Canadian M&A Perspectives Private and Public Mergers & Acquisitions | Private Equity

The Clash of the Rights Plan Cases (Redux)

Posted in Public M&A, Shareholders
Robert Hansen

The Ontario Securities Commission issued an order this week in connection with a shareholder rights plan adopted by the board of directors of MOSAID Technologies Incorporated in response to a hostile bid made by Wi-LAN Inc. The OSC ordered that effective November 1, 2011 (i.e. 70 days after the commencement of Wi-LAN’s unsolicited offer), MOSAID’s shareholder rights plan must go. The key factors considered by the OSC in arriving at its decision to allow the rights plan to stick around for another couple of weeks (not as long as MOSAID had wanted) included:

  • MOSAID was continuing to run an auction process that could lead to a superior transaction which may enhance shareholder value (and in fact had received a formal non-binding indication of interest);
  • the size and complexity of MOSAID’s business, including the significance of a recently announced transformational acquisition;
  • MOSAID’s shareholders voted to renew the shareholder rights plan (which contained a 60-day “permitted bid” provision) in the face of Wi-LAN’s offer and subsequent to MOSAID’s announcement of the transformational acquisition;
  • MOSAID’s shareholders continued to support the shareholder rights plan; and
  • there was no evidence to suggest that Wi-LAN’s offer was coercive or unfair to MOSAID’s shareholders.

Earlier this year, I prepared an overview of a number of other recent cases coming out of the Canadian provincial securities commissions relating to the adoption of shareholder rights plans to defend against hostile take-over bids. The Clash of the Rights Plan Cases: Should I Stay or Should I Go? contains brief summaries of the decisions in Re Neo Material Technologies Inc., Re 1478860 Alberta Ltd., Re Icahn Partners LP et al and Lions Gate Entertainment Corp., Re Cliffs Natural Resources Inc. and Re Baffinland Iron Mines Corporation and highlights some of the inconsistencies in those decisions.

The prevailing view of the securities regulators had generally been that the shareholders of the target company, not the board of directors, should ultimately be entitled to decide whether a company would be sold or not. Rights plans had been effective to allow a target company’s board more time to seek out white knights or other value-maximizing alternatives but, at some point, the time would come for the board to waive the rights plan and allow the offer to go to the shareholders, or the securities commissions will order the rights plan removed. The OSC’s decision in Neo appeared to open the door for a target’s board to utilize a rights plan as a tool to defend against a hostile bid where the board determined that it would be in the best interests of the corporation to do so. However, more recent decisions narrowed this interpretation somewhat and provided that a shareholder’s ability to decide whether or not to tender to a particular bid is paramount and that a board’s compliance with its fiduciary duties, while relevant, is only a secondary consideration in determining whether to cease trade a rights plan.

Although the OSC has not released detailed reasons for its decision in MOSAID, it looks like this post-Neo line of thinking led them to the decision to turf the MOSAID rights plan effective November 1, 2011. The fact that MOSAID’s shareholders overwhelmingly approved the renewal of the rights plan (over 90 per cent of the votes cast at the meeting were voted in favour) with knowledge of the existing circumstances and the fact that shareholders continued to support the rights plan were apparently not even enough to convince the OSC to let the rights plan stay in place for as long as MOSAID was seeking, let alone indefinitely.

One of the issues identified in The Clash of the Rights Plan Cases: Should I Stay or Should I Go? that had not been resolved was whether the securities commissions would defer to the wishes of shareholders who fully support the adoption of a rights plan in the face of a hostile bid and allow the rights plan to remain in place to enable a target board to pursue its existing business plan and not put the company into play. Unfortunately, this question could not be answered in the MOSAID case because the board decided to put the company into play by running an auction to seek out a superior transaction for shareholders. It would be very interesting to see if a Canadian court would step into the fray and how it would reconcile the conflicting views of the securities commissions and the corporate law duties of directors in rendering a decision in these circumstances.