Regulators restrain a ‘public interest’ push on poison pills

Canadian securities regulators are going to demonstrate commendable restraint in the exercise of the “public interest” jurisdiction to pre-empt the work of unconflicted boards of directors responding to unsolicited takeovers. The brand new proposal would allow boards facing hostile bids as much as 105 days before regulators intervene with measures that may curtail a board’s discretion, namely cease-trading “poison pill” defences. This is a marked departure in the current “standard” – that is somewhat unevenly applied – of securities regulators often being ready to cease-trade poison pills after 45-70 days and suggests a regulatory rethinking of when the “public interest” ought to be invoked.

The CSA’s proposed regime should allow most conscientious boards to fulfill their duties under corporate law when answering hostile bids. It may also encourage private parties to challenge the behaviour of conflicted (or else deleterious) boards with the courts, that are better equipped in an institutional level than are securities regulators to cope with such corporate law issues.

The logic underlying this policy reform suggests a broader reconsideration of whether private parties must have the right to invoke the power conferred on securities regulators to create a number of punitive and remedial orders if, within the regulator’s opinion, it’s within the “public interest” to do this.

While the statutory public-interest power does not expressly provide that the application could be through private parties, decisions made by the Ontario Securities Commission – and its rules of procedure – have effectively allowed such applications, even when other remedies, either before the commission or perhaps in the courts, are available.

Over time, it becomes ‘more reasonable’ to anticipate the commission … to intervene.

Despite numerous references to the “public interest” in securities regulation, there isn’t any statutory definition of the term or guidance (other than precedent) as to the scope of such power or how it ought to be exercised. Recently, the commission has effectively adopted a “reasonable expectations” standard, taking an increasingly broad look at situations in which it is ready to make “public interest” determinations regarding matters that touch on the exercise by directors of the statutory duties under corporate law, often at the behest of private parties with a particular interest in the question at issue. This will not be surprising: There is a degree of circularity baked into any “reasonable expectations” standard. With time, it becomes “more reasonable” to anticipate the commission’s willingness to intervene, even absent an alleged breach from the Securities Act, especially when investor confidence is alleged to be at stake.

Related

New takeover rules limiting poison pills will make it harder to bring hostile bidsCanadian regulators extend here we are at unsolicited takeover bids

The Supreme Court of Canada discussed the nature of the commission’s public-interest jurisdiction in a 2001 decision (Committee for the Equal Management of Asbestos Minority Shareholders). While acknowledging the commission’s public-interest jurisdiction is broad, the Supreme Court stated the purpose is neither remedial nor punitive which “cannot be utilized merely to remedy Securities Act misconduct purported to have caused harm or damages to private parties or individuals.”

With the proposed new approach to “poison pills,” it may be time for you to reflect more broadly on the trend to increase “public interest” relief as a right to private applications. One approach was signalled by the commission in the determination earlier this week to deny Catalyst Capital Group’s request, on “public interest” grounds, for a hearing to obstruct a vote by Corus Entertainment’s shareholders (which Catalyst is a) around the company’s proposed takeover of Shaw Media.

Commission staff effectively played a “gatekeeper” role. They should help the commission determine when a credit card applicatoin satisfies the criteria articulated through the Supreme Court and, if so, bring the applying themselves (instead of leaving it to personal parties to do this). This discipline could also help to develop more transparent standards and principles when ever this extraordinary power is going to be available, helping to demarcate more clearly what exactly are issues of corporate law and directors’ duties, and just what are problems with “public interest” that warrant intervention through the commission.

Just out of the box the case with regards to the regulation of using poison pills, this discipline – and the consequential exercise of restraint through the commission (in its willingness to hear such applications) – should enhance the commission’s authority and credibility while strengthening the existing remedies available for breaches of directors’ duties under corporate-law statutes. As explained by Justice William O. Douglas, when he served as the first chairman from the U.S. Filing, “government should keep the shotgun, as they say, behind the door, loaded, well-oiled, cleaned, ready for use but with anticipation that it will never need to be utilized.”

Sean Vanderpol and Edward Waitzer, professor at Osgoode Hall School, are partners at Stikeman Elliott LLP.