Jonah Mann and Sean Vanderpol
On May 6, 2010, the British Columbia Securities Commission (BCSC) released its summary Majority Reasons for its decision to cease trade the poison pill (or shareholder rights plan) implemented by Lions Gate Entertainment Corp. (Lions Gate) in the face of a hostile bid by equity funds controlled by activist investor Carl Icahn (Icahn).
By way of background, Icahn held 19% of Lions Gate’s shares and sought to increase its stake to 30% by launching a partial bid. In the face of the Icahn bid, the Lions Gate board decided it was not the time to put the company in play and, therefore, adopted a poison pill. The pill allowed certain “permitted bids”, provided that these bids, among other things, had a “minimum tender condition” which could not be waived. The board called a shareholder meeting to consider the pill for May 4.
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.