Similarities And Differences In Our Two Systems Of Securities Laws

Wednesday, August 22, 2012 - 12:08

The Editor interviews Charles (Chuck) Spector, Partner of Fraser Milner Casgrain LLP.

Editor: Please describe your practice area.

Spector: My practice is in the area of corporate finance, from the financing of start-ups all the way up to significant IPOs and M&A, both public and private.

Editor: In December 2011 the Supreme Court of Canada rejected proposed legislation for a common national securities regulator who would bring uniformity to securities regulation in all of Canada’s provinces. What was the reasoning behind this decision?

Spector: The reasoning for the Supreme Court’s decision was quite complicated as it had to deal with the division of delegated powers, under the Canadian Constitution, between the provinces and the federal government.  There has been an ongoing debate as to the desirability and legality of a national securities commission to replace the thirteen different provincial and territorial commissions. The federal government had proposed legislation for the establishment of one National Securities regulatory body, which was challenged by several of the provinces, the most vocal of which were Alberta and Quebec. In each case, the appeals courts in the provinces of Alberta and Quebec ruled in favor of the provincial governments on the grounds that securities regulation was not within the sphere of federal legislative power. The appeals courts holdings were upheld by the Supreme Court of Canada.

Editor: Of recent date there has been a division of opinion among securities commission decisions in Alberta and Ontario on the one hand and the decision of the British Columbia commission on the other as to whether a rights plan should be allowed in the face of a hostile offer where there was no competing bid. Would you describe the circumstances in these instances? How does a rights plan jeopardize the interests of individual shareholders who may stand to profit from the unsolicited offer?

Spector: You are likely referring to a series of cases that were decided over the recent past (Re Pulse Data Inc. in Alberta in 2007, Re Neo Material Technologies Inc. in Ontario in 2009, Re Lions Gate Entertainment Corp. in British Columbia in 2009, Re Mosaid Technologies Inc. in Ontario in 2011 and Re Afexa Life Sciences Inc. in Alberta in 2011). However, the issue of somewhat inconsistent decisions can be raised not only in connection with what happens in Canada but in any jurisdiction where there is more than one judicial forum and where the facts and circumstances of each case are different. When confronted with a poison pill, the bidder is looking to have the courts or the securities commission eliminate the poison pill while the target is trying to maintain the pill in place. This is not unlike the U.S. where a party has recourse to the SEC and also to the court system. Another important distinction in pursuing the proper forum is whether the case deals more with corporate rather than securities law. In terms of whether a rights plan jeopardizes the interest of shareholders by precluding them from participating in an unsolicited offer, the recent Ontario and Alberta decisions seem to be moving towards what we call a “just say no” defense, one that has been already supported in the United States, but has not been entirely accepted here in Canada. If you contrast the Ontario and Alberta’s decisions against that taken in the Lions Gate case in British Columbia, you do see a divergence of opinion. In some cases where there is a very egregious set of circumstances, facts, or behavior, there is a possibility that more and more of the securities commissions may take the position that a “just say no” defense is now acceptable in Canada.

Editor: The “poison pill” is a device used in both the U.S. and in Canada. Please describe the two situations where the poison pill is used, i.e., where a company is not facing an unsolicited offer but a creeping takeover is contemplated and in the case of an unsolicited offer.

Spector: The pills themselves go through pretty serious scrutiny on an ongoing basis by institutional shareholders as well as by the various shareholder advisory firms. Over the years, there have been many different types of pills; first generation, second generation, third generation, etc., and if you go back to the original pills from the mid to early ‘80s, there has been quite a lot of fine tuning. Under current poison pills, there are certain requirements to be met before a bid would be considered – the bid has to be a fully financed; it must be for all the shares of the company; there has to be a minimum period where the bid is kept open in order to give the board additional time to find another suitor. So, even if you do have a creeping bid in Canada, these bids will ultimately run into the thresholds of a poison pill.

Editor: Other means of warding off unsolicited bids of hostile bidders include seeking “a white knight” in the form of a prospective buyer or of a private placement of a target’s securities with another party. Describe the case of Fibrek when approached by AbitibiBowater or any other like situation.

Spector: Any time there is a bid that is allowed to prevail that is significantly less than another bid on the table, you’ve got to scratch your head at the logic of the tribunal’s decision. At the outset, AbitibiBowater had made an unsolicited bid for the shares of Fibrek with a hard lockup signed with a significant number of shares at the initiation of the bid (with no termination rights). A “white knight” (Mercer International) was brought in by the target that offered $1.30 contrasted with AbitibiBowater’s $1. In connection with the latter offer, Fibrek agreed to issue special warrants exercisable into shares at a price of $1 per share, which would have diluted the “locked-up” shareholders along with all other shareholders. A decision by the Quebec securities tribunal cancelled trading in the warrants on the grounds that the warrants were granted to deprive AbitibiBowater of its benefits under the lockups. This decision was overturned by the Court of Quebec, but then upheld by the Quebec Court of Appeal. Both Fibrek and Mercer then sought leave to appeal to the Supreme Court of Canada, which was denied. While there could be a number of concerns on the granting of special warrants to a white knight, in this particular case the tribunal concluded that leaving the special warrant transaction in place was potentially going to shut off the auction. Regrettably for shareholders, it really was the tribunal’s decision that stifled the entire bidding process and the $1 bid trumped the $1.30 bid, which again, intuitively speaking, doesn’t seem to make that much sense. The central issue of the tribunal’s decision seemed to revolve around the fact that Fibrek admitted that it did not really need the funds coming from the issuance of the special warrants, so the tribunal interpreted this as a tactic used simply to fend off an unwelcome bid by depriving AbitibiBowater of the benefits of its hard lockups.

However, the question of whether a private placement can be used to fend off an unwanted takeover had been decided in the ’70s case of Teck v. Millar, where, under a very similar set of circumstances, the court maintained the board’s decision on to proceed with a private placement.

Editor: What is the proposal being set forth by the Ontario Securities Commission to reform the various commissions’ case-by-case basis of deciding when a rights plan should end? How likely is it to be adopted?

Spector: There is a movement led primarily by Ontario to put a little bit more meat on the bones of what we refer to as National Instrument 62-202, a very long-standing national instrument that the securities commissions of all the provinces have adopted in an effort to have some consistency in determining which defensive tactics against hostile takeover tactics are acceptable. The perceived problem is that 62-202 has been deliberately flexible – less rule-making than policy-making – allowing for different sets of behavior for guiding the regulators in terms of how they’ll make their decisions. Ontario has taken the lead to codify a bit more some of the standards that should be applied in interpreting defensive tactics and how long they should stay in place. However, even if Ontario does take the lead and comes up with a more precise set of rules, the rest of the securities authorities would have to agree to follow along, and that’s not always simple in Canada.

Editor: What recourse does an unsolicited bidder now have in the event the target board is not cooperative? What is the general principle described in National Policy 62-202?

Spector: In Canada the basic rule is that the shareholders should ultimately decide. The courts and the securities commissions have clearly stated that, absent abusive takeover tactics such as partial bids, bids made without full disclosure and other potentially abusive tactics, at a certain point in time and certainly once the shareholder rights plan (or other mechanisms) has allowed the target enough time to try to find an alternative, the rule is to let the shareholders decide. If the shareholders want to tender their shares because they like the premium offered or they’re not too enamored with existing management and feel that they can better deploy their financial assets, they should be the ones who decide. Under Canadian securities law, an uncooperative board should not preclude a determined bidder from taking its bid directly to the shareholders, and if it is a poison pill that is standing in the way, then most bidders will apply to the securities commissions to have the pill removed.

Editor: Describe the recommendation of the Competition Policy Review Panel’s Compete to Win removing the power of the securities commissions to decide on when a rights program should end and transferring it to the courts. Has this recommendation gained support among provincial governments?

Spector: As long as you have overlapping authority of the courts, as the gatekeepers for corporate law, and the securities commissions, as gatekeepers for securities law, it is nearly impossible to get away from that duality. These are two spheres of law that clearly intersect in every takeover bid we’ve ever looked at, and it is highly doubtful that the securities commissions will cede their oversight of this aspect of securities law.

Editor: Is the Canadian system of making a direct tender for another company’s securities similar to that in the U.S.? Does proxy solicitation differ?

Spector: Yes, the rules for tender offers are very similar. Proxy solicitation does have its nuances, and one of the key factors is timing. The U.S. has a proxy review system in place requiring vetting by the SEC before a proxy circular can be issued. This is not applicable in Canada except in very specific circumstances. There have been efforts made by the securities authorities to respect each other’s jurisdictions in terms of lawmaking and rule-making, resulting in exemptions from some of the more stringent provisions of SEC regulation.

Editor: What do you think the outcome will be of some recently recommended changes to amend the private agreement exemption and to limit the time period for keeping rights plans in place?

Spector: I think these recommendations are part of a movement that is perpetually evolving. On the one hand, there are changes recommended to make public company takeovers easier by limiting the time period for keeping a poison pill in place, yet, at the same time, there is a movement at the provincial level to protect our Canadian companies. If you look at the Potash deal of a couple of years ago, which was turned down because some of the conditions that were going to be imposed as part of the approval from Investment Canada were felt by the buyer to be too onerous, the question of what constitutes a “net benefit" to Canada is also being scrutinized. In Quebec we’re in the middle of an election campaign so there has been drum-beating to the tune of economic nationalism. There have been two recent potential takeover bids that have come under enhanced scrutiny leading at least a couple of the political parties to threaten to enact a law allowing boards of Quebec-based companies to refuse to consider a takeover bid by a non-Quebec interest without seeking any shareholder approval. There has also been some expectation in Canada that the courts or the securities commissions will start interpreting the existing rules in order to allow for the possibility of a “just say no” defense particularly if this defense prevents prized Canadian companies from being sold to foreign interests.


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