First published in The National Post
By: Anita Anand
Stephen Jarislowsky recently claimed that "securities commissions ... take money and do nothing." It seems that he is upset with securities commissions for not stepping in to deal with the $310- million break up fee in Sun Life's proposed takeover of Clarica. But the obvious questions are what precisely Mr. Jarislowsky would like securities commissions to do and whether they would even have the authority to step in.
A typical break fee represents 2% to 4% of the value of the target company. In the Sun Life deal, a break fee of 4.5% was negotiated. Break fees are a corporate governance issue. Canadian statutory law entrusts the board of directors with the authority to act in the best interests of the corporation. Presumably, approving a 4.5% break fee would be an issue that the board would consider in discharging its duties under corporate law. If securities regulators were to get involved in break fees, they would be intruding upon the jurisdiction of the board in approving a contract made between the target and the bidder.
Perhaps one reason that investors and their representatives look to securities regulators to do something about defensive tactics, whether they are poison pills or break fees, is that they want immediate action. And, it just so happens that the Ontario Securities Commission has an efficient hearing process. From an administrative standpoint, the issue can be dealt with quickly by the commission.
The hearing process at the commission begins when a party brings an application. In the poison pill context, the application is usually to cease to trade the pill which the commission has the authority to do under its public interest power in the Securities Act. But break fees are very different beasts. They do not involve the issuance or potential issuance of a corporation's securities. Rather, they involve the allocation of corporate assets. They are terms of an elaborate corporate contract. Securities regulators do not have jurisdiction to strike down a contract that shareholders may not like.
The corporate law regime, on the other hand, offers shareholders avenues of recourse such as the shareholders' meeting (with the accompanying proxy solicitation process). In this case, the shareholders' meeting is the right avenue for disgruntled shareholders to air their differences with corporate management. In fact, the corporate statute seeks to balance the very different interests represented here by according shareholders certain rights as against management.
Apart from the shareholders' meeting, shareholders also can exercise their rights under the oppression remedy or the derivative action. Admittedly, these remedies could only kick in after the deal is approved. They can be cumbersome and involve substantial legal fees with no guaranteed reward. But if shareholders find the corporate law regime wanting because of its lack of immediacy, then this is an issue for corporate reform lobbyists -- not securities regulators.
The aggrieved investor may reply that this particular contract involves a change of control which affects the target's shareholders. Therefore, from an investor protection standpoint, securities regulators must assert jurisdiction. However, in the takeover bid context, the commission would likely only assert jurisdiction if a break fee would prevent shareholders from receiving a higher offer. Where a break fee is within a generally accepted range (i.e. the amount of the fee does not preclude a competing bid), the commission need not and should not take a position. In those circumstances, payment of the break fee is a matter of corporate governance.
The issue, then, is whether 4.5% is within the generally accepted range. In a takeover bid case, an Ontario court has held that break fees must represent a reasonable balance between their effect as an "auction inhibitor" and an "auction stimulator." While case law may be on Mr. Jarislowsky's side in assessing the legitimacy of the 4.5% break fee. However, the Ontario Securities Commission is not the right person to criticize here as it is not the right forum to hear this case.
Contrary to what Mr. Jarislowsky has said, lack of intervention by the commission is not about ethics. It is about jurisdiction to act. Investors and their counsel must step back and realize that break fees are not so much a capital markets concern as they are a corporate governance issue. The commission need not take jurisdiction here. This is a corporate law issue to be dealt with within the parameters of the corporate law statute.