The Clash of the Rights Plan Cases: Should I Stay or Should?
For many years, Canadian provincial securities commissions have stated that a shareholder rights plan cannot be used by a target company’s board of directors to block indefinitely a hostile take-over bid. It has been the view of the securities commissions that shareholders of the target company, not the board of directors, are ultimately entitled to decide whether the company will be sold or not. Rights plans have been effective to allow a target company’s board more time than a hostile bidder might prefer to seek out white knights or other value-maximizing alternatives but, at some point, the time will 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. These views are outlined in National Policy 62-202 Defensive Tactics and have been reiterated in a number rights plan cases starting with the Ontario Securities Commission’s 1992 decision in Re Canadian Jorex Ltd.
There have been a few recent decisions of the securities commissions that are of significant interest because they represent a departure from prior decisions in which securities commissions had primarily focused on whether the time had come in the circumstances to set aside the shareholder rights plan. With some of these recent decisions, the securities commissions appear to have opened the door for a target’s board to utilize a rights plan as a tool to defend a hostile bid where the board determines that it would be in the best interests of the corporation to do so. However, more recent decisions have narrowed this interpretation somewhat and provide 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.
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