Regulation Of Defensive Tactics: A Possible Third Approach

McMillan LLP has today submitted a comment letter in response to the request for comment by the Canadian Securities Administrators (the "CSA") with respect to proposed National Instrument 62-105 Security Holder Rights Plans, proposed Companion Policy 62-105CP Security Holder Rights Plans and proposed consequential amendments (collectively, the "CSA Proposal"). The comment letter also responds to the consultation paper published concurrently by the Autorité des marchés financiers (the "AMF") on an alternative approach to the CSA Proposal (the "AMF Proposal").

In our submissions, we suggest an alternative approach to that of the AMF and CSA for the regulation of defensive tactics, which we believe may better address the critical policy concerns surrounding National Policy 62-202 Take-Over Bids - Defensive Tactics ("NP 62-202").1

our comment letter

Our comment letter reviews the historical basis for, the current approach to, and the policy concerns regarding, the regulation of defensive tactics, including a discussion of the changing circumstances since the adoption of NP 62-202.2 Based on this review, we conclude that the philosophical underpinning of NP 62-202 is flawed and, as a result, NP 62-202 should not continue to apply in respect of any defensive tactic - even if on a temporary basis.

We also consider the CSA Proposal and the AMF Proposal and suggest that each has weaknesses. The CSA Proposal does not effectively enhance the powers of directors to enable them to fulfill their statutory obligations and fails to address defensive tactics other than rights plans. The CSA's focus on providing directors with what is effectively 30 more days to consider hostile bids continues the flawed approach of the past 21 years.3 We would suggest that it is time to consider these issues from a different perspective. The AMF Proposal, in seeking to defer to the decisions of directors, focuses on the process followed by the target company's board; however, in considering the protection of investors and fostering fair and efficient capital markets and confidence in such markets, securities regulatory authorities must focus largely on the impact that a decision of a board would have on the capital markets or shareholders. Accordingly, while a target board could follow a proper process, and reach a decision consistent with the exercise of its fiduciary duties, such decision could still be challenged as impacting negatively on the efficiency of the capital markets or possibly as effecting an abuse of security holders' rights. As a result, additional criteria may well be required to be enumerated in order for this approach to be effective.

In seeking to address those weaknesses, we sought to propose an alternative approach that recognizes the importance of allowing shareholders (where practical) to make the final decision as to whether to accept or reject a bid but also allows directors to carry out their statutorily imposed duties for the benefit of a target corporation both in the short- and the long-term...