Takeover Bid Defenses in the Province of Quebec
Sidney M. Horn*
INTRODUCTION
The takeover bid is a method of obtaining control of a corpora-
tion.’ The corporation, partnership or individual making the bid
solicits the shares of the corporation to be acquired, generally by
means of advertisements in newspapers and through letters to share-
* B.A., M.B.A., B.C.L. (McGill). I wish to extend my thanks to Joan Horn,
B.A., Ed.M., for her encouragement and untiring labour. I would also like to
thank Professor Yves Caron for his helpful comments.
1 The Quebec Securities Act, R.S.Q. 1964, c.274 as am. by S.Q. 1967, c.82; S.Q.
1967, c.17; S.Q. 1971, c.77; S.Q. 1973, c.67; S.Q. 1974, c.70 defines a takeover
bid as:
“… an offer, other than an exempt offer, made to shareholders the last
address of any of whom as shown on the books of the offeree company is
in the province of Quebec, to purchase such number of voting shares of a
company that, together with the offeror’s presently owned shares, will
in the aggregate exceed twenty per cent of the outstanding voting shares
of the company.” (s.113(g)).
I therefore use the term “control” not only to indicate absolute control by
holding fifty percent plus one of the voting rights, but also de facto control
resulting from the wide dispersion of the remaining shares among the other
shareholders of the company. Although it is possible that a holder of 20%
of the voting shares of a corporation will not have de facto control, in most
publicly-owned corporations such a result is unlikely. The Canada Corpora-
tions Act, R.S.C. 1970, c.C-32 as am. by R.S.C. 1970, c.10 (1st Supp.); S.C. 1970-
71-72; c.43 and c.63; S.C. 1972, c.17 defines a takeover bid as one where the
offeror’s ownership of the offeree company’s shares is increased to over ten
percent. Moreover, the offer need only be in respect of ‘equity’ shares and not
necessarily ‘voting’ shares; (s.135.1). The Canada Business Corporations Act,
S.C. 1974-75, c.33 substantially enlarges the definition in material respects
but refers to voting shares and other securities giving the right to acquire such
shares; (s.187).
For a treatment of the subject from the point of view of the law of the
United States, the reader may wish to consult the following articles: J. E.
Mullaney, Guarding Against Takeovers – Defensive Charter Provisions (1970)
25 The Business Lawyer 1441; M. M. Greenfield, Regulation of Contested Cash
Tender Offers (1968) 46 Texas L.R. 915; E. C. Schmults and E. J. Kelly, Cash
Take-Over Bids – Defense Tactics (1968) 23 The Business Lawyer 115; V.
Brudney, A Note on Chilling Tender Solicitations (1967) 21 Rutgers L.R. 609;
C. J. Barnhill, The Corporate Raider: Contesting Proxy Solicitations and Take
Over Offers (1965) 20 The Business Lawyer 763.
McGILL LAW JOURNAL
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holders, often enlisting the aid of stockbrokers to help publicize the
offer and solicit tenders. The advertisements or letters state that the
offeror wishes to purchase a specified number of shares at a stated
price2 and request shareholders who wish to accept the offer to
tender their stock by sending their endorsed certificates to a named
depository by a given date. Normally, the offer is conditional on
a certain number of shares being tendered and the offeror will
reserve the right to withdraw the offer if the required minimum
tender is not achieved? It is also common for the offeror to reserve
the right to purchase more than the stated minimum number of
shares if it so desires. The offer is usually priced substantially above
the current market price of the offeree company’s shares to induce
shareholders to tender their stock. Most successful bids have offered
shareholders premiums of a minimum of 30% to 40% above the
pre-bid market price. If the specified minimum number are tendered,
the offeror takes up ‘the shares and sends the shareholders their
payment.4
The advantages of a takeover bid over other acquisition, tech-
niques are its speed and relatively low cost. Mergers require lengthy
negotiations between the parties; proxy solicitation campaigns
usually endure many months and are rarely successful. On- the other
hand, voting control by’ means of ‘a ‘takeover bid can generally be
achieved within a few weeks. Moreover, the takeover bid method
provides a great tactical advantage in terms of.. the element of
surprise, making it an effective weapon against a complacent in-
cumbent management likely to oppose the bid. In comparison to
the proxy contest, ‘the costs of a takeover bid are relatively low.
The offeror need not pay for any shares until those needed for control
are actually tendered, whereas a proxy fight entails the slow accu-
mulation of shares in the open market and a costly and lengthy
solicitation campaign.
The causes which may precipitate a takeover’ bid are numerous.
Companies with low earnings, low dividends and consequently a
low market price for their shares are typical targets for a takeover
2The offeror may offer either cash or other securities in exchange for the
shares. This article, however, will focus on cash takeover bids.
3The Quebec Securities Act, supra, note 1, s.114 prohibits any condition
being attached to the offer other than a right of withdrawal should the
minimum tender not be achieved or should the board of directors of the
offeree company materially alter the ‘undertakings, assets or capital of the
offeree company subsequent ‘to the date of the. offer.
4Under the Quebec Securities Act, ibid.,, s.118(d), if more shares are deposited
than the offeror is bound or willing to take up, they must be taken up on a
pro rata basis.
1976]
TAKEOVER BID DEFENSES IN QUEBEC
attempt, as are companies which are excessively liquid or which
have a substantial amountof undervalued assets. Causes which may
be unrelated to the quality of the target company’s management
are the desire by the offeror to diversify vertically or horizontally
by acquiring a going concern, or merely the desire by a well-
financed group to acquire a business.
Most writers on the subject are in general agreement that the
takeover bid fulfills important economic functionsO To the extent
that business diversifications achieved by a tender offer are profit-
able, the takeover bid is a beneficial tool from an economic stand-
point. As a means of transfering control of a corporation, it tends to
promote efficiency in the employment of corporate assets, and to
increase management’s accountability to shareholders. Managements
are induced to employ assets efficiently to reduce the chances of a
takeover attempt and to retain the shareholder loyalty that is
necessary to defeat a potential takeover. An unsuccessful bid will
likewise promote managerial efficien&y ‘in order to avoid a, second
challenge.
In view of these benefits, the legislative approach adopted by
most securities laws has, been to, require full disclosure of all
relevant facts to enable shareholders to make rational -decisions,
without unduly inhibiting the use of the takeover bid as a corporate
acquisition tool. It. is for this reason that takeover bid circulars and
directors’ circulars need not be submitted to regulatory commissions
for prior approval since this could alert the management of the
offeree company to the bid ‘and destroy the element of surprise
necessary for a successful tender offer. Thus takeover bid legisla-
tion achieves a compromise between, the need to protect shareholders
and the need to retain the viability of the takeover bid technique.
To achieve this goal the legislators have carefully circumscribed the
conduct and regulated the disclosures of offerors. However, the con-
duct of the management and board of directors of the offeree com-
pany has not been statutorily regulated. It is only if the board of
directors chooses to recommend acceptance or’ ejection-of the offer
that full disclosure is required on their partO Moreover, the tactics
used by incumbent management to defend against the bid are not
regulated per se. Certain conduct may be prohibited by the common
law; other tactics may be illegal” under the relevant securities or
company laws. Many defense tactics are, however, legal. To the
extent that the latter are utilized by management in order to
5See e.g., V. Brudney, supra, note 1.
Securities Act, supra, note 1, s.129.
McGILL LAW JOURNAL
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challenge a takeover bid to the detriment of the company or the
shareholders’ proprietary interest in their shares, the appropriate
legislation should circumscribe their use. Such regulation of other-
wise legal manoeuvres when used to the detriment of shareholders
in a takeover bid situation would significantly improve the pro-
tection provided by our securities laws.
It is the object of this article to discuss some of the defense
tactics available to management, to determine the legality of these
manoeuvres under the common law and relevant statutes and,
where appropriate, to outline the policy considerations which should
govern their regulation. The article will focus on the Securities Act 7
and the Companies Act 8 of Quebec, and the federal Canada Corpora-
tions Act’ and the Canada Business Corporations Act.10
DEFENSE TACTICS
The incumbent management’s defense weapons may be con-
veniently categorized into anticipatory defense tactics and remedial
defense tactics. Tactics of the anticipatory type are generally designed
to make the offeree company less attractive to a potential offeror.
Remedial tactics on the other hand are usually employed after the
announcement of the bid, to impede the offeror’s acquisition of
control.
Managements which are alerted to a takeover attempt prior to its
announcement gain a strong tactical advantage by neutralizing the
element of surprise. It is therefore important for management to
adopt anticipatory measures which should include the development
of a defense plan in advance, regular scrutiny of the trading activity
in the company’s stock (unusually heavy volume may indicate that
an offeror is beginning to take a position in the stock) as well as
periodic reviews of the company’s share register to determine if large
holdings are being accumulated.
A. Anticipatory tactics: Making the offeree company less attractive
1. Improving poor performance
Management should attempt to correct any characteristic which
may render the company vulnerable to a takeover attempt. Professors
*1 Supra, note 1.
8 R.S.Q. 1964, c.271 as am. by S.Q. 1965, c.72; S.Q. 1968, c.72; S.Q. 1969, c.26;
S.Q. 1972, c.61; S.Q. 1973, c.65.
9 Supra, note 1.
lo Supra, note 1.
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TAKEOVER BID DEFENSES IN QUEBEC
Hayes and Taussig have concluded that “the typical subject com-
pany has exhibited disappointing operating performance, paid de-
creasing dividends and is excessively liquid”.” These characteristics
will normally result in a depressed market valuation of the com-
pany’s shares. On the other hand, a depressed share price may be the
result of poor communications between management and investors
and a public relations program may therefore be an effective tool.
2. Changing accounting methods
Management may alter accounting practices to affect operating
performance. and asset book values while nevertheless conforming
to generally accepted accounting principles. For example, during
inflationary periods the FIFO method of inventory valuation will
result in greater accounting profits than the LIFO method.’ Over-
conservative accounting methods may make a corporation more
vulnerable to a successful takeover by understating profits and asset
values. A high ratio of tender-offer-price to book value per share
will make the bidder’s offer seem more attractive to shareholders
than if shareholders were better informed of the real value of the
company’s assets. For example, a shareholder of a real estate com-
pany would be less likely to tender his shares at $100 even if book
value per share were $70, if he were aware that the assets of the
company were appraised at $250 per share.
Management should note however that frequently changing and
overly liberal accounting practices may tend to erode investor con-
fidence in the veracity and capabilities of the incumbent manage-
ment, resulting in the very thing they are trying to avoid –
a de-
pressed market value for the company’s stock. The tactic may at
times therefore turn out to be counter-productive and the best course
of action may be for management to adopt other means of informing
shareholders of the intrinsic value of their investment.
Bus.Rev. 135. ‘
11 S. Hayes and R. Taussig, Tactics of Cash Take-Over Bids (1967) 45 Harv.
‘2 The FIFO method of inventory valuation proceeds on the assumption that
the first units received into inventory are the first to be sold, and that the
last units received are still in inventory at the end of the accounting period.
Thus, during a period of rising prices, it is the cost of earlier and therefore
cheaper units which will be deducted from sales to determine income. The
LIFO method assumes that units are sold in reverse order of receipt into in-
ventory. Thus, during an inflationary period, it is the cost of later and there-
fore more expensive units which are deducted in the process of income
determination. See M. Gordon and G. Shillinglaw, Accounting: A Management
Approach (1969), 358 et seq.
McGILL LAW JOURNAL
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3. Restrictive contracts
Another tactic des-igned to make the corporation unattractive to
an offeror is to negotiate new or amend existing contracts to provide
for penalties, acceleration or renegotiation in the event that control
is acquired by outside interests. Such clauses could be inserted in
loan agreements, supply contracts, collective bargaining agreements
and leases. Alternatively, management could enlist the aid of sup-
pliers, institutional lenders, labour leaders and landlords to inform
the offeror that they do not favor the change in control and that
their relationship with the target company or perhaps with the
offeror (if such relationship exists with the latter) would be reap-
praised should the bid succeed. Where the continued- success of the
target company is dependent upon continuous, reliable and amicable
relationships with silppliers, lenders, labour or lessors, such tactics
could deter the offeror. However, if the offeror. is able to renegotiate
the-target company’s contracts, for example refinancing its’loans on
favourable terms, the tactic will be: unsuccessfuL,
The ethics of such contractual restrictions are certainly dubious.
Most would view such’action as an attempt by incumbent manage-
rhent to preserve their offices and perquisites at the expense of
the ‘interests of the company and its shareholders. In’ addition, the
legality of such action is questionable. At dommon lawI3 as well as
under section 117(1) (a) of the Canada Business Corporations Act,’ 4
it is the duty of directors to act honestly and in good faith with a
view to the best interests of the corporation. However, if the parties
to the contract honestly believe that a takeover would be harmful
to the company, there can be legal justification for such amendments.
Furthermore, where the restrictive covenant is included in the con-
tract at the request of the other party, for example the lender –
the loan being entered into in reliance on the integrity and expertise
of the company’s present management –
there may be no legal
grounds for complaint since the clause ostensibly has a legitimate
business purpose and is apparently being imposed upon the com-
pany’s management. However, if the restrictive provision is in-
corporated into the agreement at the request of the target’s manage-
ment, such an arrangement may be yiewed as an attempt by in-
cumbent management to perpetuate itself in control, Unless man-
agement can prove that they honestly and reasonably believed that
13 Regal (Hastings) Ltd v. Gulliver [1942] 1 All E.R. 378 (H.L.); Zivicker v.
Stanbury [1953] 2 S.C.R. 438; Canadian Aero Service v, O’Malley [1974]
S.C.R. 592, 40 D.L.R. (3d). 371.
‘4 Supra, note 1.
19761
TAKEOVER BID DEFENSES IN QUEBEC
the takeover would be harmful to the offeree company, the officers
and directors would be subject to liability for damages if, for exam-
ple, the company’s loan is called. The inclusion of such a restrictive
provision would then be clearly inconsistent with -the duty of di-
rectors and officers to avoid conflicts of duty and self-interest and
to act in the best interests of, their company.5 The action in damages
would belong to the company although a derivative action by a’
shareholder (even by the offeror if it owns shares at the time the loan
is called) is available if the company refuses to, sue. 6″
4. Restrictive charter and by-law provisions
Companies which are particularly prone to takeovers because of
depressed stock market conditions or because they possess the
characteristics mentioned above, may alter their charter or by-laws
to obstruct an offeror’s ability to gain’ control ‘of their operations.
The mere possibility Of such ‘delays may discouirage a potential
offeror.
A tactic which is used ‘frequefitly in the United States is to
amend the by-laws to increase the number of shares required to
call a special meeting_ of shareholders, for example ‘to 80%.”7 This
tactic is clearly illegal in Quebec. Section 96(1) of the Quebec
Companies Act 18 and section 103(1) of the Canada Corporations Act 9
contain provisions empowering the holders of 10% of the voting
shares to requisition’ a special general meeting’ The Canada Business
Corporations Act reduces the required percentage to five.20 How-
ever, in spite of these provisions, the same result may be obtained by
increasing the quorum necessary for shareholders’ meetings, for
1 See e.g., Zwicker v. Stanburry, supra, note’ 13 and Canadian Aero Service
v. O’Malley, supra, note 13. Although these cases deal with directors reaping
private profits, the principle elicited is that directors’ self-interest in patri-
monial matters must be subordinated to the interests of their company. See
also the Canada Business Corporations Act, supra, note 1, s.117(1)(a).
16 Tl’e Canada Business Corporations Act, ibid., s.234 piovides for a derivative
action for federal companies incorporated or continued under it’ For com-
panies provincially incorporated under the law of Quebec, and those incor-
porated under the Canada Corporations Act, supra,, note 1 and not continued
under the Canada Business Corporations Act, the availability of a derivative
action is doubtful. However, in the case of Legacd v. Legacg [1966] C.S. 489,
the Superior Court, iunder
(ari33 C.C.P.),
allowed a derivative action as a remedy to the abuse of rights by those ‘who
were in control of the corripany.
their superilitending powers
17J. E. Mullaney, supra, note 1, 1460.
18 Supra, note 8.
19 Supra, note 1.
2o Supra, note 1, s.137(1).
McGILL LAW JOURNAL
[Vol. 22
example requiring 90% of the voting rights to be present. The board
of directors may adopt such a “super-quorum” by-law without the
prior approval of shareholders. 21 It will be effective from the date
of the resolution of the board of directors and will cease to have
effect, unless confirmed in the interim, at the next annual meeting
of shareholders.22 Thus the offeror shareholder may requisition a
special general meeting but the super-quorum requirement could
indefinitely prevent its occurrence. The provision could also prevent
the annual meeting from being one at which business can be trans-
acted.
Even if the super-quorum by-law is rejected by the shareholders
at a valid special or annual meeting, or otherwise ceases to have
effect, there is nothing to prevent the directors under the Quebec
Companies Act and the Canada Corporations Act from reenacting it
immediately and repeating the process. Such a by-law will cause an
offeror substantial delay and may postpone indefinitely his ability to
gain control of the company’s operations.
However, the power of directors to enact a super-quorum by-law
is circumscribed by the Canada Business Corporations Act. Under
section 98(4), if the by-law is not submitted to shareholders, or is
rejected by them, it ceases to be effective, and any reenactment of
the by-law, or one that is substantially similar, will be ineffective
until confirmed by the shareholders. Section 98(5) provides that
shareholders may initiate the enactment or repeal of by-laws. More-
over, section 234 provides that a shareholder may apply to the court
for an order to amend the articles or by-laws of the corporation on
the grounds that the powers of the directors are being exercised
oppressively or in a manner that unfairly disregards lhis interests.
Thus under the Canada Business Corporations Act it is more difficult
to postpone indefinitely the offeror’s acquisition of operating con-
trol. However, these limitations do not really reduce the effectiveness
of the super-quorum by-law as a defense tactic, since the substantial
delay possible, for example to obtain a court order, may nevertheless
deter an offeror.
It has been suggested that the directors’ power to adopt by-laws
which are effective prior to shareholder approval should be limited
to those concerning the operation of the company’s business affairs,
and to require shareholder approval as a condition precedent to the
21See the Canada Corporations Act, supra, note 1, s.94(e),
the Canada
Business Corporations Act, supra, note 1, s.98(1) and the Quebec Companies
Act, supra, note 8, s.88(2)(e).
22See the Quebec Companies Act, supra, note 8, s.88(3) and the Canada
Corporations Act, supra, note 1, s.95.
19761
TAKEOVER BID DEFENSES IN QUEBEC
effectiveness of those affecting the position of shareholders vis-&-vis
the company.2
It is submitted that the Quebec Securities Act and
Canada Business Corporations Act should specifically prohibit the
enactment of a super-quorum by-law after a takeover bid is an-
nounced and should render inoperative a preexisting one during the
currency of the bid, and for a certain time after the expiry of the
offer. This would enable the offeror who has acquired voting control
to gain operating control as well. The effect of the by-law is to
deprive shareholders (including the offeror) of a voice in the conduct
of their company’s affairs and its enactment in most cases is
clearly an abuse of the directors’ powers.
Another anticipatory defense tactic is the amendment by the
board of directors of the company’s charter to create an issue
of preferred shares having disproportionately large voting rights.
The company may then make an acquisition of another company
using the preferred shares, or otherwise place the shares in friendly
hands thereby making it more difficult for an offeror to gain
control of the company’s operations.
The directors of the offeree company may also propose an
amendment to the company’s charter to limit the number of votes
which may be exercised by any one shareholder or his associates.
This tactic will certainly deter a potential offeror, since having
obtained a majority of the shares he will not be able to exercise the
voting power commensurate with his holdings. However, the adoption
of restrictive voting provisions runs the risk of alienating institu-
tional investors, thereby depressing the market price of the com-
pany’s shares. Whether the courts would strike down the amend-
ment as an oppression of the minority or as an abuse of rights or
bad faith on the part of the directors is uncertain. As mentioned
above, under section 234 of the Canada Business Corporations Act,
a shareholder may apply to the court for an order to amend the
articles if the directors are exercising their powers in an oppressive
manner. However, more specific regulation of the use of this defense
tactic in a takeover bid situation is necessary.
One of the most effective deterrents to a potential offeror is to
amend the company’s charter to provide for the staggering of the
directors’ terms of office. This is a tactic used frequently both in
Canada and the United States. Only a portion of the board will stand
for election in any given year and this can delay for several years
an offeror’s ability to elect a majority of the board even though he
owns a majority of the shares. This tactic will be ineffective if the
23 P. Anisman, Take Over Bid Legislation in Canada (1974), 278-279.
McGILL LAW JOURNAL
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relevant statutes or, the company’s charter provide for the removal
of directors during their terms of office. The Quebec Companies Act
and the Canada Corporations Act contain no such provisions. How-
ever, section 104(1)’of, the Canada Business Corporations Act does
allow shareholders to remove a director prior to the expiry of his
term.
B. Remedial tactics: Making acquisition of control more difficult
The measures described below are normally taken after the bid
has been announced. They may be conveniently divided into two
categories: tactics intended to induce shareholders not to tender
their shares a’nd those aimed at foiling the bid regardless of the
shareholders’ wishes. From a policy viewpoint the latter measures
should be :rigidly circumscribed by law since they constitute an
undue interference in ‘a matter which, in general terms, concerns
the shareholders and outsiders. The gap between management and
ownership may result in management taking measures to preserve
their offices which are opposed to the will of shareholders and which
operate to the detriment of their rights and proprietary interest in
their shares. There is not so much need for regulation of the former
situation since there, in the final analysis, the decision .is left in the’
hands of the shareholders.
I. TACTICS TO INDUCE SHAREHOLDERS NOT TO TENDER
1. Shareholder communications
Perhaps the most typical, and often the most effective, means of
thwarting a takeover is for management to launch an aggressive
publicity and communications campaign aimed at dissuading share-
holders from tendering shares by arousing uncertainty as’ to the
adequacy of the tender-offer-price, and sometimes by appealing to
loyalty and patriotism. The assault will include’ advertisements in
the press and direct contact through letters, telegrams, telephone
calls and the directors’ circular.
The target company’s statements will normally emphasize the
past progress and future potential of the company under its present
management. The specific nature of the company’s response will be
influenced by whether the offer is for cash or securities. Where the
consideration is securities, the target may attack the intrinsic value
of the securities, their potential forappreciaition and their market-
ability, as well. as the potential of the offeror’s business and the
adverse effects which the change of control may have on the target’s
business. Regardlessof the form of consideration, management may
-1976]
TAKEOVER BID DEFENSES IN QUEBEC
,allege: (i) the inadequacy of the, consideration being-, offered in
relation to book value or recent market values or to the future
potential of the company; (ii) that brokers who are encouraging the
shareholder to tender are being paid fees for their efforts; and (iii)
the tax consequences of the transaction. Shareholders will also be
informed of the defensive measures that the company is adopting
and that management has decided not to tender any of its shares’.
The Quebec Securities Act imposes certain time limitations re-
garding a tender offer. The Act provides that-every takeover bid must
remain open for a minimum of twenty-one days and shares de-
posited may be. withdrawn until the expiration of seven days from
the date of the offer. If the offeror varies the terms of the offer,
the seven -day withdrawal period is renewed 4 Where the offer is for
less than all voting shares, the offeror may not take up deposited
shares until the expiration of twenty-one days from the date of’the
offer. 5 If the offer is for all voting shares, the offeror cannot take
up any shares prior’ to the expiration of the initial seven-day period
of the offer.2 6
The imposition of, time requirements recognizes- that a takeover
bid gives rise to a need on. the part of shareholders for information
concerning their company and for time to assess. the. merits. of, the
bid in the light, of the company’s prospects and their own- financial
circumstances. The requirements therefore serve ,the. dual purpose
p giving the, directors of the target company time to :analyze a, bid
and, communicate with shareholders, and giying shareholders time to
assess information proyided by the, offeror and their company’s
management, and so reach a reasoned decision.
The Quebec Securities Act imposes. disclosure requirements on-the
offeree company’s directors only if they choose to make a recom-
mendation to shareholders regarding acceptance or rejection. of
the’bid. Disclosure is made through a directors’ circular containing
prescribed information. Thus a defense plan by incumbent manage-
xnent will usually include the drawing up Qf such a. circular as a
necessary incident to a communications campaign. The Act requires
that it be sent to shareholders “together” with the board’s re-
commendation. 7 This requirement may therefore impliedly prohibit
24 Supra, note 1, ss.115 and 116.
25 Ibid., s.118(a).
26 Ibid., s.115.
27 Ibid., s.129, and s.39 of the Regulations under the Securities Act, Reg.
73417, 30 July 1973, O.C. 2745-73, 25 July 1973, 105(24) Q. Off. Gaz., Part II,
4425 (Aug.8, 1973) as am. by Reg. 73-550, 5 November 1973, OQ. 3963-73, 31
October 1973, 105(31) Q. Off. Gaz., Part II, 5813 (Nov.14;.1973) ,and Reg. 74-172,
McGILL LAW JOURNAL
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oral recommendations, although this interpretation is not free from
doubt.
28
The directors may be exposed to possible liability as a result of
the nature and content of the statements made in the directors’
circular. It is an offense under the Quebec Securities Act to know-
ingly send out a directors’ circular if it contains or omits any
material information that makes the circular false or misleading. 2
The directors will have the burden of proving that they did not
know, and in the exercise of reasonable care could not have known,
about the untruth of the information or the fact of the serious
omissions If they fail to do so, they will be subject to the penalties
prescribed by section 84 of the Act.
The incumbent management of the target company, by under-
taking any facet of a communications campaign, incurs the risk of
liability for false representation both under statute and under the
Civil Law. The Securities Act defines as “a fraudulent act” any in-
tentionally false misrepresentation of a material fact or its deliberate
non-disclosure, as well as unreasonable assertions made in bad faith
respecting the future of the company and deliberately false declara-
tions in a directors’ circular.” These fraudulent misrepresentations
are punishable under the Securities Act unless they entail criminal
liability, 2 in which case the provisions of the Criminal Code con-
cerning fraud and false pretenses will apply2 3 Article 1053 of the
Civil Code will impose liability in damages on directors for negligent
misstatements causing damage to shareholders. In addition, section
94 of the Quebec Securities Act provides that directors may forfeit
their offices if they are guilty of misconduct or seriously remiss in
the performance of their obligations under the Act, or resort to
practices tending to depreciate the value of the company’s shares.
As can be seen from the foregoing, a communications campaign,
although an effective tool, may impose liability on the directors. They
should therefore take care not to exaggerate the company’s pros-
pects or make other statements which could expose them to legal
action.
3 April 1974, O.C. 1260-74, 3 April 1974, 106(9) Q. Off. Gaz., Part II, 1609
(Apr.24, 1974).
28 P. Anisman, supra, note 23, 243.
29 Supra, note 1, s.137(b).
30 Ibid., s.138.
3 ‘Ibid., s.35(a), (b) and (h).
=s Ibid., s.84.
33 R.S.C. 1970, c.C-34, ss.319, 320 and 338.
19761
TAKEOVER BID DEFENSES IN QUEBEC
2. Dividend increases
A common defensive response to a takeover bid is to discourage
shareholders from tendering their stock by increasing the dividend
rate or declaring an extra dividend. The desired effect is two-fold:
firstly, to give shareholders greater confidence in the intrinsic and
potential value of their shares, thereby influencing them not to
tender; and secondly, to drive up the price of the company’s shares
by increasing the dividend yield, and so reduce the tender-offer
premium, making the offer less attractive. In addition, an extra
dividend will decrease excess liquidity which may be important in
discouraging an offeror, since the target company’s liquidity may be
one of its reasons for attempting a takeover. If the dividend rate is
increased, it may provide some assurance that after the expiration
of the offer the market price of the company’s shares will remain
near the level to which the announcement of the tender-offer-price
has caused it to rise. However, if earnings do not keep pace with the
dividend increase and an eventual reduction in the dividend is
required, management’s credibility will be damaged and investor
confidence seriously eroded. The price of the company’s shares may
decline significantly, especially if financial institutions dispose of
their holdings.
Furthermore, a dividend payment presupposes sufficient retained
earnings to cover it. If directors declare and pay a dividend that
impairs the capital of the company, they will be jointly and severally
liable to the company for the amount of the dividend34 A change
in dividend policy may also have unacceptable consequences for the
company’s financial resources; liquidity may be impaired (although
not to the point of insolvency), thereby damaging its creditworth-
iness with suppliers and lenders; profitable investment projects may
have to be foregone or delayed. The company’s loan agreements will
probably contain dividend payment restrictions in the form of
working capital and/or earnings tests which must be met before
specified payments can be made. The payment of a dividend in
breach of these tests amounts to a default and will result in the
loans being called. Thus directors may find themselves in breach
of their duty of care and skill to the company and of their duty to
act in the best interests of the company, 35 exposing themselves to an
34Canada Business Corporations Act, supra, note 1, s.113(2)(c); Canada
Corporations Act, supra, note 1, s.85(5); Companies Act, supra, note 8, s.91;
this last Act renders the directors liable to shareholders as well.
35 The directors’ duty of care and skill under the common law is illustrated
by the leading cases of In re National Bank of Wales [1899] 2 Ch. 629 and
In re City Equitable Fire Insurance Co. [1925] Ch. 407. See also Canada
McGILL LAW JOURNAL
[Vol. 22
action in damages by the company or to a derivative action by
shareholders2 6
3. Stock splits or stock dividends
A mere pro rata increase in the number of shares owned by each
shareholder might be expected to have little effect on the outcome
of altakeover bid. However, this tactic capitalizes on the peculiarities
of investor psychology; many investors view such declarations, as
extra dividends. The target company may benefit from the confusion
created in the minds of shareholders as to the price they will receive
should they decide to tender their stock. When the tender-offer-price
is adjusted to account for the increase in shares outstanding, the
premium offered may appear less attractive since it Will naturally
be’ fewer dollars per share. The ability of management to declare
a stock dividend will, however, depend on the corporation having
sufficient authorized but unissued common stock. The use of this
tactic does, of course, raise some ethical questions.
4.” Proposed rights offering
Evaluation of the merits of the bid will be disrupted if manage-
ment announces to shareholders that it plans to issue new equity
,first to stockholders ,of record at a certain date. The value of the
rights will depend on subsequent negotiations and determinations
and hence an additional element .of uncertainty as to, the value of the
tender-offer is introduced. However, management should not make
such an announcement unless it intends to make the distribution. A
subsequent failure to issue the rights, without proper financial
justification, could entail liability in damages to the company (for
breach of duty, of care), and to shareholders (for negligent or
fraudulent, misstatements)!.
5. Repurchase of shares
Purchases by a corporation of its own shares, if permitted, tend
to increase the price of ‘the stock, making the tender-offer-price less
attractive, and to remove stock from shareholders who might have
tendered their shares. A disadvantage is that such purchases reduce
the amount of outstanding shares and therefore reduce the number
needed by the offeror to achieve control.
Business Corporations Act, supra, note 1, s.117(1)(b) and the cases cited
,supra, note 15.
3GSupra, note 16.
19761
TAKEOVER BID DEFENSES IN QUEBEC
The case of Trevor v. Whitworth1 established the principle that
a corporation may not deal in its own shares. However, section 32(1)
of the Canada Business Corporations Act 3 8 allows a federally in-
corporated company to acquire shares issued by it provided that
such purchases do not render the company insolvent or reduce the
realizable value of its assets to an amount less than the sum of its
liabilities and stated capital.
The illegality of common share repurchases by companies in-
corporated under the Quebec Companies Act 9 and the Canada Cor-
porations Act 40 can be circumvented by having employee pension
funds, management or other friendly parties make open market
purchases of the company’s shares. This not only achieves the same
result but eliminates the need for the target company to use its own
funds and increases the number of shares the offeror needs to
acquire control, in contrast to the situation when repurchases are
made by the company itself.
Large-scale open market purchases by the target corporation or
third parties do create some legal problems. Such purchases may
be held to be a fraudulent manipulation of the public market price
of stocks, contrary to section 338(2) of the Criminal Code.’ Mani-
pulative repurchases may also be an offense under section 35(i) of
the Quebec Securities Act. If the repurchases are undertaken by a
stock brokery the broker and/or its salesman43 run the risk of
losing their registration under section 25a of the Securities Act
should the Commission conclude that it is manipulative, abusive or
unethical, thereby impeaching the “integrity” of the registrant: 4 If
the directors of the company authorize a repurchase program which
is clearly not in the best interests of the company due to its financial
position at the time, they may be in breach of their duty of skill and
care and their fiduciary duties, and hence liable in damages .”
Notwithstanding the risk of liability, open market purchases by
the company, its management or friendly third parties may foil the
37 (1887) 12 A.C. 409.
3 8 Supra, note 1.
39 Supra, note 8.
40 Supra, note 1.
41Supra, note 33.
42As defined by the Securities Act, supra, note 1, s.1(4).
43As defined by the Securities Act, ibid., s.1(12).
44 Regulations under the Securities Act, supra, note 27, s.2(a) and the
Commission des Valeurs Mobili~res du Qu6bec, Policy Statement no. 17,
decision no. 2936, Aug.6, 1972 as revised, s.III-c and Policy Statement no 21,
decision no. 3785, Oct.1, 1973 as revised, arts.7.10.1.1 and 7.17.
4r Supra, notes 15 and 35.
McGILL LAW JOURNAL
[Vol. 22
takeover bid. The market for the company’s securities may be thin,
and these purchases may drive up the price of its shares substan-
tially (even above the tender-offer-price). Thus shareholders, al-
though possibly deprived of the takeover bid premium, nevertheless
have an opportunity to sell their shares in the market at a signi-
ficantly higher price. Although one may be tempted, from a policy
viewpoint, to advocate the prohibition of repurchase programs
during the currency of a takeover bid, the best interests of share-
holders may be better served by merely tightening disclosure require-
ments.46 The Securities Act requires persons or companies who own
shares carrying more than 10% of the voting rights of a corporation
to report their interest within 10 days of the end of the month in
which they become insiders.4
7 In the context of a takeover attempt,
this disclosure requirement is insufficient. The offeree company’s
shareholders should be able to make the decision as to whether to
tender their stock with full knowledge of all the facts. A repurchase
program by management is a relevant fact, not only because the ob-
ject of the program is to thwart the bid, but also because its effect
will be to increase the market price of the stock. Shareholders will
not know why the stock’s market price has risen until a 10% share-
holding has been accumulated and the disclosure requirement is
triggered. Moreover, it may be possible to increase significantly the
price of the stock by purchases which fail to amount to a 10%
shareholding. Thus disclosure requirements should be tightened to
oblige management to report its intention of undertaking a repur-
chase program and the purpose of the program.48 The disclosure
should be made in the directors’ circular or through any other means
of direct written communication. This will give shareholders an
opportunity to evaluate the alternative courses of action open to
them: they may dispose of all their shares in the market at the
repurchase-program induced higher price or they may tender their
shares and receive (perhaps) an even higher price. The latter course
of action runs the risk that the bid will fail or that if more shares
are tendered than the offeror is obliged to acquire, the shareholder
will have only a pro rata portion of his holdings taken up.
An alternative policy approach is to require that all repurchase
programs undertaken during a takeover bid be authorized by a by-
law which has no effect until it has received shareholder approval.
46 See P. Anisman, supra, note 23, 296.
47Supra, note 1, s.142.
48 For an extensive discussion of this point see P. Anisman, supra, note 23,
296-299.
1976]
TAKEOVER BID DEFENSES IN QUEBEC
II. TACTICS TO PREVENT TAKEOVER REGARDLESS OF THE WILL OF
SHAREHOLDERS
1. Large-scale selling of offeror’s shares by third parties
Where a takeover attempt is made by means of an exchange offer,
a decline in the market price of the offeror’s securities will result
in a corresponding reduction in the value of the exchange package
offered to the target company’s shareholders. If the extent of the
decline is substantial and the offeror is unwilling to increase the
consideration paid to offeree shareholders, the bid must inevitably
fail. One possible but little used tactic therefore, is for the target
company’s management to bring about this situation by inducing
friendly financial institutions to sell the offeror’s shares, or by
launching a detrimental rumor campaign regarding its business
affairs. Needless to say, such manipulative trading practices are not
only unethical in the extreme, but run the risk of criminal liability as
well as liability in damages or for offenses under the relevant
securities legislation.
2. Taking legal action
Legal proceedings, although rarely resorted to in Canada, may be
an effective means of aborting a takeover attempt.4 9 The result may
be achieved by causing the offeror significant delays, by impressing
upon it that a successful bid will require prohibitive legal expenses
and protracted litigation or representations to regulatory bodies.
Support for the offeror’s bid in the eyes of its shareholders may
be eroded as a result of the threat of such proceedings.
There are various ways in which this tactic may be employed. The
target company may lodge a complaint with the Securities Com-
mission under section 36 of the Quebec Securities Act alleging that
an offense or fraudulent act has been committed, for example a
failure to disclose a material fact in the offeror’s takeover circular.
The Commission may then launch an investigation. Management may
persuade the Attorney General to intervene on its behalf in relator
proceedings, to seek an injunction under the Combines Investigation
Act on the grounds that a successful takeover bid will have anti-
49 P. Anisman states that there is no recorded instance in Canada of defend-
ing directors resorting to the courts or to regulatory bodies to thwart a bid;
supra, note 23, 286. However the tactic is used regularly in the United States.
A recent example of an unsuccessful application by directors to the courts to
stop a bid is the takeover of Texasgulf by the Canada Development Corp.
McGILL LAW JOURNAL
[Vol. 22
competitive consequences.” The target company may even go so far
as to take over another company in order to create a situation
whereby if the offeror’s takeover attempt is successful, serious anti-
competitive consequences will result. The use of this last tactic is
rare since the time required to effect another takeover would
normally be too long.
If the offeror is a foreign-controlled corporation, the takeover
bid may fall under the provisions of the Foreign Investment Review
Act 5 which require that the offeror give prior notice of the bid to
the Foreign Investment Review Agency 2 and’ demonstrate that the
acquisition of control will be of significant benefit to Canada. 3
The operation of the Foreign Investment Review Act in the province
of Quebec gives the target company’s management a number of
opportunities to defend against a takeover bid. Management may,
under certain circumstances, make representations to the Federal
Minister of Trade and Commerce under sections 9(b) and 11(3) of
the Act to the effect that the takeover will not be of significant benefit
to Canada. 4 The Governor in Council may refuse to allow the take-
over, and the Act does not provide for an appeal from his decision.
50 R.S.C. 1970, c.C-23 as am. by S.C. 1974-75, c.76. A relator action is an action
brought by the Attorney General at the instance of some other person. It is
really a form of procedure which will lead to a certain remedy, in this case
an injunction. Where the Attorney General intervenes at the instance of a
private citizen, questions of legal standing to seek the desired remedy cannot
be entertained by the court since the Crown has the power (and perhaps the
duty) to see that the law is obeyed. The Attorney General has the absolute
discretion as to whether he will intervene; see H.W.R. Wade, Administrative
Law 3d ed. (1971), 124. The target company itself has no standing to seek an
injunction under the Combines Investigation Act; ss.29.1 and 30(2) provide
only that the Attornies General may seek an interim injunction or an injunction
to prevent a “merger” (as defined by s.2 of the Act). However, if the takeover
will obviously have serious anticompetitive consequences, it is likely that the
Attorney General will intervene in injunctive proceedings at the relation of
the target company. S.31.1 of the Act further provides that any person who
has suffered damage as a result of a merger may sue and recover from the
offeror the amount of the loss suffered.
51 S.C. 1973-74, c.46.
52 Ibid., s.8(1).
53 Ibid., s.9.
5 Representations by the offeree company are possible only if the offeror
has announced its intention to make the bid. Otherwise, the fact of the
offeror’s application will be kept secret unless the Minister finds it necessary
to consult with the target company under the circumstances set out in
s.11(3)(b) of the Act. In many cases, the Minister will seek representations
from the parties. Thus the operation of the Act makes a surprise takeover bid
unlikely and promotes agreement between the target and the foreign-con-
trolled offeror.
1976]
TAKEOVER BID DEFENSES IN QUEBEC
Section 114 of the Quebec Securities Act prohibits conditional take-
over bids, save for the two exceptions mentioned therein.5 Hence
an offeror cannot make a bid conditional upon approval being
obtained from the Governor in Council under the terms of the
Foreign Investment Review Act. Thus the offeror has two alternative
courses of action. First, it may proceed with the takeover without
obtaining prior approval. However, should the takeover subse-
quently be disallowed, the offeror will have to divest its holdings
of the target’s shares.” The divestiture may be at a lower price than
the tender-offer-price and the expense and time invested in the bid
will have been in vain. The offeror’s management will be severely
criticized by its shareholders. The second and most usual course of
conduct is for the offeror to announce its intention to make a bid
should it obtain the necessary approval. It then seeks the approval
of the Governor in Council and subsequently launches its bid. This
course of action clearly eliminates the element of surprise since the
target’s management will have many months to prepare a defense
to the bid. In fact, the Act tends to discourage the making of a bid
when the target’s management is in opposition. Without the consent
of management, it is unlikely that the offeror will be able to gather
sufficient information concerning the offeree to convince the Minister
that its acquisition of control will be of significant benefit to Canada.
Thus the operation of the Foreign Investment Review Act in the pro-
vince of Quebec gives the target company’s management a significant
tactical advantage and reduces the offeror’s prospects of success in
a contested takeover bid. It is submitted that section 114 of the
Quebec Securities Act should be amended to permit takeover bids
which are conditional upon obtaining approval from various regula-
tory bodies and government agencies.
It is also possible, although improbable, that where the target
company initiates legal action, an irate stockholder of the offeror
might bring a derivative action against the directors of the offeror
challenging the takeover bid. The plaintiff could allege the defensive
measures taken by the target’s management and argue that these
can only end in a long and expensive legal battle resulting in a
waste of the company’s assets, and other harmful consequences. This
may succeed in alarming the offeror’s board of directors sufficiently
to prompt it to abandon the offer.
55 Supra, note 3.
56 Foreign Investment Review Act, supra, note 51, s.20(2).
McGILL LAW JOURNAL
(Vol. 22
3.
Increasing outstanding stock
The tactic of increasing outstanding shares has a threefold
purpose:
(i) to make it more difficult and expensive for the
offeror to obtain tenders of sufficient shares to exercise control,
particularly where the shares are placed with friendly third parties;
(ii) to increase the offeror’s risk by rendering the minimum number
of shares which it is obligated to take up under the terms of its
offer insufficient for the desired control; and (iii) to dilute any
share interest the offeror may have acquired prior to the announce-
ment of the offer. On the other hand, the tactic will tend to increase
the company’s liquidity and thus enhance its attraction as a take-
over target. It should be noted moreover that the risk of achieving
the desired effects will be greater if the company’s charter provides
for pre-emptive rights whereby shares to be issued must first be
offered to shareholders already holding shares in the company.
Where the offeror makes its offer conditional upon the deposit
of a minimum number of shares, section 118(c) of the Quebec
Securities Act obliges it to purchase the designated minimum when
an amount equal to it or greater has been tendered. However, an
increase in the shares outstanding may mean that to the extent the
minimum specified includes an insufficient safety factor, the offeror
will not achieve control although it receives the specified number
of shares. Thus a relatively slight increase in the number of shares
outstanding could be disastrous. If the offeror decides to retain the
shares purchased, it may be burdened with interest payment obliga-
tions incurred to finance the purchase without having obtained
control. It is unlikely that the target company’s dividend would be
sufficient to cover these payments. If the offeror decides to sell the
shares taken up to eliminate interest payments, it may have to sell
at a substantial loss since the market price of the stock will usually
decline after the termination of the tender offer. If the offeror is
selling what amounts to control of a particular class of shares, it
may have to file a prospectus under section 50 of the Securities Act,
thereby incurring the legal, printing and perhaps underwriting ex-
penses attendant on a public offer.
The objective of the target company’s management is to increase
the number of shares required for control as soon as possible. Thus
management will employ transactions which do not require prior
stockholder approval or prior registration under the Quebec Securi-
ties Act. Two techniques are usually employed – private placements
of the target company’s shares for cash and acquisitions of securities
or assets of third party corporations in exchange for the target’s
shares.
19761
TAKEOVER BID DEFENSES IN QUEBEC
Private placements of securities with financial institutions are
exempted from registration under sections 20(g) and 52(a) of the
Quebec Securities Act. Acquisitions in return for securities are
exempt from the takeover provisions of the Act if the company
acquired is a private company or if the acquisition is by way of
private agreement with fewer than fifteen shareholders. Thus man-
agement may approach a control group of a large public company
and effect an acquisition by issuing shares without having to comply
with the takeover provisions of the Act (providing the control group
consists of fewer than fifteen shareholders). Under the Canada
Corporations Act, 7 and the Canada Business Corporations Act5″ the
directors may allot shares by resolution, without the need for
shareholder approval. The Quebec Companies Act 59 allows directors
to allot shares by a by-law which, though effective immediately, must
be subsequently confirmed by shareholders.
Management must take care that the consideration received for
the issuance and sale of additional shares is adequate. Par value
shares may not be issued at a -discount from par,60 and when they
are issued for a non-cash consideration, this must be at least equal
to the par value of the shares.61 No par value shares may be issued
for such consideration in cash or in kind as may be fixed by the
board of directors. 2 The directors will be jointly and severally liable
for the shortfall of value between the non-cash consideration received
for par value shares and the par value equivalent.3 No similar
liability is expressly imposed by the Quebec Companies Act and the
Canada Corporations Act in respect of a non-cash consideration for
no par value shares. However, section 113 (1) of the Canada Business
Corporations Act imposes liability on directors for the shortfall of
value between the non-cash consideration and the cash equivalent
57 Supra, note 1, s.35.
58Supra, note 1, s.25(1).
59 Supra, note 8, s.44.
‘O Canada Corporations Act, supra, note 1, s.101(1); Companies Act, supra,
note 8, s.42.
61 Canada Corporations Act, ibid.; Companies Act, ibid.
02The Canada Corporations Act, ibid., ss.13(12) and 13(13),
imposes on
directors the duty to act in good faith and in the best interests of the company
in fixing the consideration for no par value shares. Moreover, where the
consideration is not cash, directors must in good faith determine that such
consideration is the fair equivalent of the appropriate cash consideration.
The Companies Act, ibid., does not expressly impose such duties. Presumably,
the directors’ fiduciary duties are sufficient for the purpose.
,0 Canada Corporations Act, ibid., s.101(2); the section applies to public
companies only.
McGILL LAW JOURNAL
[Vol. 22
had the shares been issued for money on the date of the resolution
of the board. In addition, if the directors issue shares (with or
without par value), at a significant discount from their market
value in order to defend against a takeover, the company will
suffer damage and the directors may be in breach of their fiduciary
duties and of their’ duty of care. Moreover, if they issue shares at a
deep discount for the purpose of protecting their control position,
the directors may not be acting in the best interests of the company
nor in, good faith. Thus they may be subject to a stockholder
derivative action. The directors may be able successfully to defend
against the suit in either situation by proving that they had a
reasonable belief that harm would result to the company should the
takeover bid succeed and that therefore they were acting in good
faith and in the best interests of the company.”‘
The tactic of issuing shares to foil a bid should be severely
circumscribed by law. The manoeuvre results in a dilution of capital
and of the shareholders’ voting power at the discretion of the
directors (since no prior shareholder approval is required), usually
for an improper purpose –
to perpetuate the incumbent management
in office. Moreover, the tactic may prevent a successful bid and hence
deprive shareholders of the opportunity to consider the merits of the
offer. The following amendments to the provincial and federal statute
law could be considered: (i) prohibiting absolutely the issuance of
shares during a takeover bid; or (ii) limiting the issuance of shares
during a, takeover bid to rights offerings (to present shareholders)
or to distributions to the general public (i.e. no sales en bloc); or
(iii) requiring that all share allotments during a takeover bid must
be effected by a by-law which has no effect until approved by share-
holders.
CONCLUSION
Takeover bid legislation should achieve a balance of interests.
Present legislation attempts to balance the interest of the shareholder
(providing him with information with which to evaluate the merits
of a bid) with society’s economic interest in retaining the takeover
bid technique as a viable means of acquiring corporate control.
04 See Teck Corp. v. Millar (1973) 33 D.L.R. (3d) 288. The British Columbia
Supreme Court held that the directors of a company may use their power to
issue new shares to prevent a majority shareholder from retaining control if
they act in good faith in what they reasonably believe to be the best interests
of the company. If their primary purpose is to act in the best interests of the
company, the directors will be held to be acting in good faith even though they
may personally benefit from the result.
19761
TAKEOVER BID DEFENSES IN QUEBEC
Little legislative attention has been devoted to the balancing of
competing interests when incumbent management attempts to pre-
vent a successful bid by the variety of manoeuvres outlined above.
Management’s opposition may be motivated either by self-interest
or the best interests of the company and its shareholders. At times,
of course, the two interests may coincide. Research has revealed that
the final offer-price in defended takeover bids reflects a considerably
greater premium over the pre-bid market price of the target’s shares
than is the case for unopposed bids.6″ Hence defending against a
takeover may not only be in the company’s interest in certain
instances, but may also directly serve the best interests of share-
holders by increasing the ultimate takeover value of their property.
The law must therefore delicately regulate the use of defense tactics
in order to eliminate the abuses but retain the advantages which
may accrue to the company and to shareholders from a defended bid.
In theory, the case law should serve as sufficient regulation since
the relevant jurisprudence imposes on directors and senior officers
the duty to act in the best interests of the company and to avoid
conflicts of duty and self-interest0 However, in practice, juris-
prudential regulation is insufficient. The party which alleges a
breach of fiduciary duty has the burden of proving it. Moreover,
incumbent management can normally hide its trae motives by
making a variety of allegations tending to show that its opposition
is in the best interests of the company and its shareholders –
for
example, that the offer price is inadequate given the company’s
prospects or the goodwill built up by management. Management
may even justify its opposition by alleging that it constitutes an
attempt to induce the offeror to increase its offering price in order
to ensure a successful bid. Thus some statutory intervention seems
essential.
The tactics discussed are appropriate for all companies regardless
of size, with the exception of negotiating restrictive covenants. It
seems unlikely that a smaller company would have sufficient bargain-
ing power with landlords, lenders or unions to effect this purpose.
The time required to implement other tactics may limit manage-
ment’s ability to employ them. For example, the company cannot
issue additional shares quickly by way of stock dividend or other-
wise, if it has insufficient authorized but unissued capital stock.
Thus the importance of devising and implementing a defense plan
05 M. A. Weinberg, Weinberg on Take-overs and Mergers (1971), para2465.
06 See Canadian Aero Service v. O’Malley, supra, note 13; see also Canada
Business Corporations Act, supra, note 1, s.117(1)(a).
McGILL LAW JOURNAL
[Vol. 22
in advance becomes evident. The company, in order to succeed in
preventing a successful bid, must be prepared with, for example,
restrictive charter provisions and ample authorized capital well in
advance of a takeover attempt.
The tactics most likely to succeed and at the same time the least
likely to expose the directors to liability are those intended to make
the target company less attractive to a potential offeror,0 7 and a
communications campaign by management. Both are susceptible to
effective advance planning, and if a takeover is not attempted
because the target has become unattractive, any potential legal
issues are less likely to arise than if a takeover is attempted and
the offeror is forced to abandon it because of tactics employed
subsequent to its initiation.
67With the possible exception of negotiating or amending contracts to
provide for restrictive provisions.
