CHAPTER 06 Directors’ Duties and Defensive Mechanisms
> Identification of assets, the sale or disposition of which would further a defensive strategy, may depend on the identity and strategic position of the bidder. > The transaction must have a demonstrable business purpose and be undertaken with a view to the best interests of the company, otherwise it will be at risk of being set aside by a court as an improper exercise of the directors’ fiduciary duties. – An example of a recapitalization transaction would be a substantial increase in long-term debt combined with a special dividend or issuer bid to distribute cash to shareholders. > This transaction provides shareholders with an opportunity to realize cash value in respect of a significant portion of their investment. > Tax analysis is required to ascertain whether monies received by shareholders on a restructuring/recapitalization can be received tax-free. ACQUISITION OF SIGNIFICANT ASSETS – An acquisition of significant assets may make the company more leveraged and less attractive to a bidder; it could make the transaction prohibitively expensive or cause the bidder antitrust problems. – Advance identification, analysis and planning, as well as negotiation with the seller, would be required. An acquisition can be extremely difficult to implement in the face of a bid, absent significant advance work. – Again, there must be a demonstrable business purpose, and the acquisition must be undertaken by the directors with a view to the best interests of the company, not primarily for the purpose of fending off the bid. STRATEGIC INVESTOR OR ALLIANCE – Such an investment or alliance could be in respect of all or any of the businesses owned by the target. – The transaction could be implemented through a private placement for cash or assets or through a private placement share exchange with a compatible company, resulting in interlocking shareholdings (with standstills). – TSX will require majority shareholder approval in the following circumstances: > More than 25% of the outstanding shares are issued at a price lower than the market price; > More than 25% of the outstanding shares are issued in exchange for assets or shares; or > The transaction results in a new holding of more than 20% of the voting securities, or otherwise “materially affects control.” – Early identification of possible parties and analysis of the strategic rationale for any transaction would be important in demonstrating a proper business purpose.
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