Defensive Tactic Rules – NP 62-202 – Securities Regulation

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Rules developed after Unicorp: Needed to have a system that’s conscientious and fair to determine what defensive tactics are ok in the context of a TOB

  1. NP 62-202

(!) Takeover Bids are a Good Thing : Media try to paint good/bad guys, there are just people that want to make $.

  • (a) discipline on management (to make sure they do a good job)
  • (b) reallocation of resources to their most effective uses
  1. But we recognize that there’s a possibility that interests of management/board of target might differ from its SHs. Management and board might take certain steps to defeat that bid, either b/c they think it’s best for the company to do so/want a higher offer (good), or to entrench themselves (bad)
  2. Primary objective of takeover bid legislation is protection of bona fide interests of SHs of target company
  3. Second purpose/objective: create a regulatory framework where bids can happen in an open and evenhanded manner (shouldn’t favour management or offeror should put SHs in a position to make a fully informed decision)
  • Concerned that certain defensive tactics employed by board may frustrate a fair bid and deny SHs the right to make the choice ^ Directors MIND the store, they don’t own it.
  1. We, the regulators, believe is it inappropriate to specify a code of conduct for directors of a target company b/c that code runs risk of being insufficient in some cases and excessive in others
  • Uncertain, they’ll review tactics in hindsight. IF they’re abusive to SHs (denies them rt to make choice), “we’ll kill you”
  1. SH Approval (unrealistic)
  • If you’re worried, get SH approval of your defensive tactic, if they say it’s okay, it’s okay. That sounds okay, but taking meeting of SH takes 60 days min, the game is over, takeover bids are fast – unrealistic in almost every case.
  1. ***most significant point they’re going to make: administrators believe that unrestricted options produce most desirable results in takeover bids, and are reluctant to intervene in contested bids
  • They want an auction! ^ get as many bidders as possible, get price as high as possible for SHs
  • **why it might be okay to engage in these tactics: have time to get other bidders.
  1. although that’s the case and auctions are best results/we don’t want to intervene, we really are going to kill you if results of your action is to deprive SHs of opportunity/right to respond to a bid***
  • Difficult b/c forgetting bad intentions, if you don’t engage in DTs, might get a bad bid. But if you do, bid you don’t want might walk, and no white knight will come in ^ looks like you’ve denied SHs right to make a decision
  • **blabla about not being worried about protecting yourself as a lawyer, do best for your client.

o When it turns out properly, SHs get more. If you’re legitimately pursuing higher offer or better deal for SHs and a risk it might turn out badly, but measured risk that makes sense

  1. don’t think you can come to us and get prior approval for defensive tactic
  • Do whatever you think you have to do, we’ll tell you if you’re right or wrong with benefit of hindsight later, won’t bless your transaction Case Law

Teck Corp v Miller (BC SC) – Best Interests Test

Ratio: Best interests test: need to act in best interests of SH^“The directors must act in good faith. Then there must be reasonable grounds for their belief. If they say that they believe there will be substantial damage to the company’s interests, then there must be reasonable grounds for that believe. If there are not, that will justify a finding that the directors were actuated by an improper purpose”.

Producers Pipelines (Sask CA) – Proportionality Test

Ratio: Canadian law does not conflict with the business judgment rule.

In takeover situations, directors will often be in a conflict. In implementing a poison pill, the directors “must be able to establish that (a) in good faith they perceived a threat to the corporation, (b) they acted after proper investigation, and (c) the means adopted to oppose the takeover were reasonable in relationship to the threat posed”

• Defensive tactics that result in shareholders being deprived of the ability to respond to a takeover bid or to a competing bid are unacceptable

You can grab notes on other topic from here.


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