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Shareholder rights plans or poison pills are a common Canadian takeover bid defence strategy. Used properly, these plans buy target boards time to assess an unsolicited bid and, if necessary, seek alternatives beneficial to its shareholders. Used improperly, they can block a takeover bid and impede a shareholder's right to choose whether to sell its shares and to whom.

The Toronto Stock Exchange requires shareholders to ratify plans within six months of their adoption. As a result of institutional shareholder activism, shareholder approved plans now exclude or limit a number of previously seen provisions that could be used by target boards to preclude an unwanted bid. For example, the broad definition of beneficial ownership of target shares by a bidder was interpreted by a Canadian court to include the shares of a shareholder that was party to a lock-up agreement with the bidder. Shareholder approved plans now typically exclude third party shares subject to permitted lock-up agreements.

Shareholder approved plans are put in place in the normal course of business and typically have a lifespan of several years. In contrast, what are known as tactical pills are put in place in response to a specific unsolicited offer, and lapse within a short period (usually four to six months) if not approved by shareholders. Tactical pills generally grant target boards wider latitude to accept or reject a bid.

Canadian securities regulators have decided that while plans are not in themselves contrary to the public interest, all plans have a limited duration and in every bid the time must come for the plan to go. In determining when that time has come regulators will look at a number of factors including whether shareholder approval for the plan was obtained. Regulators will also consider the extent to which the plan allows the target board to thwart bids. Although each plan will be reviewed in the light of the particular circumstances of the bid, as tactical pills are not generally shareholder approved and give the target board a wider discretion to thwart a bid, the regulators may still be inclined to terminate a tactical pill more quickly than a shareholder approved plan.

Connie Sugiyama and Paul Fornazzari

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