Canadian Securities Law : Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

Under the terms of the pill, a permitted bid was required to include a minimum tender condition of more than 50% of the outstanding Lions Gate shares not owned at the time of the bid by the offeror (i.e., a majority of the disinterested shareholders). Subsequent to the adoption of the pill, Icahn varied its bid to increase the offer price, to make the bid for all of the outstanding shares, and to include a (waivable) 50.1% minimum tender condition. The revised bid was not a “permitted bid” under the pill, however, because the minimum tender condition was waivable and because it only required that Icahn obtain a majority of the outstanding shares, including the ones already owned by Icahn, as opposed to a majority of the shares held by shareholders other than Icahn. The revised expiry date of the bid was April 30 (i.e., four days prior to the scheduled shareholder meeting to consider the pill).

In its Majority Reasons, the BCSC emphasized the primacy of shareholder choice in a take-over bid – shareholders of a target company must ultimately have the opportunity to decide whether or not to accept or reject a bid. The BCSC also recognized the fiduciary duty of the board of a target company to act in the best interest of the corporation, and the reluctance of a regulator to interfere with the board in the discharge of that duty. In their view, however, that reluctance is premised on the practice of boards, in taking steps to act in the best interests of the corporation, of making efforts to maximize shareholder value, whether through enhancements to the bid, through competing bids, or through alternative transactions, and is ultimately subordinate to the need to ensure that shareholders have the opportunity to decide whether to tender to a bid.

With this reasoning in mind, the BCSC concluded that it was in the public interest to cease trade the Lions Gate pill. In their analysis, Icahn had already made several improvements to its initial offer, including raising the share price, and there was no evidence that Icahn would make any further improvements to its offer. Further, and perhaps most importantly, since the Lions Gate board had concluded that it was not the time to put the company in play, and, therefore, had taken no steps (and at the time of the hearing did not intend to take any steps) to seek a competing bid or an alternative transaction, in the view of the BCSC there was no reason to continue to sustain the pill. The pill had already generated all of the (shareholder) value maximizing alternatives that it was going to generate, and so its continued effectiveness would not have any usefulness and would deny to shareholders the ability to make their own decision about whether to accept or reject the bid.

Lions Gate had argued that the BCSC should not cease trade the pill until after the shareholders meeting (scheduled for May 4, two business days after the then scheduled expiry of the Icahn bid). The BCSC determined, however, that it would not defer or delay its decision on the pill until after the shareholder meeting. First, it found that there was no evidence that Icahn would extend its bid, and so it did not want to jeopardize the opportunity of shareholders to determine whether or not to tender to the bid. More fundamentally, however, the BCSC simply did not consider, in this context, shareholder support of the continuation of a poison pill to be relevant. In its view, shareholder support of a pill was relevant only in the context of the purpose of a pill (i.e., to allow the board time to take other shareholder value maximizing alternatives). Since Lions Gate was not pursuing alternative transactions, the only effect of continuing the pill (even if it had received shareholder support) would be to deny the ability of shareholders to tender to the offer.

Subsequent to the decision of the BCSC, Icahn extended its offer on multiple occasions, and also waived its minimum tender condition. The Lions Gate board proceeded with its shareholder meeting to consider the pill, which was approved by approximately 54% of the shareholders present at the meeting (approximately 69%, excluding the shares owned by Icahn).

The full Reasons will be released in due course and are expected to include discussion regarding the BCSC’s reservations about the decisions of the Alberta Securities Commission in Pulse Data and the decision of the Ontario Securities Commission in Neo Materials Technologies Inc., where, in both cases, shareholder support of the continuation of a poison pill weighed heavily in favour of leaving poison pills in place. The BCSC has stated that its reservations centre around these two cases’ apparent departure from the Canadian securities regulators’ view of the public interest as it relates to shareholder rights plans prior to those decisions.

That being said, the OSC endorsed the Alberta Securities Commission’s (ASC) position in Pulse Data, stating that, “as a general matter, recent and informed shareholder ratification of a rights plan, erected in the face of the hostile take-over bid is suggestive of a finding that the continuation of the shareholder rights plan is in the bona fide interest of a target’s shareholders.” The OSC further noted that a fully informed shareholder approval of a tactical plan is not determinative where:

1. there is evidence the board process in evaluation and responding to the bid, including the decision to implement a shareholder rights plan, was not carried out in the best interest of the corporation and the target’s shareholders, as a whole; or
    
2. there is evidence to suggest that management or the board of directors coerced or unduly pressured the target’s shareholders to approve the shareholder rights plan.

In short, shareholder approval will be an influential factor if it is “informed, provided freely and fairly, and in the absence of coercion or undue pressure”. 

In the immediate case, the OSC found that Neo’s shareholders were sufficiently informed, that the decision by Neo’s board to implement the tactical plan reflected its business judgment and that there was no evidence of coercion or undue managerial pressure imposed on Neo’s shareholders to ratify the tactical plan. The OSC also found that despite the fact that the Neo board did not initiate an auction for the company in response to the Pala bid, the tactical plan (at the time of the hearing) continued to serve a purpose by providing the Neo board the ability to protect the long-term interests of Neo and the shareholders as a whole.  

On the issue of what is in the best interest of the corporation, the OSC confirmed that it must give effect to the business judgment rule in ascertaining whether the board has discharged is fiduciary obligations. The business judgment rule, the OSC states, properly permits directors to make appropriate decisions sufficient to fulfill their fiduciary obligations, the scope and content of which have been amplified by the Supreme Court of Canada in the recent decision of Re BCE Inc. The OSC then proceeded to emphasize the Supreme Court’s statement that the fiduciary duty is a broad and contextual concept that is not confined to short-term profit of share value and which looks to the long-term interests of the corporation where the corporation is a going concern. Indeed, the OSC clearly states in its Reasons that shareholder rights plans may be adopted for the broader purpose of protecting the long-term interests of the shareholders, where in the directors’ reasonable business judgment, the implementation of a rights plan would be in the best interests of the corporation. The corollary of this is that using a shareholder rights plan to provide sufficient time to run an auction or seek alternative bidders (which is generally acknowledged to be the primary purpose for a shareholder rights plan) is not the only legitimate purpose for a shareholder rights plan.

The OSC, stating its was not satisfied that it would be in the public interest to grant such relief at this time, cited the following influencing considerations:

1. the second plan was adopted in the context of, and in response to the offer;
    
2. there was no evidence that the process undertaken by the Neo board to evaluate the offer or implement the second plan was not carried out in what the Neo board determined to be the best interests of the corporation and of the Neo shareholders, as a whole;
    
3. an overwhelming majority of the Neo shareholders (excluding Pala) approved the second plan while the offer remained outstanding;
    
4. the evidence supported a finding that the Neo shareholders were sufficiently informed about the second plan prior to casting their votes; and
    
5. there was no evidence to suggest that management or the Neo board coerced or unduly pressured the Neo shareholders to approve the second plan.

The OSC intends to expand upon these consideration in its full reasons for decision, which have yet to be released.