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Canada has proven to provide fertile ground for shareholders activism, in part due to a regulatory landscape that could be viewed as more shareholder friendly than some other jurisdictions. As a result, it is perhaps not surprising that activists have achieved significant success in Canada in recent years. It is apparent that shareholder activism is

This is the second installment of a series of posts in which I will be critically examining a number of arguments made by proponents of the view that the time has come for Canadian securities regulators to “vacate the field” of poison pill regulation, leaving oversight of shareholder rights plans to the courts. Evaluating the soundness of their arguments has become a matter of potentially far-reaching consequence following a proposal to reform poison pill regulation put forth earlier this year by the Canadian securities regulators,[1] in which they effectively propose to adopt — in my view, inappropriately — the recommendation that they “vacate the field” of poison pill regulation. The views expressed in this post, as in all of my posts, are mine alone and should not be taken to represent the views of my partners.

In my last contribution to Timely Disclosure I highlighted the repeated failure by proponents of the “vacate the field” perspective on poison pill regulation to appreciate that Canadian securities regulators have a legitimate basis, firmly rooted in their statutory mandates of investor protection and capital market fairness and efficiency, and quite independent of any basis the courts may have, for regulating poison pills. Their oversight in this regard has spawned a confused belief that, in applying the defensive tactics policy to prevent poison pills from interfering indefinitely with the ability of target company shareholders to respond to an unsolicited takeover bid, Canadian securities regulators have been specifying the contents, and monitoring the observance, of the fiduciary duties of target company directors. Echoes of that confusion reverberate through a number of the arguments made by the “vacate the field” crowd.

How the confusion underpinning the “vacate the field” perspective undermines the argument that poison pill regulation by the Canadian securities regulators is ultra vires

The most straight-forward version of the “vacate the field” argument, and the one that most obviously suffers from the confusion at issue, invites us to conclude, based upon little more than the observation (admittedly correct, so far as it goes) that it is the proper function of courts to interpret and enforce rights and duties that arise under corporate law, that the regulation of poison pills by Canadian securities regulators is, ipso facto, ultra vires and places a “thumb on the scale”[2] of poison pill regulation, generating (perverse) adjudicative outcomes that depart from those one might expect were poison pill regulation left to the courts (as it is in the United States).
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A colleague recently suggested that my last contribution to Timely Disclosure called to mind the more familiar view, which has gained in prominence over the past half-decade or so [1], that the time has come for Canadian securities regulators to “vacate the field” of poison pill regulation, leaving oversight of shareholder rights plans to the courts.  I found his suggestion rather troubling.  Frankly, I do not wish to be associated with that view.

To be sure, there is some superficial similarity between the “vacate the field” perspective on poison pill regulation and my own view that Canadian securities regulators should not in principle be advancing any campaign for legislative reform that aims to limit the power of shareholders on the basis of perceived threats that shareholder activism allegedly poses to corporate North America and the economy as a whole.  Both views call for restraint from securities regulators in deference to other rule-making agencies — the courts, or the legislatures (for purposes of such a general point of comparison, the specifics don’t really matter) — that are better positioned, we claim, to adequately serve the relevant regulatory objectives.

But that’s about where the similarity ends.  Indeed, I happen to think that the “vacate the field” perspective on poison pill regulation makes a version of the mistake that I effectively accused Martin Lipton of making in my last post: it fails to give Canadian securities regulators their proper due.  Mr. Lipton gives to Canadian securities regulators more than they are properly due, implicitly vesting in them the power to legislate in the name of broad policy objectives that far outstrip the scope of their twin policy mandates of investor protection and capital market efficiency and fairness.[2] The “vacate the field” view, in contrast, makes the obverse mistake of giving to Canadian securities regulators less than they are properly due, calling upon them to vacate a field of regulation that they properly occupy by virtue and in furtherance of those mandates.

Let’s pause for a moment on that last statement: Canadian securities regulators, I am claiming, are properly authorized to regulate poison pills by virtue and in furtherance of their twin policy mandates of investor protection and capital market efficiency and fairness.  I would not have thought this to be a particularly controversial claim.  Indeed, I would have thought it rather obvious that a policy mandate of investor protection can ground regulation safeguarding the ability of investors to dispose of their investments without undue restraint and on terms of their own choosing; equally obvious that the objective of fostering fair and efficient capital markets can justify regulating third-party interference in secondary market transactions between otherwise willing buyers and sellers.

But somehow these claims have been anything but obvious to those who have argued that Canadian securities regulators should vacate the field of poison pill regulation.  They have repeatedly misapprehended the basis upon which securities regulators in Canada are competent (in fact, I’d argue duty-bound) to regulate poison pills.  
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Renowned New York corporate lawyer Martin Lipton was in Toronto on October 8 preaching the evils of shareholder activism to anyone listening at the OSC Dialogue, an annual event hosted by the Ontario Securities Commission at which market participants are brought together on issues and trends facing the capital markets.

Mr. Lipton’s message is stark and unsettling: shareholder activists, and activist hedge funds in particular (so he claims) [1], contribute to a malaise of “short-termism” that has infected corporate North America by, among other things, pressuring management of corporations to shift management strategy away from long-term value creation, the “core engine for economic growth, national competitiveness, real innovation and sustained employment,” [2] and towards short-term measures designed to create immediate increases in stock prices.  If he’s right, this is a problem of crisis proportions, posing nothing less than a threat to the national, and arguably global, economy as a whole.

The trouble, or at least part of the trouble, is that it is not at all obvious that he’s right.  Notwithstanding Mr. Lipton’s claim that “there is quality empirical evidence that short-termism and activism have an adverse impact on the long-term prospects of companies generally”[3] the matter is far from being free of controversy.  Among others, Professor Lucian Bebchuk of Harvard Law School, a leading scholar in the field and a long-time intellectual adversary of Mr. Lipton’s, disputes the claim, arguing that it is not supported by the data. [4]

I have no intention of trying to settle the debate here, in part because I’m not sure that it can be settled.  As Mr. Lipton himself has observed in responding to Professor Bebchuk’s position (though seemingly without recognizing the implications of his observation for his own position):[5]

[n]o empirical study…is capable of measuring the damage done to…companies and the…economy by the short-term focus that dominates both investment strategy and business-management strategy today. There is no way to study the parallel universe that would exist, and the value that could be created for shareholders and other constituents, if these pressures and constraints were lifted and companies and their boards and managements were free to invest for the long term.
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