Corporate take-overs are currently riding a wave of unprecedented popularity. In 1995 both the frequency and the value of the recorded take-overs in Canada and the United States far surpassed those of any other era in history.(1) The motivations underlying these consolidations are assorted, ranging from the potential revenue stability of diversification, to the cost-savings of economies of scale, to the ego-oriented desires of business leaders to own an empire. Likewise, the consequences of take-overs are numerous and distinct, varying according to the make-up of the particular corporations, the skills of the players involved, and the ambitions underlying the transaction. Nevertheless, notwithstanding the peculiarities which serve to highlight the contrasts between corporate reorganizations, all take-over scenarios possess at least one fundamental similarity: the potential to inflict change on the personalities involved in the deal.
Every take-over situation is characterized by the presence of a variety of interested parties, or stakeholders, whose interests may be fundamentally affected (beneficially or detrimentally) by a merger. These stakeholders include the target corporation (the offeree), the buying corporation (the offeror), employees, and an offeree's management and shareholders. In an effort to help safeguard the rights and interests of such stakeholders, the federal government of Canada responded by installing take-over laws and regulations within the Canada Business Corporations Act.(2)
A second response to the take-over phenomenon, in this case originating from the corporations targeted for take-over, was a plethora of defensive tactics - such as poison pills, golden parachutes, and white knights - which could be used by an offeree's management to thwart its acquisition by an offeror. Such defenses, however, present the danger that an offeree's directors may exercise them for purely self-motivated reasons. In an effort to prevent such an abuse of power, and to protect the rights and interests of shareholders of offerees, the Canadian courts proceeded to strike down defensive strategies which were inconsistent with the fiduciary duties owed by directors to their shareholders under the CBCA.
Thus, the intent of this paper is two-fold. First of all, to review the objectives behind the CBCA's take-over provisions, to analyze the degree to which the objectives have so far been satisfied, and to propose regulatory changes which would allow the CBCA to better protect and balance the rights and interests of the stakeholders in take-overs. Second, to review the most common take-over defenses, to analyze the fiduciary duties of directors of Canadian corporations during a take-over attempt, and to propose methods of achieving a fairer, more effective means in Canada of controlling such defenses.
The paper is divided into five sections, as follows: Part I contains an introduction; Part II provides background information on take-overs, including an analysis of how various stakeholders are affected by consolidatory transactions; Part III addresses the numerous issues related to the regulation of take-overs by the CBCA; Part IV is devoted to the topics of defensive tactics and fiduciary duties; and Part V provides a conclusion to the paper.
A. Definition of Take-overs (v. Mergers)
The term take-over is broadly defined in Canada by both corporate and securities law. Generally, it is considered to be an offer to all or most shareholders to purchase shares of a target (offeree) corporation, where the offeror, if successful, will obtain enough shares to control the target corporation. For the purposes of this paper, a take-over will have the meaning specified in Section 194 of the CBCA:
an offer, other than an exempt offer, made by an offeror to shareholders at approximately the same time to acquire shares that, if combined with shares already beneficially owned or controlled, directly or indirectly, by the offeror or an affiliate or associate of the offeror on the date of the take-over bid, would exceed ten per cent of any class of issued shares of an offeree corporation and includes every offer, other than an exempt offer, by an issuer to repurchase its own shares.
The Ontario Securities Act(3) provides a similar definition, the most notable exception being that the OSA doesn't deem a take-over to have occurred until a 20 percent share of ownership is exceeded.(4)
While the focus of this paper is take-overs, it is important to note the distinction that exists between take-overs and other forms of corporate reorganizations such as mergers and acquisitions. For example, although the term merger doesn't have a legal meaning in Canadian corporate law, it is generally employed to refer to "any transaction whereby one corporation acquires control of another, whether by take-over bid, amalgamation or arrangement."(5) Thus, a take-over is just one form of the various types of mergers.
Take-overs can generally be grouped into one of three major categories: horizontal, vertical and conglomerate take-overs. A horizontal take-over occurs when the offeror and the offeree corporations are both engaged in the same broad sector of industry or commerce, and are actual or potential market competitors of each other. In a vertical take-over the offeror and the offeree are actual potential suppliers or customers, such as when a motor manufacturer purchases a producer of electrical components. A conglomerate or diversifying take-over is the catch-all category, taking place where the offeror and the offeree belong to different sectors of business, and stand in neither a competitive nor a buyer-seller relationship to one another.(6)
C. Motivating Factors Behind Take-overs
It would be imprudent to conduct an analysis of corporate take-overs and their regulation without first being aware of the motivating factors underlying take-overs. A review of the pertinent scholarly research reveals at least seven major theories of takeover motives: synergy, diversification, economics, tax, the improved management hypothesis, the undervaluation theory, and the hubris hypothesis.
Synergy is the most cited motive for takeovers.(7) Its basic assumption is that the value of the combination of the offeror and the offeree is greater than the sum of the individual values of the two corporations. The source of such gains in a take-over is the potential cost-savings realized from the integration of the production and investment infrastructure of the offeror and the offeree, especially economies of scale, enhanced organizational efficiencies and increased market power.(8)
Take-overs are frequently inspired by the offeror's desire to avoid "putting all its eggs in one basket." Instead, a corporation may wish to "hedge its bets." The coinsurance theory suggests that by acquiring another corporation having imperfectly correlated earnings (irrespective of whether the offeree is inside or outside of the offeror's industry); such an offeror corporation will be able to derive a combined earnings stream that is less volatile than either of the individual companies' earnings stream.(9)
In addition to the synergy benefit of economies of scale, two other economic motives that stimulate take-overs are horizontal and vertical integration. In theory, horizontal integration, or the acquisition of competitors, provides the offeror corporation with an increase in market share and market power, and in turn, allows the corporation to set and maintain prices above previously competitive levels.(10) Furthermore, vertical integration, or the acquisition of potential buyer or seller firms, offers a variety of possible benefits to the offeror corporation, including a more dependable source of supplies, and lower inventory costs.(11)
A variety of tax savings may result from a take-over. To illustrate, the offeror obtains a valuable savings if the offeree possesses transferable tax losses that the offeror is able to offset against its own income.(12) Another potential tax benefit arises where the market value of the offeree's depreciable assets is greater than their book value.(13)
(v) Inefficient Management Hypothesis
The inefficient management hypothesis suggests that where a corporation has inefficient management, there exists an incentive for an offeror company to acquire it and install new leaders who are better able to harness the full potential of the offeree's assets. If more effective and efficient management of the offeree's assets is ultimately achieved, then the resulting gains accrue directly to the offeror.(14)
(vi) Undervaluation Theory
The undervaluation theory is based on the assumption that the offeree firm is undervalued by the market, and that the offeror is in possession of such special or inside information which will not become available to the market generally, until after the take-over. Thus, the offeror is motivated to acquire the offeree with the expectation of reaping the gain that will result once the market valuation adjusts upward.(15)
(vii) Hubris Hypothesis
The hubris hypothesis of take-overs, proposed by Richard Roll, implies that managers of an offeror corporation may pay a premium to acquire an offeree that the market has already correctly valued for their own personal motives rather than for pure economic gains. Roll suggests that the pride of the offeror's managers may cause them to place greater significance on their own valuation of the offeree than on that of the market's valuation.(16)
D. History of Take-overs
The history of take-overs in the United States and Canada has been characterized by four cycles or waves - periods of high levels of take-overs followed by periods of relatively low activity. The four waves occurred between 1897 and 1904; 1916 and 1929; 1965 and 1969; and 1984 and 1989.(17) The first wave, beginning after the Depression of 1883, was stimulated in the United States and Canada by the development of large national markets and the expanding overseas markets for manufactured products. Firms wanting to grow as quickly as possible during these opportunistic times bought other corporations in the same industry in order to acquire their additional manufacturing capacity.(18) Lax federal anti-trust laws and the relaxing of corporate laws made it easier for corporations to finance their take-overs, thus further strengthening this period of horizontal integration.(19)
The second wave of take-overs, commencing in 1916, was founded on a desire to reduce operating costs and maintain profit margins through the economies of scale offered by vertical integration.(20) As a result, offeror corporations acquired both supplier and buyer firms in their attempts to internalize previously external risks.(21) Contrasting the first and second waves, George Stigler, the economics Nobel Laureate, described the former as a "merging for monopoly" and the latter as a "merging for oligopoly." This period of consolidation came to an abrupt halt in 1929 with the crash of the stock market that had been partially fueling it.(22)
The third take-over wave led to the rise of corporate conglomeration in Canada and the United States. While the previous waves had been directed at the integration of firms within one's own industry, 80% of the mergers that took place throughout this period were conglomerate-oriented and involved the take-over by offerors of offerees from different industries.(23) This cycle was driven by a variety of different corporate motivations, including a desire to circumvent tough anti-trust laws which had made it very difficult to pursue either horizontal or vertical integration strategies of expansion, and an attempt to achieve greater financial stability through diversification of products and industries.(24)
The fourth wave of take-overs that swept through Canada and the United States in the 1980s was characterized by the mega size and prominence of the offerees, and by the more hostile, aggressive tactics of the offerors.(25) As well, this period witnessed a transformation in industries, spurred on both by the deregulation of industries such as airlines and banks,(26) and by the arrival of primarily speculative investors who rapidly purchased and resold corporations purely for profit.(27)
Although it has yet to be labelled as such, the period between 1992 and the present has seen the rise of a fifth wave of take-overs and mergers in Canada and the United States. Following the recovery of the United States economy from the 1990-91 recession, as corporations once again began to seek to expand, take-overs were viewed as a quick and efficient manner in which to do exactly that. This "fifth wave" of consolidation has thus far largely avoided the super-leveraged, debt-financed transactions of the 1980s, observing instead take-overs financed primarily through the increased use of equity instruments.
The quantity and economic value of the mergers and acquisitions that have occurred in North America since 1990 have steadily increased, with there being no hint of the trend slowing down in either Canada or the United States.(28) This continued and substantial growth in corporate take-overs signifies the importance of ensuring that the take-over regulatory regime be as efficient, effective and fair as possible.
E. Stakeholders in Take-overs
As observed in the Introduction to this paper, take-overs have the potential to fundamentally affect a number of stakeholders, the most notable of which are the offeror and offeree corporations, the employees of both firms, and the management and shareholders of the offeree.(29) While it is understood that the fallout from take-overs will vary according to the facts of a particular case, studies have revealed certain patterns or trends in how each group is affected.
(i) Offeror and Offeree Corporations
Involvement in a take-over scenario is prima facie a risky venture for both the offeror and the offeree. Although the extensive varieties and complexities of the take-overs that have occurred in Canada and the United States have served as a barrier to an all-encompassing, and generally applicable research project on the consequences of take-overs on the companies involved, a number of more limited studies have been conducted. Many of these have revealed ambivalent conclusions. For example, research conducted by Tarasofsky and Corvari, building upon earlier work of Jog and Riding, held that, in the context of Canadian take-overs, the number of acquired firms that report an increase in their profits 3-5 years after the take-over is virtually equivalent to the number that report a decrease.(30) As well, a study of take-overs based on firm-specific accounting data in the United States carried out by Ravenscraft and Scherer revealed that the profitability of acquired assets in their sample deteriorated significantly after being acquired.(31)
In addition to the effects on profitability, take-overs can also cause more fundamental changes in the merging firms, such as divestitures of portions of the offeror or offeree (or both), dramatic shifts in corporate culture, and in certain cases, the collapse of one or both of the merged corporations.
The employees of the offeror and offeree are probably the most vulnerable stakeholders throughout a take-over. Economists have recognized that take-overs threaten the two most important pillars of an employee's career: job security and job satisfaction.(32) First of all, consolidations are frequently accompanied by a loss of jobs. An increase in economies of scale may result in the closure of certain sections of the merged companies, and in turn, corresponding layoffs. As well, studies indicate that take-overs are often accompanied by the divestiture of divisions or departments of the acquired company for a quick profit, again resulting in considerable loss of jobs.(33)
With respect to job satisfaction, take-overs may result in a deterioration of employee morale due to problems such as uncertainty of job description, shifts in corporate culture or separation anxiety. Astrachan, in his book Mergers, Acquisitions and Employee Anxiety, observed that job separation anxiety, or the fear by employees that relationships will be severed as a result of dismissals, transfers, or restructuring, skyrockets during a take-over.(34) Furthermore, on the basis of a study of 150 large mergers and acquisitions in the United States, Harlow Unger reported in 1986 that the turnover of senior executives of acquired companies is almost 50% within the first year after the merger, and nearly 75% by the end of three years.(35) Similarly, John Humpal has presented data, again restricted to samples in the United States, which demonstrate that the likelihood to quit was three times higher among acquired employees than parent employees.(36)
(iii) Management and Shareholders of Offeree
An offeree's management and shareholders are the two most integral groups in the determination of whether a take-over is successful. The offeree's directors may, or may not, choose to recommend to the shareholders to accept the offeror's bid. As well, corporate management may choose to deploy a strategic defensive tactic to fend off the predator company. The shareholders, on the other hand, as owners, must make the ultimate decision as to whether to acquiesce to or to fight the offeror. Thus, the participation of and the interaction between these two stakeholders during a take-over is essential to the ultimate result.
However, the balance within this relationship is constantly threatened by the reality that an offeree's management and shareholders fundamentally possess conflicting objectives. For example, studies indicate that there is a high managerial turnover following take-overs(37), thus making management naturally adverse to successful changes in ownership. As well, corporate managers typically possess keen competitive and possessive instincts which propel directors to fight for their companies' independence and survival.
In contrast, the motivations of the shareholders of an offeree are generally based on share wealth maximization. The key consideration in deciding whether to accept or reject a take-over bid is the share price being offered. A study of the take-overs of ten Canadian firms by Patry and Poitevin revealed that the target's shareholders tend to do very well, averaging a gain of 35.6% over their estimated market value.(38) As well, a study by Professor Espin Eckbo of the 1,930 mergers and take-overs of Canadian public companies between 1964 and 1983 found that the offerees' shares averaged an 11.87 percent increase in share value over the twelve months preceding and four months following the first public announcement of a possible pending reconsolidation.(39) Thus, an offeree's shareholders generally benefit from a take-over.
While it would be misleading to suggest that all directors and shareholders of target companies behave in the stereotyped manner suggested above, on a theoretical plane these two stakeholders do have fundamentally adverse ambitions which create the potential for serious problems such as conflicts of interest and breaches of fiduciary duties.
Having identified the groups whose rights and interests are affected by take-overs, the next step is to determine the role which the CBCA should play in providing regulatory protection to these stakeholders. Should the federal law attempt to safeguard all stakeholders equally? To what extent should federal legislation interfere with the operation of the commercial markets?
III. The Regulation of Takeovers and Proposed Amendments
A. Origins of Take-over Legislation
Take-over legislation in Canada has its roots in the 1965 report of the Attorney General's Committee on Securities Legislation in Ontario (the "Kimber Report").(40) Responding to concerns about how an increasing number of take-overs would affect offeree shareholders, the Kimber Report established the following rationale for all subsequent Canadian take-over laws:
...the primary objective of any recommendations for legislation with respect to the take-over bid transaction should be the protection of the bona fide interests of the shareholders of the offeree company. Shareholders should have made available to them, as a matter of law, sufficient up-to-date relevant information to permit them to come to a reasoned decision as to the desirability of accepting a bid for their shares. In arriving at its conclusions, however, the Committee attempted to ensure that its recommendations would not unduly impede potential bidders or put them in a commercially disadvantageous position vis a vis...[a] board of directors of an offeree company.(41)
In 1966 the OSA adopted the recommendations of the Kimber Report, and implemented rules for take-over bids, including disclosure and timing requirements, rights of withdrawal of tender by offeree shareholders, and rules requiring the equal treatment of offeree shareholders.(42) The first take-over provisions of the CBCA were enacted shortly thereafter, in 1970, as amendments to the Canada Corporations Act,(43) and were later largely transferred to the CBCA in 1975. These original federal take-over provisions were virtually identical to those of the OSA and have remained unchanged to this day.
B. An Introduction to the CBCA Take-over Provisions
The CBCA's take-over regulatory regime generally applies to all CBCA corporations whose shares are publicly-traded or which have 15 or more shareholders.(44) Pursuant to the Kimber Report, these provisions hinge upon the identification of a take-over bid - an offer to shareholders to purchase shares of a corporation, that, if combined with shares already beneficially owned or controlled, directly or indirectly, by the offeror would exceed ten percent of any class of issued shares of an offeree corporation.(45) Once such an offer to purchase shares is deemed to be a take-over bid, then the offeror is required to extend the offer to all the shareholders of that class of shares. The CBCA rules then specify procedures and time periods for disclosure, solicitation and take-up of shares tendered pursuant to the offer.(46)
The fundamental objective of the CBCA provisions is to protect the rights and interests of the four main parties involved in a take-over bid: the offeror, the offeree, and the shareholders and directors of the offeree. While much of the legislation is pointed at safeguarding the bona fide interests of the shareholders of the offeree corporation, there is a concerted effort made by the legislators to balance this protection with a desire not to unduly impede potential bidders.
For example, the rules are structured so as to counterbalance the offeror's informational and time advantage by requiring it to disclose to both the shareholders and directors of the offeree all the information which it possesses which is relevant to the decision to accept or reject the bid. As well, the legislation attempts to ensure that both the offeree's shareholders and directors have sufficient time to digest the information, seek advice and make a reasoned decision.(47) The rules also require that a bid be made to all shareholders of the shares sought, and that all shareholders be treated equally with respect to the taking up of their shares in an oversubscribed partial bid. Yet, at no place in the statute, does the CBCA attempt to arbitrarily prohibit any bid by an offeror. The result is a body of provisions which strives to produce a regime of fair and orderly take-over bids by means of a legal system which specifies the rights and obligations of each of the parties involved.
While four of the five main categories of stakeholders are given some degree of protection by the CBCA's take-over laws, no comparable relief is designated to help preserve the rights and interests of the employees of the offeror and offeree corporations. As discussed earlier in this paper, employees represent one of the groups that is generally most negatively affected by a take-over transaction. Nevertheless, the absence of employee-related take-over legislation in the CBCA is likely justifiable on the basis that employment issues in Canada are already regulated by labour and contract laws. Thus, if the CBCA attempted to regulate the corporate-employee relationship, it would be overstepping its legislative bounds and improperly, if not, illegally, intervening.
Having concluded a brief sketch of the policy objectives and legislative approach of the CBCA take-over provisions, a detailed examination of specific sections of the rules will now be undertaken with a dual purpose in mind: 1) to identify the protection offered to stakeholders by existing provisions; and 2) to determine ways in which the existing provisions may be amended so as to achieve a more efficient and effective system of regulatory protection.
C. Proposed Amendments of the CBCA's Take-over Provisions
It is recognized that the present CBCA take-over rules have been instrumental in creating a regulatory system in Canada which is characterized by order, stability and stakeholder protection. However, there are several opportunities by which this legislation may be improved so as to make it more efficient and effective for the key parties to take-overs.(48)
(i) Take-over Bid Threshold: Section 194
At present the CBCA's take-over provisions are triggered if an offeror, after making a bid for shares of an offeree, would control or own 10 percent or more of any class of the shares of the offeree. This threshold ensures that the offeror becomes subject to the take-over regulatory scheme of the CBCA before being able to secretly accumulate de facto or effective control of an offeree, thus providing protection to the offeree's directors and shareholders. However, the CBCA's 10 percent threshold deviates from the 20 percent level used by all provincial securities acts. Given that most take-over bids are captured by one of the provincial statutes,(49) parties who make offers to CBCA corporations are therefore usually forced to endure the burdensome compliance costs of satisfying two different but overlapping sets of regulations. The result is an unnecessary cost expenditure by the offeror and a reduction in the overall efficiency of the regulatory process.
While a possible solution to this problem would be to increase the CBCA's threshold to 20 percent, that approach has been criticized on the basis that it could delay the availability of key ownership information to shareholders of the offeree, and thus potentially injure their position by allowing predators to acquire significant shares without anyone's knowledge.(50) The significance of these fears, however, is diminished by the fact that there are a very limited number of widely-held corporations in Canada,(51) leading one to the conclusion that in most situations, a potential offeror would have to acquire at least 20 percent of a publicly-traded corporation's class of shares in order to achieve de facto control. As well, the 1983 Report of the Securities Industry Committee on Take-over Bids concluded that the 20% mark should be adopted by the CBCA as "there [was] no evidence that the benefits of a lower threshold outweigh the costs that flow from the lack of uniformity in take-over bid rules."(52)
It would appear, therefore, that an increase in the threshold would have only minor negative effects on the management and shareholders of offerees, and that these would be more than offset by the gains that would accrue to offerors by removing the inconvenience and unnecessary administrative costs associated with meeting the requirements of two different legislative systems.
(ii) Early Warning Disclosure
In order to compensate for the limited loss of shareholder and director protection that could result from an increase in the CBCA take-over threshold, it has been suggested that the CBCA adopt an "early warning disclosure" regime.(53) Based on existing provisions of the OSA, the new CBCA provision could require any offeror that acquires 10 percent or more of a class of shares of a CBCA corporation to file a report disclosing information concerning the purchase. Subsequently, such an offeror could be obligated to file similar reports for any additional acquisition of that class of shares constituting 2 percent or more of the total class.(54) The implementation of such a provision was strongly recommended by the 1983 Securities Industry Committee on Take-over Bids which recognized that a holding of 10 percent or more of a class of shares was "a significant development in the marketplace - it may be a signal of a potential acquisition of control - and should be disclosed."(55)
The integration of this early warning system into the CBCA take-over rules would allow an offeree's shareholders and directors as much advanced notice of a potential power struggle as they currently enjoy under the 10 percent threshold. Unfortunately, the proposed provision would virtually duplicate existing provincial securities legislation on the subject, while at the same time, encompassing very few additional share acquisitions that would not have already been captured by the provincial statutes.(56) As a consequence, any potential savings to offerors generated from the harmonization of the take-over thresholds of the CBCA and provincial securities law would be counteracted by the additional expense of satisfying the nearly identical early warning requirements of two separate regulatory regimes.
Perhaps the best solution to this situation would be for the Director (as appointed under section 260) to take advantage of new section 258.2 of the CBCA(57) which would allow him/her to issue blanket exemption orders in cases where similar or overlapping information is required to be filed under other legislation. Applying this power to early warning reports in particular, only those acquisitions not currently captured by early warning provisions in provincial securities laws could be made subject to a CBCA early warning regime.(58) The result would be a significantly improved set of take-over rules which would efficiently and fairly balance the offeree's desire for early disclosure with the offeror's need to reduce duplicative compliance costs.
(iii) Private Agreement Exemption
One definition of an exempt offer according to the CBCA's take-over provisions is "an offer to fewer than fifteen shareholders to purchase shares by way of separate agreements."(59) Otherwise known as a private agreement exemption, the purpose of such an exemption is to permit holders of large blocks of shares, including controlling shareholders, to sell their shares without committing the buyers to making a formal take-over bid to all the owners of that class of shares.(60) The underlying philosophy of the private agreement exemption, as originally voiced by the Kimber Report, is that "questions of fairness between shareholders [are] a matter for company law and the courts."(61) The 1983 Securities Industry Committee on Take-over Bids reluctantly accepted this philosophy, holding that the elimination of private agreement exemptions could be deemed to constitute an undue "limiting [of] the freedom of parties to contract privately, [especially] where such a restriction was unnecessary to achieve the legislative objectives."(62)
However, while this exemption protects the rights of offerors and significant shareholders to freely contract in private, it fundamentally violates a general principle of take-over regulations that "all shareholders of the same class of an offeree shall be treated similarly by an offeror."(63) Private agreement exemptions discriminate between significant and minor shareholders, allowing a relatively small number of owners to sell their shares and, in turn, a controlling interest in the offeree, to an offeror in exchange for a premium price. The remainder of the shareholders, who have not negotiated private agreements with the offeror, are given no opportunity to sell their shares or to share in the premium being offered.
In an attempt to balance the conflicting rights and interests of these stakeholders, it is proposed that two amendments of the exemption be pursued.(64) First of all, it is suggested that the maximum number of shareholders under the private agreement exemption be reduced to five. This would harmonize the CBCA rules with those of the provincial securities statutes, and as such, provide more clarity and uniformity to the law. Furthermore, the 1983 Securities Industry Committee on Take-over Bids concluded that it is very rare for more than five shareholders to be legitimate members of a controlling block, and that the extension of the number beyond five would only serve to "detract from the organized markets and invite privileged participation by shareholders who merely have an association with the offeror or a major selling shareholder." Thus, a limit of five shareholders would help protect the interests of the minority shareholders where the offeree is fairly widely-held.
Secondly, it is recommended that the CBCA take-over rules adopt a maximum premium of 15 percent over market price that can be paid for securities purchased under the exemption. One benefit that would be derived from such a ceiling would be the further harmonization of the CBCA with provincial securities statutes. As well, even though opponents of the amendment protest that it lacks a "rational, theoretical or evidentiary basis" for requiring that the premium be shared with minority shareholders(65), it ultimately represents the best balance between the views of those advocating the principle of equal treatment of shareholders in the context of take-over bids, and those favouring the private property perspective that major shareholders should be allowed to sell their shares at a premium, irrespective of whether or not a similar is made to the other shareholders.
(iv) Integration Periods
The primary purpose of integration periods is to ensure equal treatment for all the shareholders of an offeree corporation. The CBCA currently attempts to accomplish this objective by preventing holders of significant blocks of targeted shares (subject to certain exemptions such as the private agreement exemption) from selling them at a premium to an offeror during the take-over bid deposit period.(66) As outlined in sections 197(d) and 197(f) of the CBCA, all shares acquired by an offeror pursuant to a take-over bid must be purchased for the same price. Thus, if the terms of a take-over bid are amended by increasing the price offered for the shares, the offeror is then obligated to pay this increased consideration to each offeree whose shares are taken up pursuant to the take-over bid.
However, the potential still exists for shareholders to secure advantages over one another by obtaining large premiums in private purchases which occur either shortly before or after the official take-over bid period. To prevent transactions which violate the underlying spirit of the CBCA take-over regime, it is recommended that both a pre-bid and a post-bid integration period be introduced.
Modelling it after similar provisions contained in provincial securities statutes, it is suggested that the CBCA's pre-bid integration period begin 90 days immediately preceding a take-over bid. An offeror would be required to pay the same or higher price for shares purchased during the take-over period as was paid for the same class of shares during the pre-bid interval. It is further proposed that a post-bid integration period be established prohibiting, for twenty days following the expiry of the bid, the purchase of the same class of shares for a price that is not generally available to all shareholders.(67)
(v) Expanding Minimum Period and Other Time Period Related Issues
At the heart of the CBCA's take-over rules are provisions specifying certain minimum and maximum periods which regulate the deposit and purchase of shares pursuant to a take-over bid. For example, an offeree's directors currently have 10 days from the date of a bid to make recommendations to their shareholders in the form of the director's circular.(68) As well, shareholders of the offeree have a maximum of 35 days from the date of a partial bid to deposit their shares for sale.(69) There is no such limit with respect to a bid for all the shares of a class.(70) Furthermore, the CBCA provides that a minimum of 10 days for a full bid(71), and 21 days for a partial bid(72), must expire from the date of the respective take-over offer before the offeror can actually purchase the shares.
These minimum and maximum period provisions are aimed at allowing an offeree's directors to adequately analyze an offer, make recommendations to shareholders, and to seek or consider competing bids. Likewise, they are intended to ensure that an offeree's shareholders have sufficient time to consider an initial and all subsequent take-over offers.(73) Thus, they attempt to achieve one of the underlying goals of take-over bid regulation, namely the protection of the rights and interests of shareholders. However, they may still be too short to allow an offeree to acquire, assess, and output properly all of the overwhelming amount of information that accompanies any take-over attempt.
In 1990 the Canadian Securities Administrators proposed a number of changes to the provincial securities statutes, in particular that the minimum period for depositing shares pursuant to a take-over bid be increased from 21 to 35 days [in the case of the CBCA, it is currently 35 days for a partial bid and 21 days for a full bid], that the period for withdrawing securities deposited pursuant to an offer be raised from 21 days to 35 days [in the case of the CBCA, it is currently only 10 days for full bids, and 21 days for partial bids], and that directors of the offeree corporation be given 21 instead of 10 days to respond to the take-over bid in the directors' circular.(74) Both of these modifications would result in greater protection of the rights and interests of the offeree by providing it more time in order to make the crucial determination of whether to accept or reject a take-over offer. As well, an extension of the take-over bid period would likely increase the possibility of other firms expressing interest in the offeree, and in turn, raise the probability of the offered share price being forced upwards as a result of competitive bids. While such a scenario would worsen the position of initial offerors and possibly serve as a deterrent to take-over activity in general, it would also lead to greater premiums for an offeree's shareholders.
Finally, the view that offeree's shareholders and directors consider the existing time provisions to be inadequate is supported by the increasing use of shareholder rights/poison pills plans in Canada. While these defensive instruments have been criticized as being mere instruments by which management may entrench itself, their officially stated purpose is to extend the period in which shareholders may consider a take-over bid.(75) Thus, an amendment which extended the CBCA's take-over bid period would, on one hand, provide greater protection to offerees, and on the other, serve to weaken the foundation on which the use of the controversial defense tactics is based.(76)
Having seen the variety of benefits that would flow to an offeree's shareholders by an extension of the time periods specified in the CBCA's take-over provisions, one must conclude that such extensions should be implemented in the legislation. While the Industry Canada Discussion Paper on Take-overs advocates a number of specific, and seemingly arbitrary changes(77), I would recommend more generally that an offeree's shareholders be granted an increased period in which to deposit their shares, that shares deposited pursuant to the bid not be taken up by the offeror until the expiration of the take-over period, and that directors be given additional time in which to respond to a take-over bid in the director's circular.
In summary, the preceding examination of key sections of the CBCA's take-over provisions revealed numerous examples of the extensive protection which the legislation affords to take-over stakeholders. However, it also exposed a variety of areas - threshold level, early warning signals, private agreement exemptions, integration periods and minimum time periods - where the rules could be improved to make them more sensitive to the safeguarding of the interests of the vulnerable parties to a take-over, especially the shareholders. An issue which impacts strongly upon this relationship between stakeholders and the CBCA's take-over rules is the use of defensive tactics by the management of offeree corporations. A number of questions must be answered. What objectives underlie their employment, whose interests do they protect and what role should the CBCA play in administrating their use?
IV. Anti-takeover Defenses and Fiduciary Duties
Anti-takeover defensive tactics represent one of the most contentious areas of corporation law. From their crude beginnings as novel agents of corporate preservation in the midst of the wave of hostile take-overs of the 1980s, they have evolved into an elaborate and sophisticated corporate armoury.(78) Approximately 85% of large U.S. corporations now have in place some form of anti-takeover defense(79) , and despite being relatively rare in Canada, their presence on the Canadian landscape is increasing rapidly.(80)
The circle of controversy that has engulfed these defense measures stems from the theory that the interests of an offeree's directors and shareholders during a take-over are polar. While the survival of an offeree's management group is generally contingent upon the successful activation of a defense tactic to defeat a potential offeror, an offeree's shareholders are generally better off by selling their shares to the highest bidder at a large premium. Therefore, the employment of an anti-takeover strategy by an offeree's directors begs the question: in fighting the take-over, were the directors acting honestly and in good faith with a view to the best interests of the corporation [and thus satisfying their fiduciary duties], or were they acting out of their personal self-interest [and thus in breach of their fiduciary duties]? A detailed analysis of this question requires a brief outline of the various categories of anti-takeover measures, a discussion of the motivations underlying these measures, an examination of the fiduciary duties of directors in a take-over situation and a review of the role that courts and legislators have thus far played in attempting to clarify this matter.
A. Categories and Motivations of Anti-takeover Defenses
The corporate armoury of anti-takeover defensive tactics is well stocked. Falling into two major categories - preventative and active - there is an overwhelming variety of defenses now available to corporations. Whereas preventative measures are intended to decrease the likelihood of a financially successful take-over and thus deter potential bidders, active defenses are instigated after a bid has been made.
(i) Preventative Anti-takeover Defenses
Patrick Gaughan describes the installation in a corporation of preventative defenses as "an exercise in wall building."(81) The goal of preventative defenses is to alter some, if not all, of the value-enhancing characteristics of a target firm - i.e. healthy cash flows, low debt levels, and low share price-to-assets ratio(82) - either in advance of, or upon completion of, a take-over bid. While they don't guarantee that a company will be able to avoid a take-over fight, these defenses do tend to make a take-over far more difficult and costly to the offeror, the hope being that bidders will decide to bypass such a well-defended target in favour of a more vulnerable company. These preventative measures include poison pills, corporate charter amendments and golden parachutes.
Poison pills vary from company to company but generally retain certain common characteristics. As one of the most popular and common of all anti-takeover defenses, they will be described in relative detail in this paper. Poison pills are essentially shareholders' rights plans developed by a corporation's directors under which typically one right is distributed per common share. The rights do not detach and are not exercisable until some triggering event occurs. This event is usually defined in one of two ways: either 1) a potential offeror has acquired a certain percentage of common shares of a class, or 2) a specified number of days has passed since an offeror has launched a take-over bid that is intended to make that offeror the effective owner of the offeree. The integral feature of most poison pills is a flip-in provision(83) that generally stipulates that once the triggering event has occurred then all the holders of the rights, excluding the offeror, may exchange them for common shares at half their normal price. The offeror's rights are nullified upon the crossing of the triggering threshold. The result of the flip-in is, therefore, that the offeror's holdings become considerably diluted and the cost of acquiring effective ownership becomes prohibitively expensive.(84) The flip-in provision combined with the fact that an offeree's board of directors usually retain the power to redeem the rights at a minimal price up until the triggering event takes place, forces potential offerors to negotiate with the offeree's board of directors in order reach some kind of deal.
Another more recent feature of poison pills is the "permitted bid" clause which allows a potential offeror who has satisfied certain conditions to by-pass the offeree's board of directors and to negotiate directly with the offeree's shareholders without creating a flip-in event.(85) Whatever the exact structure of the instrument, all poison pills either deter a potential offeror from continuing with its bid, or else forces the offeror to work with the offeree directly. In the end, poison pills delay the take-over process, which, in turn, provides the offeree with valuable additional time to consider a take-over bid, negotiate a higher price from the offeror, or to find a competitive bidder to drive share price offers higher.
Corporate charter amendments are defensive tactics intended to make it difficult for a potential offeror to initiate changes in the managerial control of an offeree. Some examples include staggered boards of directors, dual capitalizations, and supermajority clauses.
Golden parachutes are special compensation packages that a company provides to its upper management, and although not usually primarily aimed at deterring take-overs, they may have some anti-takeover effects. A typical golden parachute agreement provides a lump-sum payment to an executive upon the occurrence of a specific change in the control or ownership of the company, or upon his/her voluntary or involuntary departure from the company after such a change in control. Thus, an offeror upon obtaining control of a company having these compensation devices is forced to pay a large sum of money in order to replace existing managers with the offeror's desired people. Since the cost of paying off the golden parachute packages is usually only a small percentage of the take-over purchase price, their anti-takeover effects are relatively small.(86)
(ii) Active Anti-takeover Defenses
Anti-takeover defensive defenses are only applicable after an offeree has received an unwanted bid. Some examples of these tactics include greenmail, white knights, and the pac-man defense. Greenmail involves the payment by an offeree of a substantial premium for a significant shareholder's stock in return for the shareholder's promise not to initiate a bid for control of the company. The white knight defensive strategy involves seeking out a friendly bidder, or white knight, as an alternative buyer to the hostile one. Finally, the pac-man defense is an extreme strategy involving a take-over attempt by the offeree on the offeror.
(iii) Hypotheses of the Motivations of Anti-takeover Defenses
The nature and extent of the potential conflict of interests between an offeree's shareholders and directors must be considered in light of the motivations which induce directors to make use of anti-takeover defenses. There are two competing accounts of the function and purpose of these defenses: the shareholder interest hypothesis (SIH) and the management entrenchment hypothesis (MEH).(87) According to the SIH, management employs anti-takeover tactics for the ultimate benefit of the shareholders. The use of defensive strategies such as poison pills to make an acquisition prohibitively expensive without the cooperation of the board of directors allows corporate management to compel the potential offeror to negotiate with them. In the effective capacity as bargaining agents for the shareholders, the SIH suggests that the objective of management is to obtain for the shareholders the "full and fair value" of their shares. This may be accomplished by either rejecting a bid that is too low, forcing the offeror to introduce a more generous bid, or by soliciting competing bids to drive up the share premium offer.(88) At the other end of the spectrum, the MEH holds that since a successful take-over often results in the dismissal of an offeree's existing directors(89), the offeree's incumbent management group may be more motivated to save their jobs than act in the best interests of its shareholders.(90) Thus, according to the MEH the power from a defense such as a poison pill may be used by management to reject take-over bids that threaten its survival. The result is a loss to the shareholders of large take-over premiums that would otherwise have been paid by the thwarted offeror.
If one accepts the management entrenchment hypothesis as correct, then the answer to the question underlying this part of the paper would be immediately discernible: an offeree's corporate managers' use of defensive strategies does result in a breach of their fiduciary duties since they prima facie place their own self-interests ahead of those of the corporation or shareholders. Likewise, if the SIH represents the operating motive then again the central issue is immediately resolved: the offeree's corporate managers' use of defensive strategies does not result in a breach of their fiduciary duties since they prima facie place the interests of the shareholders ahead of their own self-interests. The better answer is that the two hypotheses operate and interact simultaneously(91) such that the aversion of management to take-over bids is balanced by management's objective to maximize shareholders' wealth. The result then becomes realistic: the implementation of defense instruments such as poison pills has "the effect of increasing premiums in successful take-overs, while also reducing the probability of a successful take-over."(92) This hybrid view of the management objectives underlying the use of defense tactics, or the dual purpose hypothesis, (DPH) suggests that both conflicting purposes are constantly at play within the collective mind of management. The determination of which, if either, of these motivations was dominant is fundamental to concluding whether or not an offeree's directors breached their fiduciary duties in their exercise of a take-over defense.
B. The Fiduciary Duty Analysis
In examining the fiduciary duties of an offeree's directors in the context of a take-over bid, one must first consider the source of the directors' duties. Subsection 122(1) of the CBCA requires that a director, in discharging his/her duties, "act honestly and in good faith with a view to the best interests of the corporation" and "exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances." Thus, the question is whether or not the actions of the directors of a target corporation in using an anti-takeover instrument satisfied these legislative requirements.
Notwithstanding the CBCA's specific formulation of the components of a director's duties, the courts in Canada have struggled to determine how these duties may be discharged by a director defending a corporation from a take-over bid. This judicial setback may be linked to the limited number of Canadian cases that have dealt with the issue, and to the fact that those which do exist often contradict one another.(93) To facilitate a comprehensive and linear review of the approaches taken by the courts in Canada, it is recommended that the law be surveyed in three major stages: the state of the law preceding the leading Canadian case on this issue, Teck. Corp. v. Millar(94), the law as set out in the Teck decision itself, and the state of the law since Teck.
(i) Law Before Teck
The law before Teck followed the proper purpose doctrine, an approach laid out in the leading case of Hogg v. Cramphorn Ltd(95). Based on the premise that directors' powers were conferred upon them for a particular purpose or purposes, this doctrine holds that the exercise of a power for a purpose other than the specific one for which it was conferred to be invalid. The proper purpose test consists of two parts. First of all, the proper purpose for which the power was conferred to the directors must be determined. Second, it must be ascertained whether the power was exercised for that proper purpose. Since the proper purpose analysis is applied only to the primary purpose of the directors in exercising their power, so long as the directors' primary purpose is a proper one, then a secondary purpose will not invalidate the action. The burden of proof is on the plaintiff to establish that the directors' primary motive was an improper purpose. Turning to Cramphorn, the directors of the company established a trust for the benefit for the company's employees, under which shares were issued to the directors as trustees for the employees. However, the court found that the directors' primary purpose in setting up the fund and issuing shares was to prevent a certain individual seeking control of the company from acquiring a majority of the shares.(96) Finding that the primary purpose of the directors' power to issue shares was to raise capital when required, and that the power had actually been exercised for the primary purpose of retaining control, the court invalidated the action.(97)
The most significant Canadian case in the past sixty years on the subject of directors' fiduciary duties in resisting a take-over bid, Teck proposed a more lenient version of the proper purpose test.(98) The facts are briefly as follows. The plaintiff Teck, a major mining company, desired to join with a junior mine, Afton Mines, in a venture to develop a promising deposit already owned by Afton. Afton's directors, however, led by Millar, chose instead to negotiate a deal with Teck's rival, Canex. In the face of Afton's continued rejection of Teck's offers, even though they were better than the terms offered by Canex, Teck decided to obtain control of Afton through share purchases. To stave off Teck's hostile bid, Afton accordingly accelerated its negotiations with Canex and ultimately reached a deal which entailed the issuance of sufficient shares to deny Teck control, one day after Teck had accumulated a fifty percent ownership in Afton.(99) Teck subsequently brought a derivative action as a shareholder of Afton against its directors, alleging that the agreement with Canex was void because it was made for an improper purpose.
Concluding that it was not "sound to limit the directors' exercise of their powers to the extent required by Cramphorn," Berger J. for the British Columbia Supreme Court held that directors are entitled to resist a take-over bid if they meet a two-part test: (1) they must act in good faith in resisting the bid; and (2) they must believe, on reasonable grounds, that the take-over will cause substantial damage to the their company's interests. In this particular case he found that the directors of Afton had satisfied their fiduciary obligations. Berger J. placed the burden of proof on the plaintiff to show either that the directors' purpose in rejecting a bid was not in the best interests of the company, or that the directors did not have reasonable grounds for believing that the take-over would have caused the company substantial damage.(100) Furthermore, in assessing the best interests of the corporation, Teck provided that the directors may consider a variety of differing interests: 1) who is seeking control and why (assess the reputation of the offeror, previous experiences with the offeror, policies of the offeror, etc.); 2) the interests of employees and consequences to the community in general; and 3) the impact on the corporation and shareholders. Thus, Teck represented a clear departure from the strict proper purpose test of Cramphorn, with Berger J. concluding that the courts should only find a directors' exercise of power to be improper if their purpose was not to serve the best interests of the corporation.
(iii) Law After Teck
One of the difficulties in determining the judicial effects of the Teck decision is the fact that it has been thoughtfully applied in only two subsequent Canadian cases: Re Olympia & York Enterprises and Hiram Walker Resources Ltd(101) and Exco Corp. v. Nova Scotia Savings & Loan Co.(102) Prior to those two cases, however, it had been considered by the Judicial Committee of the Privy Council in Howard Smith Ltd. v. Ampol Petroleum Ltd.(103)
First of all, Howard Smith's analysis of Teck created uncertainty as to Teck's appropriate interpretation and application. By recognizing that there was no set purpose for the power of directors to issue shares, the Privy Council in Howard Smith appeared likely to follow Teck's lead and adopt a more moderate proper purpose test. However, the Privy Council observed that Teck was consistent with the traditional view of defensive measures, and then proceeded to apply the strict proper purpose test of Cramphorn to its own facts.(104)
Re Olympia & York reinforces the test outlined by Berger J. in Teck. The facts of Re Olympia & York may be summarized as follows. The hostile bidder, Olympia & York, tried to block financing extended by the board of the target, Hiram Walker, to Fingas, a corporation jointly owned by Hiram Walker and Allied Lyons, a white knight purchaser of a portion of Hiram Walker's business. This financing allowed Fingas to make a higher bid for Hiram Walker's shares than Olympia and York's initial offer. As a result, Olympia and York sought injunctions, arguing that the action of the Hiram Walker directors was for the purpose of entrenching themselves in the management of the corporation, and as such, a breach of their fiduciary duties.
Applying the Teck formulation, Montgomery J. held that the directors of Hiram Walker had acted in the best interests of the corporation and in good faith and, that as a consequence, it was irrelevant that they had also benefitted from their actions [by becoming more entrenched in the company]. While reinforcing the existing rules of the Teck test for directors' use of anti-takeover defenses, Re Olympia & York also supplements it with the following additional principles(105) : 1) it is the duty of directors in a take-over contest to maximize the value to all shareholders; 2) directors are entitled to rely on professional advice as to the adequacy of a bid, and such reliance will constitute evidence of acting in good faith and upon reasonable grounds; and 3) self-entrenchment will not necessarily be inferred where retaining control is secondary to the primary purpose of acting in the best interests of the corporation and in good faith.
While Teck and Re Olympia & York helped to build a modern, consistent framework in which to analyze the duties of directors in defending take-overs, the decision of the court in Exco served to dismantle it. The case involved an allegation that a series of share issues by the offeree, Nova Scotia Savings and Loan (NSSL), were improperly made to facilitate the accumulation of control by a corporation "not unfriendly" to NSSL's management and to defeat a hostile bid made by Exco. Richard J., in finding there had been an abuse of directors' powers, articulated a new restricted proper purpose doctrine. This new rule provides that in order for directors to discharge their fiduciary duties, they must demonstrate that their actions were motivated by "considerations consistent only with the best interests of the company and inconsistent with any other interests."(106) Exco's considerably more narrow approach alters the Teck and Re Olympia & York framework in three major ways. First of all, it limits the considerations directors may undertake. While under Teck directors could consider a number of parties' interests, including the reputation of the offeror, the community, the employees and of the corporation, Exco requires directors to consider only the best interests of the corporation. As well, Exco prohibits directors from receiving any secondary benefit from their actions. Thus although both Teck and Re Olympia & York held that if the primary purpose was proper, then any secondary benefit to the directors would not invalidate the actions, Exco would conclude there to be a breach of duty if directors' actions were even secondarily consistent with self-interest. Finally, Exco places the burden of proof on the target directors.
In the aftermath of Exco, legal analysts agree that the law in Canada is unsettled.(107) There is an ongoing struggle between Exco's restricted proper purpose test and Teck's moderate proper purpose test which will probably continue until a string of cases are consistently decided on the basis of one of the approaches. It is a struggle which should be won by the supporters of Teck. While Teck provides an analytical framework in which the decision of directors to defeat a take-over may be viewed with respect to its effect on a wide variety of groups - including the corporation, shareholders, employees and the community, Exco views the decision solely within the context of the best interests of the corporation. Thus, the Teck rule strives to consider and, in turn, possibly protect, the rights and interests of a much larger number of stakeholders to a take-over, which is more consistent with the policy rationale underlying the CBCA's take-over rules. A second major flaw in the Exco rule is the requirement that target directors demonstrate that the considerations upon which their decision was based are consistent only with the best interests of the corporation and inconsistent with any other interests. This problem with this element is that in many cases the proper exercise of directors' duties will be in the best interests of both the corporation and shareholders. For example, by rejecting a bid which doesn't appear beneficial for the shareholders and company as a whole, the directors would be simultaneously benefitting themselves. The consequence of Exco, therefore, is that target directors will rarely, if ever, be capable of discharging their fiduciary duties.(108) A third weakness of Exco is the assumption that all directorial powers are conferred with a particular, restricted purpose in mind.(109) To determine the purpose of such powers one must look to the statutory grant by which they are given. However, the statutory language inevitably tends to be very broad with little indication of the specific reason for which the power has been provided.(110) This assumption also dictates that the courts must be able to ascertain the exact primary purpose behind the directors' use of a defense strategy, as opposed to any secondary purposes. Since it is generally impossible for courts to read the minds of directors, this requirement is impossible to achieve in real terms. In contrast, Teck offers a more objective test, requiring only that directors decide, on reasonable grounds, that a take-over will cause substantial damage to the company's interests before exercising a defensive strategy.
(iv) American Jurisprudence
Any analysis of the fiduciary test for corporate directors in defeating take-overs should include an examination of American jurisprudence. While Canada is limited to very few cases on the issue, the American experience is rich with related cases. The most common approach in the United States is known as the Business Judgment Rule. The business judgment rule provides that a court should evaluate a decision by directors to employ an anti-takeover defense in the same way as they would evaluate any other business judgment.(111) Flowing from this rule are several conditions that directors must meet in order to demonstrate that they fulfilled their fiduciary duty in good faith. For example, a director must show that he/she is not interested in the subject of the business judgment. As well, he/she must be informed with respect to the subject of the business judgment to the extent that he/she reasonably believes to be appropriate under the circumstances. A director must rationally believe that his/her business judgment is in the best interests of the corporation.(112) A final requirement is that there be a valid, legitimate business purpose underlying the director's actions.(113) However, due to the possibility that the interests of directors may conflict with those of the corporation, American jurisprudence has held that before one may conduct the business judgment analysis, the defendant directors must first discharge an initial burden of proof. As introduced by the decision in Cheff v. Mathes(114) and later modified by the courts in Unocal Corp. v. Mesa Petroleum Co,(115) the test for discharging this initial burden of proof requires the defendant director to show two things: 1) that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed by the presence of the potential offeror; and 2) that the defensive measure was reasonable in relation to the threat posed.(116)
It is evident from the preceding description of the American approach on this issue that it is remarkably similar to that of the British Columbia Supreme Court in Teck. For example, the American courts have adopted the central requirement of Teck, that being that the decisions by directors to employ anti-takeover defenses must be made in good faith and on reasonable grounds. As well, both Teck and the business judgment rule allow directors to base their decisions on a number of considerations, including the best interests of both the corporation and the employees, and the identity of the offeror.
(v) The Role of the CBCA
A final point that should be considered is whether or not the CBCA should expand its role in the regulation of the fiduciary duties of directors in the context of a take-over bid by introducing a detailed code of conduct for directors. This question is examined thoroughly in Industry Canada's 1996 discussion paper on take-overs in which it is recommended that provisions be added to the CBCA requiring directors to obtain shareholder approval of all anticipatory defensive measures. Yet, such a legislative response appears to constitute an excessive and unnecessary intervention in the affairs of a corporation. The potential abuse of an anti-takeover instrument by an offeree's directors is already controlled by subsection 122(1) of the CBCA which requires that directors not act contrary to their fiduciary duties. If anything, a CBCA code of conduct would be best used to outline to directors certain prerequisites that they must satisfy in order to discharge their duties in the context of a take-over bid. It could, in the process, help to crystallize the Canadian position on the fiduciary duty test. The Canadian Securities Administrators have already made some progress in this area, issuing National Policy 38 which, among other things, recognizes the potential conflict between the interests of shareholders and management in a take-over situation, emphasizes that the primary objective of take-over legislation is to protect shareholders, and provides that ultimately the shareholders have the right to make the take-over decision.(117) In fact, the courts have already begun to turn to National Policy 38 as an interpretative guide for their examination of anti-takeover defensive measures.(118)
In summary, anti-takeover defensive strategies continue to present directors with the potential to misuse their powers at the expense of shareholders. However, the Canadian courts have successfully responded by invalidating any exercise of defensive measures which constitutes a breach of directors' fiduciary duties. In order to continue to discourage directors from abusing these defense instruments, and to foster a more balanced, trusting relationship between shareholders and directors, we should aspire to two goals. First, the Teck fiduciary test must be adopted as the only true test for directors' take-over fiduciary duties. Second, the CBCA should draft a guideline outlining the keys to avoiding a breach of duty during a take-over.
Take-overs have always been characterized by the underlying greed and selfishness of their participants. The cold and competitive realm of corporate business promotes only those behaviours which foster growth and profit. As a consequence, take-overs are often the site of battlefields which, in time, become strewn with the bodies of its victims. It is the role of take-over legislation to prevent such meaningless deaths. Continuously striving to protect the rights and claims of offerors, offerees and shareholders, the CBCA's take-over provisions have produced a take-over regime in Canada marked by its balance of relative equality, stability and efficiency. Although the abuse of anti-takeover defensive tactics by management has threatened to destroy this balance by depriving corporations and shareholders of the independence to make their own decisions, evolving case law promises to eliminate this peril. Yet, there is much work to be done. We must continue therefore to search for opportunities to reduce the bodies on the battlefield by endeavouring to make the CBCA's take-over rules more sensitive to the needs and interests of all stakeholders.
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1. P.A. Gaughan, Mergers, Acquisitions, and Corporate Restructurings (Toronto: John Wiley & Sons, 1996) at 49.
2. R.S.C. 1985, c. C-44 [hereinafter CBCA].
3. R.S.O. 1990, c. S.5 [hereinafter OSA].
4. Section 89 of the OSA.
5. R.A. Shaw, "Merger and Acquisition Strategies" (1996) 34 Alta. L. Rev. 630 at 631.
6. Gaughan, supra note 1 at 7.
7. Ibid. at 104.
8. B.E. Eckbo, "The Market for Corporate Control: Policy Issues and Capital Market Evidence" in R. Khemani, D. Shapiro & W. Stanbury, eds., Mergers, Corporate Concentration and Power in Canada (Canada: The Institute for Research on Public Policy, 1988) 143 at 149.
9. Gaughan, supra note 1 at 113.
10. Ibid. at 126.
11. Ibid. at 133.
12. M. Gillen, Economic Efficiency and Takeover Bid Regulation" in W. Moull, ed., Advanced Business law Workshop, Vol.1 (Toronto: York University Press, 1985) 1 at 16.
13. Gaughan, supra note 1 at 550.
14. Eckbo, supra note 8 at 150.
15. Gillen, supra note 12 at 16.
16. R. Roll, "The Hubris Hypothesis of Corporate Takeovers," (1986) 59 Journal of Business 197-216.
17. A. Tarasofsky & R. Corvari, Corporate Mergers and Acquisitions: Evidence on Profitability (Ottawa, Minister of Supply and Services Canada, 1991) at 9.
18. J.E. McCann & R. Gilkey, Joining Forces: Creating and Managing Successful Mergers and Acquisitions (Toronto: Prentice Hall, 1988) at 20.
19. Gaughan, supra note 1at 21.
20. McCann, supra note 18 at 21.
23. Statistical Report on Mergers and Acquisitions, Federal Trade Commission, Washington, D.C., 1977.
24. McCann, supra note 18 at 21-22.
25. Gaughan, supra note 1 at 43.
26. Ibid. at 44.
27. E.R. Bruning, "The Economic Implications of the Changing Merger Process" in D.L. McKee, ed., Hostile Takeovers: Issues in Public and Corporate Policy (New York: Praeger, 1989) 47 at 57.
28. Gaughan, supra note 1 at 48.
29. I recognize that the management group and the shareholders of the offeror are also impacted upon by a take-over. It is further noted that some writers such as Jeffrey MacIntosh [in "The Canadian Securities Administrators' Takeover Proposals: Old Wine in Old Bottles" (1993) 22 Can. Bus. L.J. 231 at 236] have argued that legislative protection should not distinguish between offeror and offeree shareholders. However, I disagree for two reasons. First of all, as the catalysts behind a take-over attempt, the offeror's management and shareholders do not require legislative assistance to ensure they have sufficient time and disclosure to evaluate the merits of the bid. As well, any additional legislative protection of the offeror would only serve to encourage greater numbers of take-overs. Therefore, I will not include the management and shareholders of the offeror in my discussion.
30. Tarasofsky, supra note 17 at 24-28.
31. Ibid. at 17.
32. C. Hammond, The Protection of Interests in Takeover Bids (Toronto: University of Toronto, 1984) at 4.
33. J. Funiciello, "Mergers, Acquisitions, and Divestiture...Effects on Workers" in T.J. Kopp, ed. Perspectives on Corporate Takeovers (New York: University Press of America, 1990) 67 at 68.
34. J.H. Astrachan, Mergers, Acquisitions, and Employee Anxiety (New York: Praeger, 1990) at 2.
35. S. Cartwright & C.L. Cooper, Mergers and Acquisitions: The Human Factor (Toronto: Butterworth-Heinemann) at 42.
37. J.C. Coffee, Jr., "Regulating the Market for Corporate Control: A Critical Assessment of the Tender Offer's Role in Corporate Governance (1984) 84 Colum. L. Rev. 1145 at 1150.
38. M. Patry & M. Poitevin, "Hostile Takeovers: The Canadian Evidence" in L. Waverman, ed., Corporate Globalization through Mergers and Acquisitions (Canada: University of Calgary Press, 1991) 123 at 131.
39. B.E. Eckbo, "Mergers and the Market for Corporate Control: the Canadian Evidence" (1986) 2 Can. J. of Econ. 236 at 239-244.
40. Ontario, Legislative Assembly, Report of the Attorney General's Committee on Securities Legislation in Ontario (the "Kimber Report") (Toronto: Queen's Printer, 1965).
41. Ibid. at 22, para. 3.10.
42. Gillen, supra note 12 at 7.
43. R.S.C., 1970, c. C-32 [hereinafter CCA].
44. Section 194 of the CBCA, supra note 2.
46. Report of the Securities Industry Committee on Take-over Bids, The Regulation of Take-over Bids in Canada: Premium Private Agreement Transactions, November, 1983 at 5.
47. Ibid. at 5-6.
48. A number of proposed amendments to the CBCA are considered in an Industry Canada Discussion Paper on Take-overs and the CBCA. See Industry Canada, infra note 48.
49. It is only when all the offeree shareholders of a CBCA corporation are located in Prince Edward Island, New Brunswick, the Yukon, the Northwest Territories [the securities laws of these provinces and territories do not contain take-over provisions], or outside of Canada that a take-over bid could avoid the jurisdiction of provincial regulation.
50. Industry Canada, Discussion Paper: Take-overs (Ottawa: Industry Canada, 1996) [This paper was downloaded from the internet, and thus, I have no official page references].
51. S. Rao & C. Lee-Sing, "Governance Structure, Corporate Decision Making and Firm Performance in North America" in R. Daniels & R. Morck, eds., Corporate Decision Making in Canada (Calgary: University of Calgary Press, 1995) 47-48. This book discussed a study which found that only 23. 1 percent of Canadian public companies are widely held, as compared with 40.2 percent in the United States.
52. Report of the Securities Industry Committee on Take-over Bids, supra note 46 at 46.
53. Industry Canada, supra note 50.
54. See Section 101 of the OSA, supra note 3.
55. Report of the Securities Industry Committee on Take-over Bids, supra note 46 at 46.
56. See comment, supra note 49. Nevertheless, it was observed in Industry Canada's Discussion Paper on Take-overs that at least seven CBCA corporations only issue securities in the United States. As provincial securities laws do not apply to take-over bids involving CBCA corporations that issue securities only in the United States, the CBCA provisions represent the only Canadian regulatory system that would be applicable. Although these types of companies are still somewhat rare at the moment, if the practice becomes more common in the future then the importance of the overlapping CBCA take-over provisions will increase significantly.
57. When s. 258.2 is proclaimed into force it will permit the Director of the CBCA to issue blanket exemptions where there is duplication of the documents required to be filed under the CBCA and other federal or provincial legislation.
58. Industry Canada, supra note 50.
59. Section 194 of the CBCA, supra note 2.
60. Report of the Securities Industry Committee on Take-over Bids, supra note 46 at 7.
61. Ontario, Report of the Committee of the Ontario Securities Commission on the Problems of Disclosure Raised for Investors by Business Combinations and Private Placements (the "Disclosure Report") (Toronto: Queen's Printer, 1970) at para. 7.09.
62. Report of the Securities Industry Committee on Take-over Bids, supra note 46 at 39.
63. The City Code on Take-overs and Mergers, rev. ed. (London: Council for the Securities Industry, 1981). See General Principle 8.
64. Industry Canada, supra note 50.
68. Section 210(2) of the CBCA, supra note 2.
69. Section 196(1)(b) of the CBCA, supra note 2.
70. Section 195 of the CBCA, supra note 2.
71. Section 195(b) of the CBCA, supra note 2
72. Section 196(1)(a) of the CBCA, supra note 2
73. Industry Canada, supra note 50.
75. C.R. McCall, "Poison Pills - The 1995 Proxy Season" (1995) 7 Corporate Governance R. Here it was recorded that the Fairvest Securities Corporation had reported that over 50 Canadian companies submitted rights plans to shareholders for confirmation, as compared to only a dozen the year before.
76. I will review in detail the merits of defensive tactics in the next section of this paper.
77. Industry Canada, supra note 50.
78. Gaughan, supra note 1 at 151.
80. McCall, supra note 75at 4.
81. Gaughan, supra note 1 at 153.
83. Some poison pills have flip-over provisions which are similar to flip-in clauses but are only applicable if an acquirer wished to purchase 100% of an offeree.
84. P. Dey & R. Yalden, "Keeping the Playing Field Level: Poison Pills and Directors' Fiduciary Duties in Canadian Take-over Law" (1990) 17 Can. Bus. L.J. 252 at 258-259.
86. Gaughan, supra note 1 at 172.
87. J.G. MacIntosh, "The Poison Pill: A Noxious Nostrum for Canadian Shareholders" (1989) 15 Can. Bus. L.J. 276 at 278.
89. Coffee, supra note 37 at 1150.
90. MacIntosh, supra note 87at 281.
93. M.S.P. Baxter, "The Fiduciary Obligations of Directors of a Target Company in Resisting an Unsolicited Takeover Bid" (1988) 20 Ottawa L. Rev. 63 at 76.
94. (1972) 33 D.L.R. (3d) 288,  2 W.W.R. 385 (B.C.S.C.) [hereinafter Teck].
95. (1963),  Ch. 254,  3 All E.R. 420 [hereinafter Cramphorn]. The leading Canadian case on the proper purpose doctrine was Bonisteel v. Collis Leather Co. (1919), 45 O.L.R. 195, 15 O.W.N. 465 (H.C.).
96. Ibid. at 267.
97. Ibid. at 268-269.
98. Baxter, supra note 93 at 79.
99. J.G. Howard, "Takeover Defences: A Reappraisal" (1990) 24 U.B.C. L. Rev. 53 at 63.
100. Supra note 94 at 315-17,  2 W.W.R. at 414-16.
101. (1986) 59 O.R. (2d) 280, 37 D.L.R. (4th) (Div. Ct.) [hereinafter Re Olympia & York].
102. (1987), 78 N.S.R. (2d) 91 at 163-65, 35 B.L.R. 149 at 259-61 (S.C.T.D.) [hereinafter Exco].
103. (1974),  A.C. 821,  1 All E.R. 1126 (P.C.) [hereinafter Howard Smith].
104. Ibid. at 835,  1 All E.R. at 1133.
105. Industry Canada, supra note 50.
106. Supra, note 102 at 261.
107. Baxter, supra note 93 at 88, and Howard, supra note 99 at 66-67.
109. B.V. Slutsky, "Canadian Regulation of the Hogg v. Cramphorn Improper Purposes Principle - A Step Forward?" (1974) 37 Mod. L. Rev. 457.
110. Baxter, supra note 93 at 86-95.
111. J.H. Farrar, "Business Judgment and Defensive Tactics in Hostile Takeover Bids" (1989) 15 Can. Bus. L.J. 15 at 22.
112. Ibid. at 21.
113. Howard, supra 99 at 68.
114. 199 A.2d 458, 41 Del. Ch. 494 (1964) [hereinafter Cheff].
115. 493 A. 2d 946 (Del. S.C.1985) [hereinafter Unocal].
116. Ibid. at 955.
117. Supra note 2, National Policy 38.
118. 118 R. Yalden, "Controlling the Use and Abuse of Poison Pills in Canada: 347883 Alberta Ltd. v. Producers Pipelines Inc." (1992) 37 McGill L.J 887 at 907.