A poison pill, or shareholder rights plan, is a device implemented by a company’s board of directors in order to deter unsolicited or hostile acquisition proposals. The rights plan originated in the United States and was introduced in Canada in 1988 when Inco adopted its first rights plan. The introduction of poison pills in both countries was met with questions as to their legality. In the divergent approaches through which these questions were resolved in Canada and the United States (in particular Delaware), the rights plan and its effectiveness as a take-over defence have followed divergent paths.
In Delaware, the courts are primarily responsible for adjudicating shareholder actions with respect to rights plans. The analysis focuses on the business judgment rule and the standards for the adoption of defensive measures set forth in Unocal Corp. v. Mesa Petroleum Corp. Essentially, Unocal requires that a board adopting defensive measures show that it had reasonable grounds for concluding that a threat to a corporate objective existed and that its response was neither preclusive or coercive and was reasonable in relation to the threat posed. It is thus largely concerned with the conduct of, and process undertaken by, the board of directors as well as the fulfilment of their duties. Delaware courts recognize that a company may, as a matter of business judgment, simply refuse to rescind a rights plan with a major consequence of this approach being that the rights plan has developed into a cornerstone of the “just say no” defence.
In Canada, provincial securities regulators have become the forum for adjudicating shareholder actions with respect to rights plans. Canadian securities regulators take the position, as referenced in National Policy 62-202—Take-Over Bids—Defensive Tactics, that defensive measures taken by companies should not deny shareholders the ability to decide whether or not to tender to an acquisition proposal. Accordingly, Canadian companies do not have the option to “just say no” to a hostile acquiror as there will be a time when public interest will require that the rights plan be terminated and shareholders will be able to accept the offer. While that time is typically no more than 60 days after the start of the hostile offer, it is generally determined as the point in time when the plan no longer serves shareholder interests by facilitating the development of value maximizing alternatives (i.e. there is no longer a reasonable likelihood of attracting a better offer in the near term). Following the decisions in Re Pulse Data and Re Neo Material Technologies and Pala Investments Holdings Limited, the limited exception to the foregoing may be that a rights plan adopted after a hostile offer and approved by a majority of informed shareholders before that offer expires may continue to operate in the face of that offer for an indefinite period until circumstances change.
The Canadian position on rights plans, together with the relative difficulty of entrenching directors of Canadian companies through the use of staggered boards, make Canada a take-over friendly jurisdiction relative to the United States. Unlike their Delaware counterparts, it is not possible for Canadian issuers to “just say no” to a hostile acquiror. As a result, in Canada it will ultimately be the shareholders, and not the board of directors, who decide whether to entertain a hostile acquisition proposal.
Next time in Poison Pill 101: Shareholder Approved and Tactical Pills.