Since starting this job, I have wanted to write a trend piece. Unfortunately, my thoughts on normcore and peplums don't seem much in demand, so I have to settle for the hot corporate law trend of the season: The "voting pill."
Like most trends, it's gone from something that only the cool kids know about to hitting the mass market, as major Canadian law firms and newspapers have written about the voting pill in recent weeks. This fringe trend looks like it is about to hit the mainstream.
What makes the voting pill such a desirable corporate accessory is that it is designed not just to thwart hostile takeovers, but to thwart activist investors who band together to attempt to oust a board of directors or influence corporate policy.
The pill operates by expanding the definition of "beneficial owner." Traditionally, shareholder rights plans, or "poison pills," define a "beneficial owner" as someone, or a group of persons working together, who acquires ownership over 20 per cent of a company's securities. This person then becomes an "acquiring person" and triggers a "flip in" event, where each non-acquiring person is given stock at a greatly discounted price, diluting the acquiring person's stake and making an acquisition prohibitively expensive.
A voting pill widens the definition of "beneficial owner" to include persons acting "jointly or in concert" (a term of art in Canadian law mostly meaning "working together") for the purpose of voting as "acquiring persons." While a voting pill will contain a number of exceptions to prevent routine proxy voting from triggering the pill, the ultimate effect is to bar activists from co-ordinating with one another.
You've got to admit, that's some sexy drafting. If you indulge this increasingly strained metaphor, sexy drafting is one thing; approval of Canada's fashion cognoscenti – read, the securities commissions – is another. So, will the commissions uphold the voting pill?
No, of course not, and that's the point. The voting pill is a way for boards to buy time, not a way for boards to stop proxy fights altogether.
On first pass, under Canada's securities laws, courts have consistently found that boards are allowed to pass by-laws regulating the ability of activists to coordinate. In Genesis Land Development v. Smoothwater, the Alberta Court of Appeals found that, for the purposes of Canada's early warning report regime, Canada's national policy addressing takeover bids also applied to activists working together during a proxy fight. Activists have to disclose the fact that they are co-ordinating if together they exercise control of more than 10 per cent of a company's voting shares. In Genesis Land v. Smoothwater, the remedy for the failure to disclose was a postponement of the meeting.
However, in this spring's dispute between Orange Capital and Partners REIT, the Ontario Superior Court examined the policy behind a company's advanced notice by-laws (by-laws requiring that nominees for a board be announced a certain number of days in advance). The court rejected an attempt by Partners to exclude Orange's directors through an ambiguous technical provision in the by-laws, finding that while such by-laws could be used prevent "ambushes," any ambiguity in the by-laws would be resolved in favour of shareholder choice.
Taken together, Smoothwater and Partners suggest that regulators may treat voting pills in a similar fashion to traditional poison pills by giving boards a period of time to engage with activists before cease trading the pill.
On the other hand, voting pills are distinguishable from advance notice by-laws and early warning reports, in that they directly limit shareholder voting and therefore run contrary to the "shareholder centric" securities regulatory regime. Hence, the Canadian Securities Administrators released guidance last year looking skeptically on pills that affect the ability of shareholders to vote or make proposals to the board.
Given that boards already have significant control over the proxy fight process – through advance notice bylaws and the ability to set meeting dates for the vote far in the future – and the detrimental effect of the pill on activists' voting rights, even the logic behind Smoothwater and Partners promoting powers that allow boards to even the playing field with activists, may not be enough to save the voting pill from being immediately cease traded if challenged.
Even if the voting pill is too much for regulators to stomach, it still functions as a delay tactic designed to put activists in front of regulators and a tactic to force activists to directly engage the board. The pill is expected to fail, but it's expected to fail after a process.
Which is, oddly, also kind of like fashion. Think of the voting pill as an offensive t-shirt worn to the first day of school. Yeah, you know you're going to be forced to take it off; the goal is to keep it on as long as possible in order to get your message out.
Adrian Myers