Academic journal article McGill Law Journal

Lock-Ups, Squeeze-Outs, and Canadian Takeover Bid Law: A Curious Interplay of Public and Private Interests

Academic journal article McGill Law Journal

Lock-Ups, Squeeze-Outs, and Canadian Takeover Bid Law: A Curious Interplay of Public and Private Interests

Article excerpt

Securities law permits takeover bidders to enter into prebid lock-up agreements with major target shareholders. Lock-up agreements may have a stifling effect on takeover auctions, but allowing them is thought to entice more bidders to make offers in the first place. Locked-up shares may then be counted in the minority approval vote needed to authorize a subsequent going-private transaction. In effect, these transactions override dissenting shareholders' property rights in the broader public interest of facilitating takeover bids.

Examining the decisions in BNY Capital Corp. v. Katotakis, the author considers the interplay between the current securities law practice and the effect of rights of first offer and first refusal in shareholder agreements, which can functionally resemble lock-up agreements. After canvassing the nature of such rights and the general regulatory framework governing takeover bids and going-private transactions, the author considers the Katotakis decisions by the Ontario Securities Commission and in the courts. These decisions provide rare insights into an area that has largely been unexplored by Canadian courts.

Some curious aspects of shareholders' contractual rights and minority shareholders' property interests in the takeover bid context are revealed. The case illustrates, but does not conclusively resolve, the issue of how the courts' and the regulators' divergent views of the relative importance of the public interest in encouraging takeover auctions and the private contractual and property interests of shareholders can affect the outcome of takeover litigation.

Le droit regissant le marche des valeurs mobilieres autorise le vote sur les actions obtenues dans le cadre d'un accord de fermeture en pre enchere dans des operations de fermeture malgre l'effet d'etouffement entourant les operations de fermeture aux encheres. En effet, le droit regissant le marche des valeurs mobilieres outrepasse les interets contractuels des actionnaires ainsi que leurs interets en matiere de propriete dans le bur public de faciliter les operations de fermeture aux encheres.

En se basant sur les decisions, BNY Capital v. Katotakis, l'auteur exanune l'interaction entre ce principe en droit du marche des valeurs mobilieres et les effets concrets des droits de premiere offre et de premier refus dans le cadre d'accords entre actionnaires. Apres une analyse de la nature de ces droits et du cadre de reglementation regissant les offres publiques et les operations de fermeture, l'auteur analyse les decisions rendues par la Commission des Valeurs Mobilieres de l'Ontario ainsi que celles rendues par les tribunaux. Ces decisions offrent des perspectives uniques sur un domaine que les tribunaux canadiens ont laisse inexplore.

L'auteur expose quelques aspects inquietants en matiere de droits contractuels des actionnaires qui font face a une situation d'offre d'achat a mainmise. Cette situation demontre a quel point les actionnaires minoritaires peuvent utiliser leurs droits de premiere offre pour enclencher un achat de mainmise aux encheres malgre l'interet public plus large voulant que ces encheres soient controlees.


  I. Rights of First Offer and First Refusal

 II. Background to Rules Governing Canadian
     "Going-Private Transactions"

III. Facts in BNY Capital Corp. v. Katotakis

 IV. The OSC Hearing

  V. The Court Hearing



Under certain circumstances, small shareholders of Canadian public companies can be forced to sell their shares against their will. The law sometimes overrides a shareholder's private interest to protect a greater public interest. It aims to indirectly benefit minority shareholders in general by encouraging takeover offers. Indeed, even the private interests of larger shareholders are susceptible to unexpected regulatory modifications made in the public interest.

This sort of interplay between shareholders' property and contractual rights, and the broader public interest in the case of publicly traded corporations, has generated few Canadian court decisions. …

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