed majority of shareholders satisfies the established public interest principle that shareholders of a target company be allowed to decide whether to accept the bid.
The majority in Lions Gate clearly revert to the traditional position of Canadian securities regulators regarding the proper use of rights plans and the circumstances under which a plan should be set aside. In Lions Gate, the BCSC affirmed that shareholder rights plans are still only permitted as temporary defensive measures and it will not allow a plan to continue in force if the board of directors of the target company is not actively seeking alternatives or improvements to the bid. The BCSC also conclude that majority shareholder approval of a shareholder rights plan, even in the face of a hostile bid, is not determinative in deciding whether the plan should remain in place and that a plan cannot be used, even one that has been approved by a majority of shareholders, to deprive each shareholder of the opportunity to decide whether or not to tender its shares to the bidder.
In its full reasons, the BCSC canvasses the public interest principles developed by Canadian securities regulators prior to BCE Inc. and Neo in respect of target companies adopting SRPs as defensive strategies and then proceeds to apply each principle to the facts in Lions Gate. Interestingly, in considering Pulse and Neo, the BCSC concluded that, properly interpreted, the decisions in Pulse and Neo were not, in fact, meant to be a departure from the traditional position of Canadian securities regulators. The BCSC determined that Pulse and Neo do not, as some commentators have suggested, represent authority for target boards to adopt rights plans and “just say no” to non-permitted bids if those rights plans were approved by a majority of informed shareholders in the face of a bid. The majority reasons in Lions Gate rely on closing remarks of the commissions in Pulse and Neo that the shareholder rights plans in question might properly be cease-traded in the future, should circumstances change. The BCSC expressed regret that the ASC and the OSC failed to provide guidance in those decisions as to which fact scenarios would lead to the shareholder rights plans being properly cease-traded in the future and commented that this failure limits the usefulness of Pulse and Neo as authorities.
Given the BCSC’s determination that Neo and Pulse do not expand the traditional purpose of shareholder rights plans to fit the broader view of directors’ fiduciary duties emphasized in BCE, it remains to be seen how securities regulators outside of British Columbia will interpret Neo and Pulse and how those regulators will rule in future similar cases.
The board of directors of Lions Gate adopted the SRP on March 11, 2010, ten days after Icahn (at that time a 19% shareholder of Lions Gate) made an all-cash bid of US$6 per common share to acquire up to an additional 11% of Lions Gate shares. The Board viewed the Icahn partial bid as financially inadequate and coercive and, after adopting the SRP, it sent notice to Lions Gate shareholders of a special meeting of shareholders seeking shareholder approval of the SRP. The meeting was scheduled for May 4, 2010. The Lions Gate board concluded that it was not the time to put Lions Gate in play and therefore it had no intention of seeking an alternative bid.
Icahn varied its offer twice, increasing the price per common share to US$7 and expanding the offer to all common shares. The varied bid included a minimum tender condition that could be waived by Icahn. The latest offer was due to expire on April 30th. In late April, just prior to the Lions Gate shareholders meeting to vote on the SRP, Icahn successfully applied to the BCSC for an order cease-trading the Lions Gate plan.
Lions Gate applied to the British Columbia Court of Appeal for leave to appeal the decision. Leave to appeal was refused.
Public Interest Principles
The BCSC summarized the public interest principles for target companies adopting SRPs as follows:
- It is in the public interest that each shareholder of the target company be allowed to decide whether to accept the bid.
- Faced with a bid, the board of a target company has a fiduciary duty to act in the best interests of the corporation. In discharging this duty, target company boards often take various defensive measures. Regulators are reluctant to interfere with directors taking steps to discharge that duty.
- SRPs are not contrary to the public interest when used to buy time for the target company to respond appropriately to the bid. Plans are acceptable only as a temporary defence. The issue is not whether the SRP should go, but when.
- A non-exhaustive list of factors relevant to the period of time an SRP will be allowed to remain in place includes: the number of potential viable offers; what the board of directors has done to find alternative bids and whether the board is likely to succeed in finding an alternative bid; when the plan was adopted; whether shareholders approved the plan; and whether the bid is coercive or unfair.
- Take-over bids are fact-specific so the relevant factors to be considered will vary.
Application of Public Interest Principles
The BCSC applied each of the public interest policy principles in turn to the facts in Lions Gate:
Each shareholder’s right to decide whether to tender into the bid
The right of each individual shareholder of a target company to make an informed decision about whether or not to accept a hostile take-over bid appears to be a paramount concern of the BCSC in determining whether to uphold the SRP. The BCSC concluded that if it denied Icahn’s application to cease-trade the SRP, it would deprive shareholders of this right.
The BCSC referenced National Policy 62-202 – Take-Over Bids – Defensive Tactics, which provides that regulators may take action if a target board adopts defensive tactics that are “likely to deny or limit severely the ability of the shareholders to respond to a take-over bid.” The BCSC remarked that the take-over bid provisions should “favour neither the offeror nor management of the target company and should leave the shareholders of the target company free to make a fully informed decision.”
Fiduciary duty of the board
On the topic of whether a target board has fulfilled its fiduciary duty in the context of a hostile bid, the BCSC took the view that the decision of a target board not to seek an improvement to the bid or to seek a bid alternative is not, per se, indicative of a failure by the target board to fulfill its fiduciary duty. The majority in Lions Gate found that the Lions Gate board had fulfilled its fiduciary duty in responding to the Icahn bid.
The BCSC noted that if a board failed to discharge its fiduciary duty, that failure would be an aggravating factor that would likely induce a regulator to set aside the shareholder rights plan but that proper behaviour is the expected norm and, as a consequence, the fact that a board has fulfilled its fiduciary duty is not a factor in favour of upholding a shareholder rights plan.
The BCSC points out that, in Neo, the OSC decision to allow the plan to continue appears to have been based on a review of the target board’s reasons for not conducting an auction and on the OSC’s determination that the target board’s process was reasonable. The BCSC takes issue with this approach by stating that the reluctance of Canadian securities regulators to interfere in the target board’s exercise of its fiduciary duty arises from the importance of ensuring that the board has sufficient time to seek an improved or alternate transaction and that this is the focus of that fiduciary duty.
A shareholder rights plan is only a temporary defence
In upholding the view that the question is “not whether the pill should go but when”, the BCSC took issue with the interpretation of the decisions in Pulse and Neo that seem to suggest that, in certain circumstances, SRPs can be allowed to stand indefinitely and that, in effect, a target board can “just say no” to a hostile bid, even in the absence of any steps to improve the bid or seek alternatives. The BCSC does not accept Pulse and Neo as authority for the proposition that a target board can “just say no”.
The BCSC found that SRPs may only ever be temporary defences, because to allow them to stand would ultimately deprive individual shareholders of the right to decide whether to tender to a bid and concluded that, “…there is no basis for allowing an SRP to continue if the target company board is not actively seeking alternatives to the bid.”
After the adoption of the SRP, Icahn made several improvements to the initial offer, including raising the offer since and expanding the offer to include all shares not already owned by Icahn. Since the Board had no intention of seeking any competitive bids, alternative transactions or taking other steps that shareholders could consider before responding to Icahn’s bid, the BCSC was of the view that the SRP had ceased to be useful.
Shareholder approval of an SRP
The BCSC stated that shareholder approval of an SRP is a relevant, but not a determinative, factor in whether securities regulators will uphold such a plan.
The BCSC noted that the panels in Pulse and Neo placed strong reliance on shareholder approval and noted that in Pulse the plan was approved by a 73% vote but only 56% of the shares were voted. As a result, a minority of the target’s shareholders determined the outcome for the rest of the shareholders. While the numbers were more favourable in Neo with a significant majority of shareholders approving the plan in the face of the bid, the BCSC noted that one-third of Neo’s shareholders were deprived of an opportunity to decide whether or not to tender into the bid. The BCSC expressed the opinion that this outcome is inconsistent with the principle that each shareholder ultimately should have the opportunity to decide whether or not to tender into the bid.
The BCSC reasons suggest that majority shareholder approval of a SRP should not be allowed to stand as a proxy for the right of each individual shareholder to decide for his or herself whether to tender to the bid.
The BCSC canvassed a number of decisions and concluded that where coercion is found, it is at most a factor in determining whether to allow a shareholder rights plan to continue while the target board seeks alternatives. The BCSC went on to state that this does not change the basis for extending the plan – that the board use the time to seek alternatives – nor does it change the criteria for determining when a plan, as it must, should come to an end.
It was argued by counsel for Lions Gate that the Icahn bid was coercive because a shareholder, not knowing how much of the company would end up in Icahn’s hands, would not have had the necessary information to make an informed decision. Lions Gate also argued that because Icahn could waive the minimum tender condition, its bid was in substance a partial bid and was therefore coercive.
The BCSC did not agree that partial bids are inherently coercive and it characterized the right of the bidder to waive the minimum tender condition as a common feature that is not, in and of itself, coercive. The terms of the Icahn bid provided that if the minimum tender condition was satisfied, the bid would be extended by a period of a further 10 business days so that those who had rejected the bid could still tender in light of the new information. Similarly, the BCSC noted that if Icahn waived the minimum tender condition, the bid would have to be extended and shareholders would then have an opportunity to tender or to withdraw in light of that variation to the bid.
The Lions Gate decision creates a substantial degree of doubt as to whether the principles set out in the Neo and Pulse decisions, which accord more latitude to a target board in defending against an unsolicited offer, will be strictly confined to their facts or more liberally applied in future decisions. It will be interesting to see how the Alberta and Ontario regulators approach the next application to cease-trade a rights plan in view of the decision of their B.C. counterparts in Lions Gate.