347883 Alberta Ltd. v. Producers Pipelines Inc., (1991) 92 Sask.R. 81 (CA)

• Judge: Bayda, C.J.S., Tallis and Sherstobitoff, JJ.A.
• Court: Court of Appeal (Saskatchewan)
• Case Date: April 08, 1991
• Jurisdiction: Saskatchewan
• Citations: (1991), 92 Sask.R. 81 (CA)

347883 Alta. v. Producers Pipelines (1991), 92 Sask.R. 81 (CA)

MLB headnote and full text

347883 Alberta Ltd. (appellant/applicant) v. Producers Pipelines Inc. (respondent/respondent)

(No. 835A)

Indexed As: 347883 Alberta Ltd. v. Producers Pipelines Inc.

Saskatchewan Court of Appeal

Bayda, C.J.S., Tallis and Sherstobitoff, JJ.A.

May 9, 1991.

Summary:

Producers Pipelines' board of directors faced the prospect of a hostile takeover bid. The board responded with a Shareholder Rights Agreement. The agreement was known as a 'poison pill'. The agreement would be triggered by, inter alia, a non-permitted (i.e., hostile) takeover bid. The agreement allowed all shareholders, except the shareholder making the hostile bid, to purchase ten shares for each one held at a favorable price. The result would be a substantial dilution of the holding of the shareholder making the hostile bid. Later, Producers' board made an offer to purchase 560,000 of Producers' outstanding shares at a price higher than that contemplated by the proposed takeover offers. A shareholder that wanted to make a takeover bid submitted that the board's actions were unlawful because, inter alia, some shareholders were unfairly prejudiced. The shareholder applied for an interlocutory injunction to restrain Producers from accepting the tendered shares until the matter of the legality of the board's defensive measures was determined.

The Saskatchewan Court of Queen's Bench, in a decision reported at 91 Sask.R. 162, dismissed the application. The shareholder appealed.

The Saskatchewan Court of Appeal, Bayda, C.J.S., dissenting, allowed the appeal. The Court of Appeal set aside the Shareholder Rights Agreement and extended the closing date of Producers' share purchase offer.

Company Law - Topic 2170

Shareholders - Shareholder's rights - To rectify oppressive or unfairly prejudicial act - A company's board of directors faced the prospect of a hostile takeover - The company's shares were substantially undervalued - To gain time, the directors passed a Shareholder Rights Agreement (i.e., a poison pill) - If activated by a hostile takeover bid, the agreement could result in a substantial dilution of the holding of the shareholder making the hostile bid - The board also offered to purchase 34% of the company's outstanding shares at the fair market value - One shareholder that wanted to make a takeover bid submitted that the board's conduct was oppressive, or unfairly prejudicial to, or unfairly disregarded the interests of certain shareholders - The Saskatchewan Court of Appeal allowed the shareholder's application for relief - See paragraphs 43 to 58.

Company Law - Topic 2173

Shareholders - Shareholder's rights - Repurchase of shares by company - A company's board of directors was faced with the prospect of a hostile takeover bid - In response, the board decided that the company would make an offer to buy back 34% of the company's outstanding shares - The price was higher than that proposed in the potential takeover bids and reflected the fair market value - A shareholder that was interested in making a takeover bid submitted that the buy-back offer was invalid because it was made for an improper purpose; i.e., to entrench the board of directors - The Saskatchewan Court of Appeal held that the board acted for an improper purpose - See paragraph 48.

Company Law - Topic 4160

Directors - Powers - General - To prevent hostile takeover - A board of directors faced the prospect of a hostile take-over bid - The board adopted certain defensive measures - A shareholder that wanted to make a takeover offer submitted that the board's actions were unlawful - The Saskatchewan Court of Appeal observed that, whenever possible, prior shareholder approval of defensive tactics should be obtained by the board - See paragraph 31.

Company Law - Topic 4160

Directors - Powers - General - Power to issue shares - Conflict of interest - The Saskatchewan Court of Appeal stated that directors must "exercise their powers in accordance with their overriding duty to act bona fide and in the best interests of the corporation even though they may find themselves, ..., in a conflict of interest situation. If after investigation, they determine that action is necessary to advance the best interests of the company, they may act, but the onus will be on them to show that their acts were reasonable in relation to the threat posed and were directed to the benefit of the corporation and its shareholders as a whole, and not for an improper purpose such as entrenchment of the directors." - See paragraph 32.

Company Law - Topic 4164

Directors - Powers - Improper exercise of powers - To oppose takeover bid - [See Company Law - Topic 2170 ].

Company Law - Topic 4164

Directors - Powers - Improper exercise of powers - [See Company Law - Topic 2173 ].

Company Law - Topic 4164

Directors - Powers - Improper exercise of powers - As part of a plan to ward off hostile takeover bids, a company's board of directors passed a Shareholder Rights Agreement - The agreement stated that it would expire on December 27, 1990, unless it was ratified by the shareholders - The board declined to submit the agreement to the shareholders for approval - Nevertheless, the board extended the term of the agreement to April 15, 1991 - A shareholder submitted that the extension was invalid because the directors lacked the power to extend the agreement - The Saskatchewan Court of Appeal held that the extension was invalid - See paragraph 50.

Company Law - Topic 4168

Directors - Powers - Power to issue shares - Shareholder Rights Agreement - [See Company Law - Topic 2170 ].

Company Law - Topic 4301

Directors - Duties to company and shareholders - General - Duty - Not to fetter discretion - Section 97(1)(b) of the Business Corporations Act stated that, unless otherwise authorized by a unanimous shareholders agreement, the directors were charged with managing the business and the affairs of the company - A company's board of directors amended a Shareholder Rights Agreement so as to require the unanimous agreement of directors before a takeover bid was approved and placed before the shareholders - The action was not authorized by a unanimous shareholders agreement - The Saskatchewan Court of Appeal held that the amendment was invalid because it fettered the directors' discretion - See paragraph 50.

Company Law - Topic 7221

Fundamental changes and shareholders' rights - Takeover or acquisition of control - General - [See Company Law - Topic 2170 ].

Company Law - Topic 7221

Fundamental changes and shareholders' rights - Takeover or acquisition of control - General - Company A's board of directors faced the prospect of a hostile take-over bid - As a defensive measure, the board passed a Shareholder Rights Agreement (SRA) - Company B wanted to make an offer for Company A - Company B purchased shares in Company A after the SRA was passed - Company B submitted that the SRA was oppressive to shareholders and applied for relief under s. 234 of the Business Corporations Act - Company A claimed that the right to make a take-over bid was not a right that accrued from the ownership of shares - The Saskatchewan Court of Appeal allowed Company B's application for relief - See paragraph 54.

Company Law - Topic 7221

Fundamental changes and shareholders' rights - Takeover or acquisition of control - General - Company A's board of directors faced the prospect of a hostile take-over bid - As a defensive measure, the board passed a Shareholder Rights Agreement (SRA) - Company B wanted to make an offer for Company A - Company B purchased shares in Company A after the SRA was passed - Company B submitted that the SRA was oppressive to shareholders and applied for relief under s. 234 of the Business Corporations Act - Company A claimed that Company B should be denied relief because it knew of the oppression when it purchased the shares - The Saskatchewan Court of Appeal allowed Company B's application for relief - See paragraph 55.

Company Law - Topic 7230

Fundamental changes and shareholders' rights - Takeover or acquisition of control - Management's duty of disclosure - A company's board of directors was faced with the prospect of a hostile takeover bid - As a defensive measure, the board passed a Shareholder Rights Agreement (a poison pill) - The board later amended the agreement so that the unanimous approval of the directors was required before any takeover offer was put before the shareholders - A company that wanted to make a takeover offer submitted that the unanimous approval requirement contravened s. 108 of the Securities Act, 1988 - The Saskatchewan Court of Appeal held that the amendment and the agreement were invalid - See paragraph 50.

Company Law - Topic 9413

Actions by corporations - Parties - Derivative actions - Company A passed a Shareholder Rights Agreement (SRA) as a defense against a hostile takeover - Company B submitted that, inter alia, the action of Company A's board of directors in passing the SRA resulted in the oppression of the interests of certain shareholders - Company B applied for relief under s. 234 of the Business Corporations Act - Later it was suggested that the relief should have been requested under s. 232 as the case was a derivative action - The Saskatchewan Court of Appeal declined to consider the personal action v. derivative action issue because it was not raised during the appeal - See paragraph 60.

Company Law - Topic 9413

Actions by corporations - Parties - Derivative actions - As a defence against a hostile takeover bid, Company A's board of directors passed a Shareholder Rights Agreement (a poison pill) - Company A later made an issuer bid for a portion of its own outstanding shares - Company B, a shareholder of Company A, submitted that the Shareholder Rights Agreement was unlawful as it unfairly prejudiced certain shareholders - Company B applied to have the agreement set aside - The Chief Justice of the Saskatchewan Court of Appeal discussed the nature of an application for relief under ss. 232 (the derivative action) and 234 (the oppression remedy) of the Business Corporations Act - See paragraphs 99 to 117 - The Chief Justice noted that in order to succeed under s. 234, a complaint had to prove unfair prejudice; not just invalidity - See paragraphs 106 and 107.

Company Law - Topic 9783

Actions against corporations - Action for oppressive conduct - Persons entitled - Shareholders - Company A passed a Shareholder Rights Agreement (SRA) as a defense against a hostile takeover - Company B submitted that, inter alia, the action of Company A's board of directors in passing the SRA resulted in the oppression of the interests of certain shareholders - Company B applied for relief under s. 234 of the Business Corporations Act - Later, it was suggested that the relief should have been requested under s. 232 as the case was a derivative action - The Saskatchewan Court of Appeal declined to consider the personal action v. derivative action issue because it was not raised during the appeal - See paragraph 60.

Company Law - Topic 9784

Actions against corporations - Action for oppressive conduct - Condition precedent - Shareholders action - As a defence against a hostile takeover bid, Company A's board of directors passed a Shareholder Rights Agreement (a poison pill) - Company A later made an issuer bid for a portion of its own outstanding shares - Company B, a shareholder of Company A, submitted that the shareholders rights agreement was unlawful as it unfairly prejudiced certain shareholders - Company B applied to have the agreement set aside - The Chief Justice of the Saskatchewan Court of Appeal discussed the nature of an application for relief under ss. 232 (the derivative action) and 234 (the oppression remedy) of the Business Corporations Act - See paragraphs 99 to 117 - The Chief Justice noted that in order to succeed under s. 234, a complainant had to prove unfair prejudice; not just invalidity - See paragraph 106 and 107.

Practice - Topic 9012

Appeals - Restrictions on argument on appeal - Issues or points not raised on application or at trial or in pleadings or in prior proceedings - Company A passed a Shareholder Rights Agreement (SRA) as a defense against a hostile takeover - Company B submitted that, inter alia, the action of Company A's board of directors in passing the SRA resulted in the oppression of the interests of certain shareholders - Company B applied for relief under s. 234 of the Business Corporations Act - Later it was suggested that the relief should have been requested under s. 232 as the case was a derivative action - The Saskatchewan Court of Appeal declined to consider the personal action v. derivative action issue because it was not raised during the appeal - See paragraph 60.

Words and Phrases

Poison Pill - The Saskatchewan Court of Appeal considered the validity of the actions taken by a company's board of directors to ward off hostile takeover bids - Those actions included a Shareholder Rights Agreement (i.e., a poison pill) and an offer to purchase a portion of the company's outstanding shares at fair market value.

Cases Noticed:

Martin v. Gibson (1907), 15 O.L.R. 623, consd. [para. 20].

Greenhalgh v. Arderne Cinemas, [1951] Ch. 286, consd. [para. 20].

Howard Smith Ltd. v. Ampol Petroleum Ltd., [1974] 1 All E.R. 1126 (P.C.), consd. [para. 21].

Hogg v. Cramphorn, Ltd. and Others, [1966] 3 All E.R. 420, refd to. [para. 21].

Teck Corporation Ltd. v. Miller et al. (1972), 33 D.L.R.(3d) 288 (B.C.S.C.), consd. [para. 22].

Exco Corporation et al. v. Nova Scotia Savings & Loan Company et al. (1987), 78 N.S.R.(2d) 91; 193 A.P.R. 91; 35 B.L.R. 149 (N.S.T.D.), consd. [para. 23].

Re Olympia & York Enterprises and Hiram Walker Resources Ltd. (1986), 37 D.L.R.(4th) 193 (Ont. H.C.J.), consd. [para. 27].

Unocal Corp. v. Mesa Petroleum Co. (1985), 493 A. 2d 946 (Del. Sup. Ct.), refd to. [para. 29].

Desert Partners Limited Partnership v. USG Corp. (1988), 686 F. Supp. 1989 (N.D. Ill.), refd to. [para. 29].

Ringuet et al. v. Bergeron, [1960] S.C.R. 672, refd to. [para. 50].

Eiserman v. Ara Farms and Eiserman (1988), 67 Sask.R. 1, refd to. [para. 53].

Re Ferguson and Imax Systems Corp. (1983), 43 O.R. 128 (C.A.), refd to. [para. 53].

Re Palmer and Carling O'Keefe Breweries of Canada Ltd. (1989), 56 D.L.R.(4th) 128 (Ont. Div. Ct.), consd. [para. 55].

Goodyear Tire and Rubber Co. of Canada Ltd. et al. v. T. Eaton Co. Ltd. et al., [1956] S.C.R. 610, consd. [para. 108].

Rawluk v. Rawluk, [1990] 1 S.C.R. 70; 103 N.R. 321; 38 O.A.C. 81, refd to. [para. 108].

Scottish Cooperative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324, consd. [para. 119].

Statutes Noticed:

Business Corporations Act, R.S.S. 1978, c. B-10, sect. 97(1), sect. 117(1) [para. 19]; sect. 234 [paras. 2, 52, 62]; sect. 240 [para. 105].

Securities Act, S.S. 1988-89, c. S-42.2, sect. 108 [para. 16].

Authors and Works Noticed:

Canadian Securities Administrators, Take-over Bids - Defensive Tactics (1986), National Policy No. 38, generally [para. 12].

Coleman, Poison Pills in Canada (1988), 15 Can. Bus. L.J. 1, pp. 1, 2 [para. 8]; 6 [para. 49].

Gower, Principles of Modern Company Law (4th Ed.), p. 582 [para. 50].

Iacobucci, F., Planning and Implementing Defences to Take-Over Bids: The Directors' Role (1980-81), 5 Can. Bus. L.J. 132, pp. 137 [para. 129]; 160 [para. 14].

MacIntosh, Jeffrey G., The Oppression Remedy: Personal or Derivative (1991), 70 Can. Bar Rev. 29, generally [para. 60].

MacIntosh, Jeffrey G., The Poison Pill; A Noxious Nostrum for Canadian Shareholders (1988-89), 15 Can. Bus. L.J. 278, pp. 278-281 [para. 9].

Ulmer, Karen, Business Issues: The Oppression Remedy (1989), 53 Sask. L. Rev. 209, p. 212 [para. 119].

Welling, Corporate Law in Canada: The Governing Principles (1984), p. 526 [para. 106].

Ziegel, Canadian Company Law (1967), p. 564 [para. 104].

Counsel:

R.D. Laing, Q.C., and H.R. Huber, for the appellant;

D.G. McLeod, Q.C., for the respondent.

This appeal was heard on April 8, 1991, by Bayda, C.J.S., Tallis and Sherstobitoff, JJ.A., of the Saskatchewan Court of Appeal. The following judgments were delivered on May 9, 1991:

Sherstobitoff, J.A. (Tallis, J.A., concurring) - see paragraphs 1 to 60;

Bayda, C.J.S., dissenting - see paragraphs 61 to 143.