The Ontario Securities Commission's reasons in Baffinland Iron Mines Corporation clearly rejected the proposition that securities commissions should defer to the business judgment of a target board of directors in deciding whether to cease trade a shareholder rights plan (also known as a poison pill). This decision should clarify some of the confusion arising from the OSC's earlier decision in Neo Material Technologies Inc. and the British Columbia Securities Commission's decision in Lions Gate Entertainment Corp.
The Baffinland Contest
Nunavut Iron Ore Acquistion Inc. made an unsolicited offer to acquire the shares of Baffinland on September 22, 2010, which resulted in a contest for control of Baffinland. On November 8, 2010, Baffinland entered into a support agreement in connection with a competing offer from ArcelorMittal S.A. The ArcelorMittal offer also had the support of Baffinland shareholders holding approximately 26% of the outstanding shares. Both offers have been subject to variations and extensions and were recently superseded by a joint offer of the two companies.
The Baffinland Poison Pill
The Baffinland shareholder rights plan, or poison pill, was originally put in place in January 2006 and amended in January 2009. It was approved by Baffinland shareholders in March 2009.
In accordance with the ArcelorMittal support agreement, Baffinland agreed to keep its poison pill in place until immediately prior to the expiry of the ArcelorMittal bid, or any earlier time requested by ArcelorMittal. The support agreement also precluded Baffinland from soliciting any competing offers. Effectively, Baffinland and ArcelorMittal were seeking to use the Baffinland poison pill to eliminate Nunavut's timing advantage due to the fact that its offer was launched much earlier than ArcelorMittal's and had, at the time of the agreement with ArcelorMittal, been outstanding for more than the minimum statutory period of 35 days.
The Application to the Ontario Securities Commission
Nunavut brought an application to the OSC to cease trade the Baffinland poison pill, which would effectively nullify the pill and allow Nunavut to acquire any shares tendered to its offer. The application was heard on November 18, 2010 and the OSC issued an order cease trading the Baffinland poison pill on November 19, 2010, with reasons issued on December 3, 2010.
The OSC's decision was consistent with its traditional view, expressed in decisions before Neo, confirming that it is generally time for a shareholder rights plan to go when it has served its purpose by facilitating an auction.
At the time of the hearing, the Nunavut offer had been outstanding for 57 days. The Baffinland board had conducted an auction, succeeded in procuring a competitive offer and had agreed not to solicit further offers. Accordingly, the OSC was able to conclude that there was no real and substantial possibility that leaving the poison pill in place would increase shareholder choice.
The OSC confirmed its prior view that it is not appropriate to use a poison pill to eliminate the timing advantage of the first bidder, concluding that Nunavut is entitled as the first bidder to the timing advantage its offer had under the Canadian take-over bid regime.
The OSC rejected the argument that the Nunavut offer was coercive because Nunavut had the unilateral right to waive the minimum tender condition, noting that the vast majority of take-over bids are made on this basis.
Deference to the Business Judgment of the Target Board
While the OSC's decision on the merits of the application in Baffinland is not novel, its reasons also addressed the scope of its 2009 decision in Neo. Given the debate triggered by that decision and subsequent conflicting decision by the BCSC in Lions Gate, the OSC's comments provide valuable guidance.
In the Neo decision, the OSC declined to cease trade a poison pill notwithstanding that the hostile offer had been outstanding for a long time and the target board was not seeking alternatives. The primary rationale for the decision was that the target shareholders had approved the adoption of the poison pill after the hostile bid was launched with full disclosure of the fact that the poison pill could prevent the offeror from taking up securities under the bid.
The OSC in Neo had adopted the reasoning from the Alberta Securities Commission's 2007 decision in Pulse Data Inc., made in similar circumstances. However, in Neo the OSC also suggested that a poison pill could serve legitimate purposes other than allowing time for an auction, such as protecting the long-term interests of shareholders, where, in the directors' reasonable business judgment, the implementation of a poison pill would be in the best interests of the corporation and shareholders as a whole. The discussion in Neo regarding the target board's fiduciary duty and the references to the Supreme Court of Canada's discussion of the business judgment rule in the BCE decision prompted speculation that the OSC had adopted a more deferential approach to target boards and their use of defensive tactics in the wake of BCE.
The BCSC's 2010 decision in Lions Gate specifically rejected this approach and held that whether a target board complies with its duty to act in the best interests of the corporation is at best a "neutral factor" in the analysis.
In Baffinland, the OSC was unequivocal in its rejection of the broad interpretation of Neo, stating:
. . . Neo does not stand for the proposition that the Commission will defer to the business judgment of a board of directors in considering whether to cease trade a rights plan, or that a board of directors in the exercise of its fiduciary duties may "just say no" to a take-over bid.
Instead, the OSC held that Neo stands for the principle that the OSC will, in appropriate circumstances, defer to the wishes of a target's shareholders where they have expressed overwhelming support for a rights plan in the face of a specific bid. Moreover, whether the target board of directors was complying with its fiduciary duties was characterized as a relevant, although secondary, consideration in determining whether to cease trade a rights plan.
Conclusions
The Baffinland decision narrows the gap between the position expressed by the BCSC in Lions Gate and the OSC in Neo. While there is still a divergence on the importance of recent, informed shareholder consent of a rights plan by target shareholders in the face of a specific bid, this is a much narrower point of distinction than the prospect of applying the business judgment rule in the context of defensive tactics. In effect, with Baffinland the OSC appears to be confining the scope of Neo to a narrow exception to the general proposition that it is a question of when, not if, the pill should go in much the same manner as Pulse Data had been interpreted before Neo.
The OSC's reasons are available on its website.
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