Mergers & Acquisitions
M&A practice involves transactions that would result in a change of control or ownership of a corporation. The M&A lawyer's primary role is to lead a team of specialists and coordinate their input on the various areas of law that a transaction engages, as well as providing strategic advice to senior management in conjunction with other professionals such as investment bankers and accountants.
Canadian courts' traditional deference to regulators of all kind, including securities regulators, has contributed mightily to the fact that Canadian targets have historically been low-hanging fruit for American acquirers.
The continuing trend is evidenced by the March 2012 judgment of the Québec Court of Appeal in AbitibiBowater Inc. v. Fibrek Inc. The case involved Fibrek management's decision to dilute existing shareholders' interests by issuing a private placement of warrants to a white knight bidder, thereby diluting the position of the original bidder from about 50 per cent to about 40 per cent.
The original bidder responded by applying to the Québec Bureau de décision et de révision for a cease-trade order. The Bureau concluded that the warrants were intended to interfere with lock-up agreements negotiated in good faith and with the financial markets, and their issue was an abusive defensive measure that merited a cease-trade order on the grounds of public interest.
Interestingly, the Bureau made the ruling despite submissions from its advisory staff that the issue of the warrants was not abusive because the warrants were hybrid in the sense that they conferred a financial benefit on Fibrek as well as serving as a defensive tactic.
Fibrek appealed to the Québec Superior Court, which reversed the Bureau's decision. The court ruled that the private placement was a “real financing.” But on further appeal, the Québec Court of Appeal overturned the decision of the Superior Court and restored the Bureau's original decision. The Court of Appeal held that courts were bound to give the highest deference to the decisions of independent and specialized administrative tribunals and should only substitute their views if the tribunal's decision was unclear, unintelligible or could not be justified on the basis of the facts or the law.
The upshot is that target boards continue to be in a much stronger position in the US than they are in Canada, partly because take-over defences initiated by boards are much more likely to pass muster in US courts who give enormous respect to directors' business decisions and judgments regarding hostile bids. Canadian courts and regulators, however, treat them as virtually inconsequential. The result is that in Canada shareholders' rights trump directors' business judgment.
At the heart of the schism is a philosophical controversy over corporate governance. The US position, and particularly that of the trend-setting Delaware courts, is that so long as a board has acted within the scope of its fiduciary duties, the courts will not question its actions — including the decision to issue a poison pill and “just say no” to a take-over bid. The traditional Canadian view nods much more distinctly in the direction of shareholders' rights by allowing poison pills to remain in place just long enough for a company to seek out competing bids.
So while Canadian poison pills can for the most part delay but not prevent a persistent bidder from putting the matter to shareholders, US boards can maintain a “just say no” posture as long as they remain in office.
Although a series of controversial and inconsistent decisions between 2009 and 2011 by regulators in Ontario, Alberta and British Columbia had suggested that there might be circumstances in which poison pills could remain in place indefinitely, both the Ontario Securities Commission (in MOSAID) and the Alberta Securities Commission (in Afexa) have recently indicated that the question remained when, rather than whether, a rights plan would be set aside.
By contrast, in February 2011, the Delaware Chancery Court delivered a powerful affirmation of the effectiveness and strength of poison bills as a hostile take-over defence in the Airgas case. The court made its ruling despite the fact that the pill had been in place for more than a full year – more than any litigated poison pill – in Delaware history, and even though the pill had fully served its purpose by giving management enough time to show four quarters of improved financial results.
While it is true that a persistent bidder has a path to control through the ballot box, US rules make it much more difficult to remove directors than it is in Canada partly because American companies have staggered boards, where only one-third of the board can be replaced at any time. In Canada, the entire board can be removed without cause at a meeting requisitioned by just five per cent of shareholders.
There are some signs that things could change in Canada. In November 2011, Naizam Kanji, Deputy Director of Corporate Finance at the Ontario Securities Commission, revealed that the Commission is considering a standalone rule on shareholders rights plan that would allow poison pills to remain unchallenged if approved by shareholders. While regulation of pills would be minimal, shareholders would have to be able to remove the pill on a majority of the minority vote. M&A lawyers say that if such a measure were adopted, it would bring Canadian law much closer to US law.