The recent corporate scandals in the US have, among other things, focussed attention on the issue of the independence of directors generally. In Canada, in the recent Second Cup/Cara decision rendered by the Ontario Securities Commission (OSC), the OSC briefly highlighted the issue of independence with respect to special committee members and advisers.
In response to an unsolicited bid by Cara, Second Cup's directors formed a special committee. The OSC determined that the chair of the committee was a former classmate, long-time friend and business associate of a shareholder who was keen to defeat the Cara bid. The OSC also determined that counsel to the committee was a longstanding legal adviser to Second Cup and that if Cara's bid succeeded, his retainer would very likely cease. Finally, the OSC determined that the committee supported the reimbursement of the shareholder's expenses of C$100,000 ($68 000), for his efforts to advance a bid that would not be a permitted bid under Second Cup's poison pill.
In considering Second Cup's poison pill, the OSC stated that one of the underlying principles that emerges from the rules, policies and cases on shareholder rights plans (poison pills), is the required fiduciary duty of directors, members of a special committee of directors and their advisers. Adherence to this requirement should be reflected in conduct and recommendations that are based on the best interests of shareholders generally and not those of any group of shareholders, bidders, potential bidders or others. The OSC also held that it is of utmost importance that any adviser to a special committee be independent. Based on its findings, the OSC held that the special committee members were not motivated solely by the best interests of the shareholders and for that and other reasons the poison pill was not in the best interests of shareholders.
The concerns of the OSC in the Second Cup/Cara decision are reinforced by the definitions in the corporate governance proposals of the Toronto Stock Exchange in Canada and the New York Stock Exchange and NASDAQ in the US and by the Higgs Report in the UK as they relate to independent directors. These definitions can also be considered instructive for determining when an adviser is independent. With the heightened focus on defensive corporate governance and the pursuit of "best practices", boards of directors should bear in mind these definitions when establishing an independent committee and appointing advisers for such a committee. In the future, these definitions will collectively constitute the new standard for independence and may be used by third parties as guidance for evaluating the membership and decisions of a special committee.
Kathleen Ritchie and Nicholas Dietrich
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