CANADA Law and Practice Contributed by: Kevin West, Andrea Hill, Priya Ratti and Gabriel Potkidis, SkyLaw
“business judgement rule”, which sets out that a court should not substitute its own decisions for those deci - sions made by directors, and deference should be accorded to business decisions of directors provided they are taken in good faith and within a range of rea - sonableness in the performance of the functions the directors were elected to perform by the shareholders. If directors act independently, in good faith and on an informed basis in a way that they reasonably believe is in the best interests of the corporation, courts gener - ally will defer to their judgement. Directors should take reasonable steps to show that they made their deci - sion on an informed basis, for example by retaining outside experts or by learning about relevant issues such as the impact of AI on the business. 8.4 Independent Outside Advice Independent outside advice is commonly given to directors in a business combination from:
MI 61-101 encourages, but does not require, targets to form special committees and encourages the for - mation of a special committee in any transaction to which MI 61-101 applies. Conflicts of interest of directors, managers, share - holders or advisers have been the subject of judicial and regulatory scrutiny as well. Securities regulators in Canada have, in particular, examined the question of whether a party is a joint actor with the acquiror. This is a factual analysis, and its finding may have an impact on whether the transaction is an insider bid or related party transaction and hence subject to the additional requirements under MI 61-101 previously set forth. Hostile takeover bids are permitted in Canada but are not very common, as the takeover bid regime is rela - tively target-friendly. 9.2 Directors’ Use of Defensive Measures Canadian securities laws allow directors to use meas - ures to defend against hostile takeovers. Regulators may intervene when defensive measures are likely to deny or severely limit the ability of shareholders to respond to a takeover bid. 9.3 Common Defensive Measures Shareholder Rights Plans Shareholder rights plans or poison pills are often used by target companies to defend against hostile bids. Rights plans will not block hostile bids entirely but are instead a way to encourage the fair treatment of shareholders in connection with a bid and to allow the target board and shareholders to respond to and con - sider the bid. They also allow time for the target board to seek available alternatives and prevent creeping takeovers. See 4.3 Hurdles to Stakebuilding . Crown Jewel/Scorched Earth A target may attempt to restructure or recapitalise so as to provide shareholders with cash value, for instance, by selling a significant asset in order to become less attractive to a bidder. The directors must undertake 9. Defensive Measures 9.1 Hostile Tender Offers
• investment bankers; • outside legal counsel; • financial and tax advisers; • public relations firms; and • proxy solicitation firms. 8.5 Conflicts of Interest
Under Canadian corporate law, if a director is a party to a transaction with the corporation, is a director or officer of a party to the transaction or has a material interest in a party to the transaction, the director must disclose the nature and extent of this interest and may be required to refrain from voting on the matter. Under Canadian securities law, the Multilateral Instru - ment 61-101 (MI 61-101) regulates transactions with potential conflicts of interest. This instrument provides procedural protections for minority shareholders. Depending on the type of transaction, the following may be required: • a formal valuation by an independent valuer super - vised by a special committee; • a majority of the minority shareholder approval; and • enhanced disclosure, including disclosure of prior valuations prepared for, and offers received by, the target in the past two years.
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