On November 1, I had the opportunity to participate in a panel discussion on M&A Trends and Outlooks during OSC Dialogue 2011 (which we've discussed previously on this blog). The panel also included James Turner (Vice-Chair of the OSC) and Naizam Kanji (Deputy Director of Corporate Finance at the OSC). Of particular interest was the discussion of poison pills.
Mr. Kanji reported that the OSC is currently considering adopting a standalone rule on shareholder rights plans that would allow poison pills to remain unchallenged if approved by shareholders. While the content of pills would be minimally regulated, shareholders would have to be able to remove the pill on a "majority of the minority" vote (requiring a bidder to launch a proxy battle or proceed with a permitted bid).
The purpose of the rule would be to provide more consistency and certainty in the context of defensive tactics and decrease the need for regulatory intervention. In this respect, both Mr. Kanji and Mr. Turner expressed that, in their view, securities regulators are better situated to consider shareholder rights plan challenges than the courts. Courts, Mr. Kanji stated, are restricted by the way an application is presented and then must undertake a process oriented analysis applying the business judgment rule. A substantive analysis, which can be undertaken by securities regulators, would be more appropriate. Mr. Turner added his view that Ontario courts are not the right venue for defensive tactics. They are not Delaware courts, he noted, and the Commission is more apt at dealing with the policy issues involved.
Mr. Kanji noted that there is a need for a more transparent and predictable regime and that many things have changed since the defensive tactics policy (NP 62-202) was first adopted. According to the OSC panel members, a better framework would be to remove the regulation of pills from the defensive tactics policy and create a separate rule for pills that would allow pills to remain unchallenged if they are approved by shareholders. The shareholders would be able to remove the pill on a vote, which essentially means the bidder would have to launch a proxy battle (as opposed to coming before the Commission to have the pill cease traded). There would otherwise be very minimal regulation of the content of the pill itself, with the Commission leaving it up to shareholders and the board to determine the scope and latitude.
Mr. Kanji continued that this approach may in fact represent "walking away" from Jorex. In his view, it is time to set aside the framework that was put in place by Jorex and start the process from first principles. These proposals (to re-visit defensive tactics and create a standalone shareholder rights plan policy) are currently before the CSA at a very preliminary level.
At a preliminary level (without having more details), it is fair to say that people would like to see the Commission get out of the regulation of pills and this approach seems to achieve that. While I find it difficult to comment on this approach without knowing the details, assuming institutional shareholders keep their current positions on what they want to see in a shareholder rights plan, we would likely see more "permitted bids" under this approach. Since an unsolicited bidder would not be able to mount a challenge before the Commission its only option would be to come in as a permitted bid. In this situation you would have a traditional pill that gets approved on an annual basis and could layer a tactical pill on top of it.
Admittedly, not everyone believes that regulators should continue regulating conduct by boards in relation to shareholder rights plans. As my partners Ed Waitzer and Sean Vanderpol argue, such battles would be better left to the courts.
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