Fairness at What Price? An Analysis
of the Regulation of Going-Private
Transactions in OSC Policy 9.1
Anita I. Anand”
Ensuring that minority shareholders receive fair treatment
appears to have been the original motivation for the Ontario Se-
curities Commission’s efforts to regulate going-private transac-
tions. In light of recent proposed revisions to Policy 9.1, it is
important to revisit the question of what, exactly, is meant by
“fairness”
in the context of going-private transactions. The
author favours a conception of fairness that is directly related to
the price that minority shareholders ultimately receive on a go-
ing-private transaction.
The author argues that two of the obligations imposed on
corporations by Policy 9.1 in its current form, namely disclo-
sure of information and majority of the minority voting, further
the objective of price-based fairness to minority shareholders. It
is highly questionable, however, whether independent valuation
and the formation of independent committees to select a valuer
promote price-based fairness. If it is accepted that Canadian
markets are not strong-form efficient, then disclosure of any in-
formation which would lead shareholders to demand a higher
price for their shares would guard against unfairness by pre-
venting the exploitation of non-public information by majority
shareholders. Since access
to such information would be
meaningless without an accompanying power to reject an unfair
share price, the majority of the minority approval requirement
of Policy 9.1 is similarly justified.
By contrast, assessments of minority share value done by
independent valuers as well as the establishment of independent
committees to oversee the valuation process are more prob-
lematic. Social acquaintances between valuers, members of the
independent committee and management make the independ-
ence of valuers questionable. Moreover, determining the true
value of a share can be a difficult, if not impossible, task.
The author concludes that in the absence of empirical
evidence, it is difficult to assess whether regulation is effective
or necessary.
La rdglementation de Ia Commission des valeurs mobilih-
res de l’Ontario rgissant les transformations en compagnies
privdes semble avoir dtd adopte avec comme objectif
d’atteindre une certaine 6quitd pour les actionnaires minoritai-
res. A la lumihre des rdvisions proposdes de la Policy 9.1, il im-
porte de voir en quoi consiste exactement le concept d’dquitd
dans le contexte des transformations en compagnies privdes.
L’auteure prdconise une definition directement lie au prix pay6
aux actionnaires minoritaires pour leurs actions au terme d’une
transformation en compagnie privde.
L’auteure est d’avis que seulement deux des quatre obli-
gations imposdes aux compagnies par la Policy 9.1 dans sa
forme actuelle, soit le ddvoilement d’information et I’accord de
la majorit de Is minorit6 des actiormaires, nous rapprochent de
l’objectif d’dquit6 basde sur le prix. a est cependant douteux
que les exigences quant A l’dvaluation independante de la va-
leur des actions et la mise sur pied de comitds inddpendants
pour la supervision de cette 6vauation assurent l’aquitd telle
qu’envisagde par l’auteure. Ainsi, s’il est accept6 que le marchd
canadien n’est pas un marchd ot) l’information circule parfaite-
ment, l’obligation de ddvoiler des informations pouvant inciter
les actionnaires A demander un prix plus dlev6 pour leurs ac-
tions prdiviendrait
‘exploitation par les actionnaires majoritaires
d’information non-disponible au public. Puisque la detention de
cette information est inutile si elle n’est pas accompagde du
pouvoir de rejeter ‘offre d’un prix injuste aux actionnmares mi-
noritaires, ‘exigence de l’accord de la majoritd de la minoritd
estjustifide.
Cependant, ii s’av~re que l’dvaluation des actions minori-
taires par des dvaluateurs ind6pendants, tout comme Ia supervi-
sion de l’dvaluation par un comit
inddpendant posent pro-
blhme. Les relations sociales des dvaluateurs, des membres des
comit6s
la gestion mettent en cause
l’inddpendance des 6valuateurs. De plus, Ia determination de la
valeur relle des actions peut 8tre une tfiche difficile sinon im-
possible.
inddpendants et de
L’auteure conclut qu’en l’absence de telles dtudes, il est
difficile d’dvaluer l’efficacitd et le bien-fond6 de la rglementa-
ion.
. Anita I. Anand is an Assistant Professor (Adjunct), Faculty of Law, The University of Western
Ontario. She wishes to thank John Knowlton for his input, comments and consistent support through-
out the many drafts of this paper. Numerous individuals were kind enough to provide comments on
drafts of the paper, including: P.E.S. Jewett, J.E.A. Turner, J.E Tuer, R Panet and D. Forman.
McGill Law Journal 1998
Revue de droit de McGill
To be cited as: (1998) 43 McGill L.J. 115
Mode de r6f6rence: (1998) 43 R.D. McGill 115
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 43
Introduction
I. The Efficiency and Fairness Principles
A. The Efficiency Principle
B. The Fairness Principle
I1. Evolution of the Fairness Principle and the Regulation of Going-
Private Transactions
I1. The Four Pillars of Policy 9.1
A. Disclosure
B. Majority of the Minority Voting
C. Valuations
D. Special Committees
E. Why Two Pillars Must Be Retained
Conclusion
19981 A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
117
Introduction
Over the past two decades, going-private transactions (“GPTs”) have become in-
creasingly regulated in Canada.’ While provincial securities regulators refrain from
prohibiting GPTs, they are concerned that GPTs can be unfair to minority sharehold-
ers. As a result of this concern, regulators have set up an armoury of rules with which
a corporation must comply if it intends to complete a GPT. Under Ontario Securities
Commission Policy 9.1 (“Policy 9.1”), a corporation must obtain a valuation, receive
minority approval at a shareholders’ meeting and comply with stringent disclosure re-
quirements before proceeding with a GPT. In addition, Policy 9.1 states that it is
“good practice” for a corporation to establish a special committee of independent di-
rectors prior to proceeding with a GPT. In addressing recent claims by minority
shareholders that they had been treated unfairly, the Ontario Securities Commission
(“OSC”) indicated that it may develop even more stringent rules to govern GPTs.2
Policy 9.1 defines a GPT as a transaction in which the interest of a holder of a
participating security in a target company may be terminated without his or her con-
sent and without the substitution of an equivalent value in a participating security of
the acquiror.’ A typical GPT is structured as a one-step amalgamation transaction in
which the acquiror incorporates a wholly-owned subsidiary and transfers its majority
shareholdings to the subsidiary. The subsidiary then amalgamates with the target. The
common shares of the subsidiary, which are the shares held by the acquiror, are con-
verted into common shares of the amalgamated entity. The common shares of the tar-
get, being the shares held by the minority shareholders of the target, are then con-
verted into redeemable preference shares of the amalgamated entity. The shares held
by the target in the subsidiary are cancelled. The amalgamation occurs with share-
holder approval and the preference shares are redeemed for cash.
‘ Ontario Securities Commission, “Disclosure, Valuation, Review and Approval Requirements and
Recommendations for Insider Bids, Issuer Bids, Going Private Transactions and Related Party Trans-
actions” in P.G. Findlay, ed., Consolidated Ontario Securities Act and Regulation 1996, 25th ed.
(Toronto: Carswell, 1996) at 1115 [hereinafter Policy 9.1].
2 See A. Willis, “Gordon finds fault with valuation of Ford Canada” The Globe and Mail (30 Sep-
tember 1995) B2; B. Critchley, “Break-up Fees to Outlast Tangled Deal” The Financial Post (24 Oc-
tober 1995) 5.
‘ Policy 9.1, supra note 1, s. 2.2(4). The OSC recently issued “Notice of a Proposed Rule and Pol-
icy Under the Securities Act (Ontario) –
Insider Bids, Issuer Bids, Going Private Transactions and
Related Party Transactions” (1996) 19 O.S.C.B. 2981 [hereinafter Proposed Revised Rules] in which
it proposes a new type of GPT which it terms a “quasi-going private transaction.” This type of trans-
action involves a person or company that is a related party of the target and would be a GPT if it were
not for the substitution of an interest of equivalent value in a participating security of the target. See
Part II “Evolution of the Fairness Principle and the Regulation of GPTs” below for a discussion of the
Proposed Revised Rules.
‘ In some cases, the shares held by minority shareholders may be exchanged for shares in the acqui-
ror. In such cases, the transaction would not fall within the definition of “going private transaction”
under Policy 9.1, but would be considered a “quasi-going private transaction” under the Proposed
Revised Rules, ibid.
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 43
GPTs may also occur as a second step after a takeover bid for the target. If a cer-
tain percentage of the target’s shares –
ninety percent under the federal corporate
statut& –
are acquired under the bid, the balance of the shares can be compulsorily
acquired and there is no need for a second step. Typically, however, the bid also dis-
closes the acquiror’s intention to effect a second-step GPT so that the shares tendered
to the bid can be counted for the purposes of minority approval requirements.’ Assum-
ing other conditions in Policy 9.1 are met, the second step can be effected after the
bid.
Because minority shareholders are forced to sell their shares in a GPT, a central
issue with respect to the regulation of these transactions is how to ensure that the mi-
nority shareholders receive a fair price for their shares. Two competing principles
dominate the debate: the efficiency principle and the fairness principle. The efficiency
principle asserts that market price is an accurate measure of the value of a corpora-
tion’s shares.! According to this principle, there is no need to look beyond market
price to measure value. Competition among investors and other market participants
“ferrets out” all relevant information with respect to the value of a share. This infor-
mation is reflected in the share price and, therefore, regulation is unnecessary to en-
sure that shareholders receive a fair price.
The fairness principle does not recognize the market’s ability to reflect appropri-
ate share prices in the context of a GPT. Proponents of this principle maintain that
relevant information, particularly non-public or inside information, is not reflected in
market price. In particular, market price does not reflect the benefits to be gained
through taking a corporation private, such as reduced agency costs and the saving of
public company costs.! Those who espouse the fairness principle seek to ensure that
the controlling shareholder does not treat the minority shareholders unfairly by offer-
ing a price that is less than the value of the shares without also disclosing the infor-
mation necessary to assess the offer. In the context of a GPT, therefore, regulation is
necessary to ensure that minority shareholders receive a fair price for their shares.
Part One of this article examines the efficiency and fairness principles in greater
detail and presents them as a theoretical structure within which regulation of GPTs
may be analyzed. In Part Two, it is argued that Policy 9.1 is founded upon the fairness
principle and that the efficiency principle has been implicitly discarded as a viable
5 Canada Business Corporations Act, R.S.C. 1935, c. C-44, s. 206(2) [hereinafter CBCA].
6 Policy 9.1 indicates that if the acquiror discloses its intention to effect a second-step OPT and
provided that certain conditions are met, it can count the shares tendered under the bid for the pur-
poses of minority approval requirements in completing the second step. See Policy 9.1, supra note 1,
s.32.1.
7 See ibid For an overview of rules relating to GPTs, see C.L. Saga & A.I. Anand, “Complex Rules
Govern Going-Private Transactions” The National Law Journal (21 August 1995) B9.
8 See V. Brudney, “Efficient Markets and Fair Values in Parent Subsidiary Mergers” (1978) 4 J.
Corp. L. 63 at 64 [hereinafter “Efficient Markets”].
9 Examples of public company costs include costs associated with listing, registering, preparing and
filing documents and costs associated with servicing shareholders, including record keeping, hiring
transfer agents and legal counsel.
1998] A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
119
means of assessing value. This conclusion is reached by outlining the history of
regulation with respect to GPTs in Ontario which culminated with the implementation
of Policy 9.1. It is further contended that the use of the term “fairness” in Policy 9.1 is
ambiguous; it is unclear whether the measures adopted to achieve fairness and per-
ceived fairness in Policy 9.1 actually achieve this end. A conception of fairness that is
directly related to the price that minority shareholders receive on a GPT should be
adopted. Once fairness is conceived in terms of price, there is no need to ensure that
GPTs are perceived to be fair.
Part Three questions whether the regulation of GPTs in Policy 9.1 is necessary to
ensure that minority shareholders receive a fair price. Based on the argument that
capital markets in Canada are not strong-form efficient, two aspects of Policy 9.1 are
necessary to protect minority interests: disclosure of information requirements and
majority of the minority approval. The effectiveness of the rule requiring an inde-
pendent valuation and the OSC’s recommendation that the target establish a special
committee of independent directors are questioned. Recent GPTs have indicated that
the valuation is of little guidance to minority shareholders and that often, valuers and
special committees are independent in name only.
This conclusion highlights the importance of using empirical evidence to support
the implementation of regulation. The approach of the regulators has been to respond
to practices that are perceived to be unfair by adding to existing regulation, as though
the absence of such additional regulation would necessarily leave minority sharehold-
ers in a position where their interests were inadequately protected.” Policy 9.1 im-
poses significant costs on acquirors such as those associated with hiring an independ-
ent valuer, forming a special committee of independent directors, compiling and cir-
culating an information circular, and holding a shareholders’ meeting. Because the
regulation of GPTs imposes such significant costs, securities regulators bear some re-
sponsibility to justify new regulation by providing tangible evidence that the regula-
tion will fulfill its intended objectives and that the benefits received by minority
shareholders will outweigh the costs imposed by the regulation.” Discharging this
burden calls for cost-benefit analyses in which serious attention is paid to empirical
data.
I. The Efficiency and Fairness Principles
A. The Efficiency Principle
According to the efficient-markets hypothesis” or the efficiency principle, regula-
tion of GPTs is undesirable as it impedes operation of the capital markets which, if
‘0 See R.J. Daniels & J.G. MacIntosh, “Capital Markets and the Law: The Peculiar Case of Canada”
(Fall 1990) Canadian Investment Review 77.
“See N. Wolfson, “A Critique of Corporate Law” (1980) 34 U. Miami L. Rev. 960 at 981.
,5 For a discussion of the efficient-markets hypothesis as it pertains to GPTs, see “Efficient Mar-
kets”, supra note 8.
MCGILL LAW JOURNAL / REVUE DE DROITDEMCGILL
[Vol. 43
permitted to operate freely, would enrich society as a whole. 3 There is no need to look
beyond the market value of the shares to determine the price at which minority share-
holders will be squeezed-out; a fair price can be determined by the market alone. In
order for the market to determine a fair price, certain underlying assumptions must be
made. One of these is the existence of a perfect market wherein there is a free flow of
information, many participants, no institutional imperfections, and no corrupt or ma-
nipulative influences are present.” If these conditions exist, regulation of GPTs is un-
necessary.
Market efficiency is defined in relation to the availability of information to inves-
tors.”5 Three types of market efficiency are distinguished: weak-form efficiency, semi-
strong-form efficiency and strong-form efficiency. A market is efficient in the weak
form if all historical price and trading data is reflected in the prices of securities. In
this case, investors cannot expect to earn superior returns using trading strategies that
are based solely on historical price and volume data. In the semi-strong form, a mar-
ket is efficient if an investor cannot earn excess returns from trading rules that are
based on publicly available information. A market is efficient in the strong form if an
investor cannot earn a superior retum using any information, whether such informa-
tion is public or not.
If markets were strong-form efficient, there would be no need to regulate GPTs
since the market price of the shares would include all relevant information, including
inside information. As Brudney explains this theory, reliance on the market as the
measure of value is fair because, “the market ferrets out all relevant information about
the prospects of an enterprise, and therefore the value of its securities, and causes that
information to be reflected in the price of the security ‘instantaneously’.”‘ Thus, mi-
nority shareholders share in the gains expected by the controlling shareholder from
the GPT. However, studies have shown that Canadian capital markets are not strong-
form efficient” and the fact that insiders can earn abnormal returns by trading on the
basis of non-public information supports such findings.” In the context of a GPT, the
controlling shareholder may have access to non-public information and, absent any
regulation, could benefit from the use of this information.’
“See L. Lowenstein, “Management Buyouts” (1985) 85 Col. L. R. 730 at 750.
“See “Efficient Markets”, supra note 8 at 65.
“See R.J. Daniels & J.G. MacIntosh, “Toward a Distinctive Canadian Corporate Law Regime”
(1991) 29 Osgoode Hall L.J. 863 at 872.
“See “Efficient Markets”, supra note 8 at 64.
“See Daniels & Macintosh, supra note 15 at 873, n. 22.
“See H.N. Seyhun, “Insiders’ Profits, Costs of Trading, and Market Efficiency” (1986) 16 J. of Fin.
Econ. 189.
” Consider the claims of minority shareholders of Ford Motor Co. of Canada Ltd. who opposed the
GPT initiated by its U.S. parent. Minority shareholders claimed that the controlling shareholder did
not reveal enough information to decide whether the $185 offer was fair or not. in particular, Mack-
enzie Financial stated that “more detail is needed on Ford Canada’s sensitivity to Canadian dollar
changes and on the split of profits between manufacturing and sales” (G. Keenan, “Ford Canada buy-
out approved” The Globe and Mail [13 September 1995] BI).
1998] A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
121
Some proponents of the efficiency principle claim that even if some of the under-
lying assumptions of the efficient-markets hypothesis are not correct, the market will
deter controlling shareholders from treating minority shareholders unfairly in the
context of a GPT. A corporation which gains a reputation for squeezing-out minority
shareholders at an inadequate price will be penalized by the market when raising eq-
uity capital in the future.” Either potential investors will choose not to purchase shares
or they will only agree to purchase shares at a lower price. Thus, they insulate them-
selves against a potential loss if a GPT were to occur. As Wolfson explains, “[t]he
probability of that adverse impact will act as a powerful deterrent against overreach-
ing by corporate insiders.”‘”
The effectiveness of this deterrence mechanism is questionable. First, in the con-
text of a parent corporation taking its subsidiary private, there is little reason to be-
lieve that investors will apply this discount to future equity issues of the parent since it
is unlikely that there will be a threat of a GPT in relation to the parent. This discount
will be applied only to the equity of other subsidiaries. Second, GPTs do not occur
frequently; they are often a once-in-a-lifetime event. Because they happen infre-
quently, the corporation may benefit from the short-term memory of investors; if the
deterrent effect occurs at all, it may not extend beyond a short period of time. Third,
there are a limited number of investment options which investors can pursue, particu-
larly in the context of Canadian RRSP investments. As a result, it is improbable that
investors will abstain from investing in a particular corporation simply because that
corporation happened to treat its minority shareholders unfairly in the past. Investors’
desire to maintain diversified investment portfolios will outweigh the desire to punish
a company that squeezed-out its minority shareholders at a price which was perceived
to be unfair.
Other proponents of the efficiency principle claim that the welfare of investors is
maximized by a legal rule that permits unequal division of gains from GPTs, subject
to the constraint that no investor be made worse off by the GPT This result is known
in welfare economics as the Pareto criterion.’ In discounting this claim, some advo-
cates of the fairness principle argue that investors are indeed worse off if the price
paid to minority shareholders is less than the purchase price that they originally paid.
What these advocates of the fairness principle appear to ignore is that, in an efficient
capital market, all historical price and volume data are incorporated into today’s price.
The fact that the corporation’s share price was once higher than it is today does not
indicate that it will rise again. If the price paid to minority shareholders on a GPT is
above the current market price, it is no less beneficial to the minority shareholders
simply because the price was once higher. The controlling shareholder paying the
See Wolfson, supra note 11 at 979.
2, See ibid.
n See Lowenstein, supra note 13 at 750. See also F.H. Easterbrook & D.R. Fischel, “Corporate
Control Transactions” (1982) 91 Yale L.J. 698 at 715.
See Easterbrook & Fischel, ibit
2 See ibid at 729.
122
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 43
above-market price will not profit from the GPT unless it increases the value of the
target.
This disproportionate sharing of gains can be further justified by reference to the
shareholders’ agreement to contract ex ante on the basis that “they do not in substance
own anything but are merely contracting out their capital … the price at which they
bought their shares already reflected the risks of a buyout.”‘ On the one hand, when
they purchased the shares, minority shareholders assumed the risk that they may be
forced to sell the shares that they acquired. On the other hand, one could also argue
that shareholders have certain expectations in contracting with a corporation whose
majority seeks to squeeze them out. One of these expectations is that the minority will
not be squeezed-out without sharing equally in the gains that result from the GPT.
This argument is central to the fairness principle.
B. The Fairness Principle
In contrast to the efficient-markets hypothesis, the fairness principle is premised
on the belief that the operation of a free market does not ensure that minority share-
holders receive the fair value of their shares. In other words, “there can be a signifi-
cant divergence between enterprise or share value and share price.”” Some propo-
nents of the fairness principle argue that minority shareholders must also receive the
difference between the value of the shares and the market price of the shares. Others
assert that fair treatment “requires not only that [minority shareholders] be given the
value that they are compelled to surrender but also that they be given a share of the
increment or of the opportunity which the insiders acquire by forcing them out.””
Specifically, as a result of the squeeze-out, minority shareholders are unable to share
in the gains the corporation makes upon taking advantage of corporate opportunities
which would require shareholder approval.
Arguments that shareholders are entitled to fair treatment are sometimes trans-
lated into a doctrine of equality: minority shareholders expect to share equally per
share with controlling shareholders in the gains resulting from the GPT.2’ Instead of
aspiring towards this goal, controlling shareholders, as economic agents, will “take
more than their aliquot share of the gains.”‘ Because it frustrates the minority’s expec-
tations that they will share equally in the gains, a rule of unequal sharing is seen as
unfair. Thus, if GPTs are permitted, regulatory bodies must implement measures that
ensure that the minority shares equally in the gains of the transaction.
The difficulty with the fairness principle is not its underlying assumptions. In-
deed, these assumptions seem to be sound. It is plausible that the controlling share-
25Lowenstein, supra note 13 at 750.
” “Efficient Markets”, supra note 8 at 66.
2, V. Brudney, “A Note on ‘Going Private”‘ (1975) 61 Va. L. Rev. 1019 at 1025 [hereinafter “Going
Private”].
28 V. Brudney, “Equal Treatment of Shareholders in Corporate Distributions and Reorganizations”
(1983) 71 Cal. L. Rev. 1072 at 1131.
” Ibid at 1132.
1998] A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
123
holder will seek to buy out the minority at the lowest price possible. In recent GPTs
where U.S. parents have taken their Canadian subsidiaries private, the parents have
made low-ball offers to the minority shareholders? In response to the efficiency
theorists’ argument that the parent will likely be deterred by the need to raise future
equity, advocates of the fairness principle would assert that in a GPT involving a U.S.
parent and Canadian subsidiary, there will be no need to raise equity in Canada once
the GPT has occurred unless the parent has other Canadian subsidiaries. Therefore,
there will be no need to preserve the firm’s reputation vis-A-vis public investors in
Canada.
The overarching difficulty with the fairness principle lies in the seeming practical
impossibility of determining what counts as a “gain” that must be shared. Advocates
of the fairness principle readily acknowledge this shortcoming in their theory.’ Is the
gain received by the controlling shareholder measured by the number of shares that
were acquired from the minority at a particular price? Is it measured by an estimation
of the savings in agency costs and costs associated with servicing stockholders or by
an estimation of the prospects of the company now that it is no longer publicly held?
These difficulties manifest themselves particularly during appraisal proceedings
wherein a court attempts to determine the dollar equivalent of the fair value of the tar-
get’s shares. The difficulties raise a question with respect to the formulation of regu-
lation: what extent of regulation is necessary to ensure that minority shareholders re-
ceive a fair price? A discussion of the regulation with respect to GPTs will explore the
OSC’s response to this question.
II. Evolution -of the Fairness Principle and the Regulation of
GPTs
Prior to 1977, the OSC did not specifically regulate GPTs. On 30 September
1977, the OSC introduced Policy 3-3732 The policy initially pertained to issuer bids
offers by an issuer to purchase, redeem or retire its own securities. It compelled
–
timely disclosure of certain information contained in the issuer bid circular and re-
” For example, in March 1995, the U.S.-based Dana Corp. originally offered minority shareholders
of its Canadian subsidiary, Hayes-Dana Inc., $17.50 per share. The holder of the largest number of
minority shares, the Ontario Municipal Employees Retirement Savings Board (“OMERS”), held out
for $18.50. All shareholders were ultimately paid the higher price. In May 1995, Ford Motor Com-
pany initially offered $150 per share and eventually increased it to $185 per share because of minority
claims that the price did not adequately reflect the value of the shares. See G. Keenan, “OMERS ac-
cepts new Dana offer” The Globe and Mail (19 April 1995) B4 and “Ford boosts bid for Canadian
unit” The Globe and Mail (6 July 1995) B2.
3, See “Going Private”, supra note 27.
32 (1977) O.S.C.B. 253 [hereinafter Policy 3-37]; amended (1977) O.S.C.B. 268; notices (1977)
O.S.C.B. 273, (1978) O.S.C.B. 60; exemptions (1978) O.S.C.B. 114; amended (1978) O.S.C.B. 224;
interpretation statement (1978) O.S.C.B. 323; draft amendment (1981) 1 O.S.C.B. 7E; addendum to
draft (1981) 1 O.S.C.B. 24E; published as 9.1 (1982) 4 O.S.C.B. 538E; draft (1990) 13 O.S.C.B.
2021; replaced (1991) 14 O.S.C.B. 3345; amended (1992) 15 O.S.C.B. 2921.
” Policy 3-37, ibid, indicated that the following items must be disclosed: benefits that would accrue
to any senior officer, director or other insider of the issuer;, any material changes, and “a summary of
MCGILL LAW JOURNAL/REVUE DE DROIT DE MCGILL
[Vol. 43
quired the issuer to obtain an independent valuation in certain instances.” In subse-
quent amendments to Policy 3-37, the OSC extended the Policy to a takeover bid
made by any insider of the issuer or any associate or affiliate of the insider.” Although
the term “going-private” was not found in these amendments, their effect was to bring
GPTs within the purview of Policy 3-37.3″
A significant turning point in the history of GPTs came with the OSC’s decision
in Re Cablecasting Ltd.”‘ In that case, a shareholder requested the OSC to issue a
cease-trade order to prevent Cablecasting from squeezing-out its minority sharehold-
ers. The shareholder argued that the information circular failed to comply with the
disclosure requirements in Policy 3-37 with respect to the preparation of a valuation
and that a more elaborate regulatory structure must be in place before a squeeze-out is
permitted3 The OSC refused to issue the cease-trade order but it did state in its deci-
sion that it would review Policy 3-37.9 The OSC subsequently requested that a
memorandum on the subject of GPTs be prepared by the Director of the Commission,
Charles Salter.
The primary conclusion of the Salter Memorandum’ was that the OSC need not
prohibit GPTs but that it was appropriate to regulate them in order to ensure that they
remained fair to all shareholders.”‘ Fairness should be determined by weighing a
number of factors, including: whether a majority of the minority vote would be taken;
whether an independent representative of the minority negotiated the transaction;
what tax consequences would accrue to the minority shareholders; whether an ap-
praisal remedy was available; and whether there was a valid business purpose. 2 The
Salter Memorandum ultimately concluded that an independent valuation should be
mandatory.
In July 1978, the OSC issued a notice in which it reviewed the results of its delib-
erations on the Salter Memorandum and prescribed specific rules to govern GPTs.”
The OSC rejected the fairness test proposed by the Salter Memorandum. In its view,
any appraisal or valuation known to the directors or officers [completed] … within two years preced-
ing the date of the bid” (ibid. at 258).
Policy 3-37, ibid at 262.
3 (1977) O.S.C.B. 273. The rule applied only if the bid was for more than 5 per cent of the out-
standing shares of the issuer and if the change was intended to compel any shareholder to terminate
his or her interest in the issuer.
” For a commentary on the history of Policy 3-37, see PG. Findlay, “The History and Scope of
Policy 9.1″ in OSC Policy 9.1: A Practical Approach to Related Party Transactions (Mississauga:
Insight, 1991) 1 at 3.
S(1978) O.S.C.B. 37.
38See ibid. at 46.
” See ibid at 48.
‘0 17 May 1978. The Salter Memorandum was not a published document but is on file with the
Ontario Securities Commission.
,Ibid at 60ff.
‘2Ibid.
“”‘Going Private’ Transactions, Including Comments as to Other Issuer Bids and Insider Bids”
(1978) O.S.C.B. 214 [hereinafter 1978 Notice].
1998] A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
125
the test was too imprecise and would be unnecessary if the GPT were accepted by a
majority of the minority shareholders.” The 1978 Notice did not, however, abandon
the fairness principle altogether. In the opinion of the OSC, “the question to be re-
solved is the nature of the rules that should be applied to ensure that these transactions
[i.e. GPTs] are implemented on a basis that is not unfair to the minority.”‘5 The OSC
implemented mandatory valuations, majority of the minority voting and disclosure
requirements.” It thus retained its commitment to the fairness principle but chose to
rely on procedural rules to ensure that minority shareholders receive fair treatment.
This approach continued to motivate the OSC in its formulation of regulation govern-
ing GPTs. As Anisman notes, the Commission’s approach “emphasizes structural and
procedural provisions rather than determinations of substantive fairness in each case
… the Commission would prefer not to become a regular arbiter of substantive fair-
ness. 47
In 1982, the OSC issued Policy 9.1 (“Original 9.1″) which covered GPTs, issuer
bids and insider bids.” Original 9.1 required an acquiror to have a valuation prepared
It was also mandatory for the acquiror to ob-
in accordance with certain procedures’
tain minority approval of the GPT. If the consideration were payable wholly or partly
in cash or was less than the mid-point of the range of per security values disclosed in
the valuation, then two-thirds minority approval would be required.” In any other
case, majority of the minority approval was sufficient. Finally, disclosure of relevant
items (including reasons for the GPT, material changes in the affairs of the issuer, tax
consequences and a summary of the valuation) was required in an information circu-
lar.
On 23 May 1990, the OSC introduced a revised version of Original 9.1 for com-
Instead of waiting for comments before implementing the new policy, the
ments.’
OSC warned that those issuers which did not comply with it might be immediately
subject to administrative proceedings and appropriate sanctions. On 5 July 1991, the
OSC published another version of Policy 9.1 which was amended on 26 June 1992′
and which continues to govern GPTs today.’
“Ibid at 220.
43Ibid. at 216.
“Ibid.
47 P Anisman, “The Commission as Protector of Minority Shareholders” in Securities Law in the
Modern Financial Marketplace: Special Lectures of the Law Society of Upper Canada (Toronto: De
Boo, 1989) 45 at 473.
“1 See (1982) 4 O.S.C.B. 538E.
4′ Ibid., ss. I.C.4, II.A.
Ibid. s. II.B. 1.(a).
“(1990) 13 O.S.C.B. 2021.
2 bid. at 2021.
(1991) O.S.C.B. 3345, amended (1992) O.S.C.B. 2930.
54This revised version of Original 9.1 and the amendments that follow it will be referred to collec-
tively as Revised 9.1. or Policy 9.1, supra note 1.
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 43
Revised 9.1 significantly increased the regulation of GPTs. While retaining the
disclosure, valuation and minority approval requirements of Original 9.1, it specifies
detailed procedures that must be adopted in the fulfillment of these requirements.
First, Revised 9.1 requires that the valuation be prepared by a qualified and independ-
ent valuer.” This valuer must have regard to a number of different valuation ap-
proaches”6 and must consider factors particular to the issuer, such as recent purchases
or sales of companies, assets and liabilities.” The valuer must also prepare a formal
valuation report which contains specific information with respect to the issuer and the
method of valuation’ Second, Revised 9.1 requires extensive disclosure in the infor-
mation circular of a number of items, including a detailed summary of the valuation.”
Third, Revised 9.1 strongly recommends that target companies establish special
committees of independent directors, and sets forth considerations to be taken into ac-
count when assessing independence. ‘ Fourth, Revised 9.1 retains minority approval
voting requirements.”
The increased regulation in Revised 9.1 –
particularly the regulation with respect
to valuations and special committees –
highlights a fundamental assumption of the
OSC in its approach to regulating GPTs. In formulating regulation, the OSC has as-
sumed that the market cannot be relied upon to ensure that minority shareholders re-
ceive a fair price for their shares. This assumption directly opposes the views of effi-
ciency theorists who postulate that regulation is unnecessary to ensure that minority
shareholders receive a fair price on a GPT. In Revised 9.1, the OSC demonstrates its
commitment to the fairness principle:
The Commission regards it as essential that all security holders be treated in a
manner which is fair and which is perceived to be fair Issuers and others who
benefit from access to the capital markets assume an obligation to treat security
holders fairly. The fulfilment of this obligation by issuers and their related par-
ties is essential to the public interest in maintaining capital markets which op-
erate efficiently, fairly and with integrity.2
Little, if any, regard has been paid by the OSC to the efficient operation of capital
markets. Rather, by implementing Revised 9.1, the OSC seeks to address not only the
” IbM, s. 24.3(6).
5’6 Ibid., s. 24.3.
37 Ibid
” Ibid, s. 24.
59 Ibid, s. 24.5.
, Ibid s. 27. Revised 9.1 also introduces regulation with respect to a type of transaction which it
calls a “related-party transaction” (“RPT”). Under Revised 9.1, if a transaction does qualify as a RPT,
the issuer must comply with requirements that are similar to those governing GPTs, see Revised 9.1,
ibid. s. 17. If a transaction happens to fall outside the definition of a GPT in Revised 9.1 because mi-
nority shareholders are receiving an interest of equivalent value in another participating security, the
transaction will nevertheless be bound by the rules with respect to RPTs. The Proposed Revised
Rules, supra note 3, seek to correct this anomaly by referring to a transaction in which minority
shareholders receive an interest of equivalent value as a “quasi-going-private transaction.”
61 IBM!, ss. 30,31.
62 bid., s. 1.1 [emphasis added].
1998] A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
127
unfairness but also the appearance of unfairness of GPTs. The OSC’s move from at-
tending to issues of unfairness to issues of perceived unfairness is significant. Even
though a particular transaction may not itself be unfair, mere perception warrants in-
creased regulation.
Since the implementation of Revised 9.1, the OSC has remained wedded to the
view that the regulation in the Policy, and indeed increased regulation, is necessary to
In May 1996, the OSC introduced for
preserve “adequate investor protection”.’
comments its “Notice of a Proposed Rule and Policy Under the Securities Act
Insider Bids, Issuer Bids, Going Private Transactions and Related Party
(Ontario) –
Transactions.”‘ The Proposed Revised Rules were formulated after the OSC was
granted rule-making authority pursuant to the Securities Amendment Act.’ As soon as
the Proposed Revised Rules become a rule pursuant to the SAA, they will have the
force of law.”
The Proposed Revised Rules do not alter the rules with respect to GPTs signifi-
cantly.’ However, the Rules do endorse the previous approach in Policy 9.1 of ad-
dressing transactions that are unfair or that are perceived to be unfair by resorting to
additional regulation. In response to the criticism that Policy 9.1 goes too far, the OSC
cites a practitioner who states that Policy 9.1 has “served a useful role in sensitizing
the community to the need to ensure adequate safeguards are provided when proceed-
ing with a transaction that involves actual or potential conflicts of interest.”‘” How-
ever, the key issue is whether the safeguards contained in Policy 9.1 are indeed ade-
quate. One response to this query would be that even if the regulation in Policy 9.1
does not protect minority shareholders against all instances of unfairness, it certainly
attacks instances of perceived unfairness.
There is an inherent ambiguity in the use of the word “fair” in Policy 9.1. The
Policy does not define the terms “fair” or “perceived to be fair.” In the absence of any
such definitions, the meaning of “fairness” in the Policy is open to speculation. In-
stead of relying on procedural rules designed to convince minority shareholders that
they are being treated fairly, a conception of fairness that is directly related to the
price that minority shareholders receive on a GPT should be adopted. For minority
‘3 Comments by Brenda Eprile, Executive Director of the OSC, cited in (1996) 19 O.S.C.B. 2961.
“Ibid. at 2981. See also supra note 3.
S.O. 1994, c. 33 [hereinafter SAA]. Note that the SAA was passed in 1994 following the recom-
mendations of Ontario’s Task Force on Securities Regulation. See Responsibility and Responsiveness:
Final Report of the Ontario Task Force on Securities Regulation (Toronto: Queen’s Printer, 1994).
The SAA grants the OSC the ability to make rules provided that the OSC adheres to a statutory public
notice and comment period, see SAA, s. 143. In particular, s. 143(13) states that a rule has the “same
force and effect as a regulation,” except that it is passed by the OSC and not Cabinet and that it is not
subject to certain requirements contained in the Regulations Act, R.S.O. 1990, c. R-21.
“It is not clear whether all of Policy 9.1 will become a rule or whether it will be reformulated as a
rule and companion policy statement. See Proposed Revised Rules, supra note 3 at 2983.
67 See supra note 3 at 2985 in which the OSC states that the Proposed Revised Rules “would regu-
late going private transactions in substantially the same manner as they are currently regulated.”
63 Ibid. at 2982-83.
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 43
shareholders, the key issue with respect to fairness is the price they receive for their
shares. The implementation of procedures to eliminate perceptions of unfairness is of
little use if these procedures do not ensure that shareholders actually receive a higher
price than that which they would have received without them. Rather than focus on
fairness and perceived fairness in a seemingly abstract sense, the Policy ought to
specify that these two terms refer to the price minority shareholders actually receive.
Once a conception of fairness based on price is adopted, there will be no need to be
concerned with perceptions of fairness. If minority shareholders receive a fair price,
there will be no perception of unfairness.
Ill. The Four Pillars of Policy 9.1
What are the policy implications of this argument? If a conception of fairness
based on price is adopted, then it must be ensured that minority shareholders are pro-
vided with the opportunity to assess whether they are receiving a fair price for their
shares. In order to do this, two of the four pillars of Policy 9.1 are necessary –
dis-
closure and majority of the minority approval requirements. However, it is argued that
a conception of fairness based on price does not warrant the other two pillars –
the
valuation requirement and the recommendation that the target establish a special
committee of independent directors.’
A. Disclosure
Policy 9.1 calls for extensive disclosure in an information circular to be prepared
and mailed to each shareholder prior to the shareholders’ meeting to approve the
GPT.”‘ The information circular must contain, among other things, a description of
rights available to shareholders who oppose the transaction, a detailed summary of an
independent valuation and any prior valuation involving the target or a substantial
part of its business.”
As previously discussed, in markets that are strong-form efficient, all relevant in-
formation with respect to the value of the share is contained within its market price.
However, as mentioned, studies have shown that capital markets in Canada are not
” The Proposed Revised Rules relating to Policy 9.1 propose the retention of all four facets of Pol-
icy 9.1. See supra note 3 at 2961. This argument becomes more persuasive when one considers em-
pirical evidence with respect to GPTs in Canada. See A.I. Anand, “Fairness, Efficiency and Policy
9.1: Are Going-Private Transactions Over-regulated”, Law and Economics Workshop Series, 27
September 1996 (on file with the Canadian Law and Economics Association). As part of the paper, a
study of 55 acquisition transactions which occurred in Canada between 1986 and 1995 was com-
pleted. The study suggested that the additional regulation in Policy 9.1 does not result in minority
shareholders receiving increased premiums on GPTs. In particular, no empirical evidence was found
to support the claim that returns to minority shareholders after the enactment of Policy 9.1 were
higher than they were prior to the implementation of the Policy.
0See Policy 9.1, supra note 1, s. 12.
‘ See ibid
1998
A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
129
strong-form efficient.7 ‘ In other words, market price may not indicate value where
certain information with respect to a company is not embedded in the market price of
its shares. If it is accepted that capital markets are not strong-form efficient, it follows
that disclosure is necessary to ensure that majority shareholders do not exploit non-
public information to the detriment of minority shareholders. Hence, disclosure of
non-public information such as prior valuations is warranted as is disclosure of mate-
rial changes. ‘
What information is relevant? Proponents of the fairness principle would argue
that disclosure requirements must be strict and would likely contend that most infor-
mation with respect to insiders is relevant. They would assert that minority sharehold-
ers ought to know, for example, the extent to which insiders benefit from the GPT.
This view is motivated by the concern that minority shareholders are entitled to share
equally in the gains that result from the GPT. However, the threshold for disclosure
should be whether the information would lead minority shareholders to demand a
higher price for their shares. If so, such information is relevant and ought to be dis-
closed.
B. Majority of the Minority Voting
Policy 9.1 provides that minority shareholders must approve a GPT. A simple
majority of the minority vote will be required if the consideration is cash only and if
the price offered is at least equal to or above the mid-point of the high and low ends
of the valuation. A two-thirds majority is required if the consideration is wholly or
partly non-cash or if it is less than the mid-point of the valuation. 5
7 See Daniels & Macintosh, supra note 15 at 873, n. 22.
71 Policy 9.1, supra note 1, ss. 4, 8, 12, 17 compel disclosure in the proxy material as well as in
press releases and material change reports that are filed with the provincial securities regulators. In the
recent Ford GPT, the Ontario Securities Commission engaged Gordon Capital Corp. to assist it in de-
termining whether the minority shareholders of Ford Motor Company of Canada were provided with
enough information to decide whether an offer to buy them out at $185 per share was adequate.
Mackenzie Financial Corp., the largest minority shareholder, and other institutional investors claimed
that Ford Canada should have provided better disclosure about its sensitivity to exchange rate fluc-
tuations and division of profit between manufacturing and sales. See E. Heinrich, “OSC probing
Ford’s disclosure to holders” T1w Financial Post (14 September 1995) 5.
74 Note the GPT completed in August, 1995 by Service Corporation International, a U.S. parent, and
Service Corporation International (Canada) Limited, its Canadian publicly-held subsidiary. At the
time of the GPT announcement, there were approximately three million common shares of the sub-
sidiary held by minority shareholders. There were also outstanding stock options for the purchase of
over one million additional common shares. As disclosed in the Management Information Circular of
the subsidiary dated 24 July 1995, a large number of these stock options were held by senior officers
of the parent.
‘- See Policy 9.1, ss. 30.1, 31.1. Section 15.2(2) of Policy 9.1 allows an exemption from the minor-
ity-approval requirements if a person or company holds ninety percent or more of the target’s securi-
ties at the time of the GPT and either the appraisal remedy is available to shareholders or such share-
holders are provided with an enforceable right that is substantially equivalent
MCGILL LAW JOURNAL/REVUE DE DROITDE MCGILL
[Vol. 43
A sound argument in favour of minority approval rests on democratic principles:
if minority shareholders are going to be forced to sell their shares, then certainly they
should be permitted to approve the price at which they will sell them. By providing
the minority with a separate opportunity to approve the GPT, controlling shareholders
are prevented from using “their voting power to favour their own interests over those
of the minority.”7 Also, given that GPTs occur infrequently and that their occurrence
is unpredictable, the market price of a company’s shares may not reflect the risk that a
GPT will occur. Minority approval requirements offset this risk by enabling minority
shareholders to reject an unanticipated or unsatisfactory offer. Furthermore, separate
minority approval gives meaning to disclosure requirements. It would be meaningless
for minority shareholders to receive information, on the basis of which they formulate
informed opinions with respect to the value of their shares, unless those shareholders
had the power to reject an unreasonable offer.’
One reason why the minority approval requirement is particularly effective is that
often large blocks of the minority shares are held by institutional investors such as
banks, trust companies, pension funds, insurance companies and mutual funds.” By
issuing press releases and making public announcements with respect to their voting
intentions, they inform other minority shareholders of their views with respect to the
fairness of the offer.’ In this way, retail investors are able to “free ride” on the sophis-
tication of the institutional investor.’ Retail investors also benefit from the institu-
tion’s obstinacy at holding out for a price that does not meet the institution’s satisfac-
tion.” If a shareholder tenders to the offer and the institutional shareholder holds out
for and ultimately receives a higher price, all shareholders receive the higher price.”2
76 J.G. MacIntosh, “Corporations” in Fiduciary Duties: Special Lectures of the Law Society of Up-
per Canada (Toronto: De Boo, 1991) 189 at 241.
” Recent GPTs suggest that the minority voting requirement operates effectively; where an offer is
unacceptable to minority shareholders, they reject it or even hold out for a higher price. In 1993,
Goodyear Tire & Rubber Co. sought to take the minority shareholders of its Canadian subsidiary pri-
vate at $48 per share. The minority shareholders rejected the offer but when the parent increased the
price to $65 per share, they overwhelmingly approved the transaction. Similarly, in 1994, U.S.-based
Texaco Inc. offered to buy out the minority shareholders of its Canadian subsidiary at $1.40 a share.
The minority shareholders, led by Canadian 88 Energy Corp., rejected the offer. In 1995, the minority
shareholders, led by Canadian 88 again, agreed to be bought out at $1.48. See supra note 32 for a dis-
cussion of the Dana Corp. GPT. See also G. Keenan, “OMERS blocks Dana bid” The Globe and Mail
(29 March 1995) B20; B. Jang, “Texaco closes in on control of Canadian operation: Largest minority
shareholder agrees to sell 9.8% stake” The Globe and Mail (14 April 1995) B4; and J. Kazanjian &
M. McNee, “Tensions in Corporate Governance: Minority Shareholders in U.S. Controlled Canadian
Public Companies” (1995) 7 Corp. Gov. Rev. 1.
7′ See J. Macintosh, “The Role of Institutional and Retail Investors in Canadian Capital Markets”
(1993) 31 Osgoode Hall L.L 373 at 383.
” See G. Keenan, “Ford Canada buyout approved: Angry dissenters say offer still too low” The
Globe andMail (13 September 1995) B1.
“0 See MacIntosh, supra note 78 at 376.
See ibid at 377.
See Policy 9.1, s. 32.1. See also supra note 30 which discusses the Dana Corp. OPT in which
OMERS held out for, and ultimately received, a higher price for all shareholders.
1998] A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
131
It is arguable that the presence of institutional investors reduces the need to have a
two-thirds voting requirement, which is triggered if the offer price is less than the
mid-point of the high and low ends of the valuation range. The higher approval
threshold seems to be justified since the offer price is less likely to be fair if it lies at
the lower end of the valuation range. This risk necessitates more stringent approval
requirements to protect minority shareholders. However, institutional investors are
sophisticated investors who assess the fairness of the GPT on their own and often
through valuations that are generated internally. By negotiating with the controlling
shareholder or holding out for a higher price, institutional investors reduce the need
for minority shareholders to be protected by this high approval threshold. Indeed, as
MacIntosh argues, the presence of institutional shareholders enhances market effi-
ciency and therefore reduces the need for regulation generally.3
Some scholars argue that although majority of the minority approval is an effec-
tive mechanism for ensuring that minority shareholders are treated fairly, it should not
be regarded as “a complete certification of fairness.”” Daniels and MacIntosh contend
that shareholders will be inhibited from dissenting because of management control of
disclosure and shareholder collective action problems. These problems will be par-
ticularly severe in the secondary market in which retail shareholders are prevalent.
These shareholders do not “take the time to inform themselves adequately to wield
their votes effectively: many simply will return their proxies to management without
reviewing the proxy material or will fail to return their proxies at all.”‘
Daniels and Macintosh are correct in pointing to disclosure of information as a
necessary element in a shareholder’s ability to make meaningful judgements with re-
spect to a GPT. All shareholders – whether they are institutional or retail –
should
be entitled to make their respective decisions on a fully-informed basis. In addition, it
is true that shareholders may not always co-ordinate themselves to vote collectively
one way or another on a GPT. To what extent, however, should regulation take into
account that retail shareholders may be apathetic? The transaction will be fair if it
provides information on which shareholders can make an informed decision. Whether
shareholders actually choose to review the information and make the decision is a
matter outside of the controlling shareholder’s and the regulator’s concern.
C. Valuations
Policy 9.1 compels the target corporation to have a valuation prepared by a valuer
that is “qualified and independent”.” Under Policy 9.1, “the purpose of a formal
valuation is to provide an objective assessment of value to permit security holders to
form a reasoned judgment concerning a transaction.”” The valuer must give an opin-
‘3 See Macintosh, supra note 78.
“Daniels & Macintosh, supra note 15 at 931.
,5Ibid at 931-32.
Policy 9.1, supra note 1, ss. 13, 22-26. Section 26.1 states that the valuation may be waived upon
7 Ibid, s. 22.1.
application by the target to the Director.
132
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 43
ion with respect to the “value or range of values” of the shares.” The wording of Pol-
icy 9.1 suggests that the valuation will be prepared under the supervision of the spe-
cial committee and that value will be determined by the valuers alone, once they re-
view “all relevant information”. ‘ However, in practice, the valuation requirement pre-
sents various difficulties. To begin, the OSC itself has noted that disclosure in the
valuation is often unsatisfactory.” The OSC reached this conclusion on the basis of a
report prepared by the Canadian Institute of Chartered Business Valuators which
concluded that the disclosure in more than half of the opinions reviewed was inade-
quate.” In addition, an intense negotiation process usually occurs in which the con-
trolling shareholder, the special committee, the valuer and officers of the target seek to
arrive at a range that is satisfactory to all parties. This negotiation process undermines
the objective assessment of value. If an assessment is objective, it is doubtful that it
can be reached through a negotiation process between interested parties.”
Further impeding the objective assessment of value is the financial incentive that
valuers have in arriving at a price that meets management’s approval. While valuers
may ostensibly be independent, they wish to retain their customers. A valuer which
anticipates receiving business in the future will have “an incentive to arrive at a result
congenial to management, who will decide the disposition of future business.”9 In its
Proposed Revised Rules relating to Policy 9.1, the OSC states that it does not find it
“troublesome” that independent valuers may have a relationship with management,
and particularly independent directors” This statement evidences a change from Pol-
icy 9.1 which states that valuers must be independent from any interested party.”
While the independence of valuers may be questionable, it appears as though
Daniels and MacIntosh have overstated the case when they assert that “[i]t is virtually
unheard of for an investment banker or other valuer to deliver a fairness opinion or
valuation that does not reflect management’s view.”” First, the negotiation process
“Ibid. s. 24.3(2).
9 Ibid, s. 24.3(1).
“Proposed Revised Rules, supra note 4 at 2990.
91(1993) 18 O.S.C.B. 5014.
9’ Some may argue that the fact that each of these parties is involved in reaching a decision with re-
spect to the range ensures that the process is legitimate; it is akin to negotiation between ann’s-length
parties. But if the process is akin to arm’s length negotiation, then representatives from the group of
minority shareholders should certainly be seated at the bargaining table.
“‘ Daniels & Macintosh, supra note 15 at 925; see also Anisman, supra note 47 at 469-72.
9” See supra note 3 at 2988.
‘ See Policy 9.1, supra note 1, ss. 23.4, 23.5. It is also questionable how relevant an externally gen-
erated valuation is to shareholders. Institutional shareholders usually prepare their own valuation
when deciding whether to tender to a GPT. Although the valuation may be of interest to retail inves-
tors, there are numerous other factors such as the investors’ individual financial circumstances, the
price at which they bought their shares, the advice of their professional advisors and news regarding
the intentions of institutional investors which tend to influence their decisions regarding the GP. In
short, it is unclear how useful a valuation is to minority shareholders.
9′ Supra note 15 at 925. Note the lack of independence of the special committee in the Ford trans-
action. The special committee of the Canadian subsidiary retained Wood Gundy Inc. to prepare the
valuation. However, two of the four members on the special committee were also directors of the Ca-
1998] A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
133
would not be as intense as it is unless the valuer held a particular view about the
proper valuation range of the shares. Second, valuers have their own reputation to
protect; they may pay more than mere lip-service to the requirements in Policy 9.1 to
avoid the presumption made by either the OSC or retail shareholders wishing to deal
with the valuer’s firm that this valuer engages in shoddy practice. Such a presumption
would also have a negative impact on the valuer’s public relations. Third, valuers who
are closely related to management frequently do business with institutional investors
who may be the minority shareholders in a GPT. Valuers thus have some incentive to
provide an opinion acceptable to all parties, management and minority shareholders
alike.
The difficulties with the valuation requirement are not only that valuers are rarely
independent. Determining value itself is, in many cases, a very difficult, if not impos-
sible task. Consider the Ford GPT in which a number of valuations have been and are
being prepared. Prior to proposing the GPT to its Canadian subsidiary, U.S.-based
Ford Motor Company retained a valuer who concluded that the fair market value of
the subsidiary’s shares was in the range of $110 to $150 per share. Ford U.S. pro-
posed the GPT to minority shareholders at $150 per share. The special committee of
the subsidiary then retained a valuer that stated that the fair market value of the shares
was in the range of $170 to $200. The minority shareholders were then offered $185
per share. Though Ford Canada was able to complete the GPT without the approval
of minority shareholders, ‘ some minority shareholders are exercising their appraisal
right and have commissioned their own valuation. A Montreal firm also issued a sub-
sequent valuation stating that the shares are worth up to $750 each!’
It may be impossible to value the shares of Ford Canada and to reach a value with
which all parties, including minority shareholders, would agree represents the value
of the shares. This raises the question of whether the rules with respect to valuations
in Policy 9.1 are effective: do valuations make it more likely that minority sharehold-
ers will receive a fair price for their shares? It is simply not possible to provide an
adequate response to this question without empirical evidence to support the re-
sponse? Without such evidence, it could be argued that the extensive regulation in
nadian Imperial Bank of Commerce, Wood Gundy’s parent company. Almost any test with respect to
independence would point to the lack of independence and potential conflict of interest here. See G.
Keenan, “Ford Pouring Millions into Oakville” The Globe and Mail (17 May 1995) B1.
9, The Ford GPT was exempt from minority approval requirements under section 15.2(2) of Policy
9.1, supra note 1. Ford Canada owned more than ninety percent of the shares and the minority share-
holders had the option of relying on the appraisal remedy.
9′ See E. Heinrich, “Market speculates parent will raise Ford Canada bid” The Financial Post (5
May 1995) 5.
One may ask what type of empirical evidence would be useful in this endeavour. Comparative
empirical data with respect to premiums prior to and subsequent to the imposition of the more strin-
gent valuation requirements in Policy 9.1 (May 1990) could be collected. In addition, it may be useful
to compare premiums in GPTs in which an exemption from the valuation requirements was obtained
against GPTs in which valuations were prepared in accordance with Policy 9.1. It would also be use-
ful to update a study completed by B. Amoako-Adu & B. Smith, “Minority Buyouts and Ownership
Characteristics: Evidence from the Toronto Stock Exchange” (1992) 21 Fin. Man. 41, discussed in
Anand, supra note 69.
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 43
place with respect to valuations in Policy 9.1 is unnecessary since it does not result in
an increase in the price received by minority shareholders.
D. Special Committees
Policy 9.1 does not require the target board of directors to establish a special
committee of independent directors; it merely states that it would be “good practice”
to do so.'” Though this is currently only a recommendation, the formation of a special
committee by the target in a GPT has been established by practice. In an ideal world,
such a committee would alleviate the inherent conflict between management and the
controlling shareholder on the one hand, and the minority shareholders on the other.
As a body comprised of persons without an economic interest in the GPT, the special
committee selects an independent valuer, supervises the preparation of the valuation,
reviews it and makes decisions with respect to its assumptions. The special committee
makes a recommendation to the board which, in turn, makes a recommendation to the
shareholders as to the fairness of the GPT.
Often, the ostensibly independent director is not, in fact, independent.”‘ It is
common for directors to share a social bond with the controlling shareholder and fel-
low directors, which they do not share with widespread groups of minority sharehold-
ers.’ 2 There is, in Canada, a small pool of individuals from which to choose inde-
pendent directors. 3 Independent and non-independent directors will often have
served together on various boards or will have become acquainted in other circles.
Management chooses its independent directors but, rather than viewing the special
committee as a truly independent and neutral entity, it usually views it as a body that
legitimizes the transaction. The special committee often serves to “freshen the atmos-
phere”.” Indeed, in the context of a GPT, it seems that independent committees rarely
deviate from supporting management’s proposal.
Thus, one of the primary consequences of having a special committee is that it
gives an aura of legitimacy to the GPT. This consequence is relevant to the considera-
tion of whether the special committee is a necessary aspect of the regulation govern-
ing GPTs. The mere implementation of procedural rules does not necessarily ensure
that substantive fairness will be achieved. The strong recommendation that manage-
ment establish a special committee is but one example of the way in which Policy 9.1
“‘ In insider bids, it is mandatory that a special committee of independent directors supervises the
valuation; see Policy 9.1, supra note 1, s. 5.
to, For a discussion of independent directors, see V. Brudney, “The Independent Director – Heav-
enly City or Potemkin Village?” (1982) 95 Harv. L. R. 597.
,o2 See Anisman, supra note 47 at 470.
203 See J.G. Macintosh, “Corporate Governance in Canada: A Broad-Brush Assessment” in Securi-
ties Regulation: Issues and Perspectives (Scarborough: Carswell, 1994) at 327-28.
0’ See Daniels & Macintosh, supra note 15 at 931; Daniels & Macintosh borrow this idea from
Gottlieb v. Heydon Chemical Corp., 91 A. 2d. 57 at 59 (Del. S.C., 1952).
1998] A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
135
provides a procedural safe harbour which insulates what may be a suspect GPT from
the scrutiny of the regulator.”
An independent committee may be viewed as a useful tool in the OSC’s endeav-
our to combat perceived as well as actual unfairness. Once again, the possibility that
independent directors are not in fact independent merely points to a deeper difficulty
in Policy 9.1 itself: it is not certain whether independent directors are useful in ensur-
ing that minority shareholders receive a fair price. Empirical studies such as whether
special committees actually contribute to higher prices for minority shareholders are
necessary before this additional regulation should be endorsed.
E. Why Two Pillars Must Be Retained
It could be asserted that the argument that only two of the four pillars should be
retained does not necessarily follow from the contention that fairness ought to be
based on price. First, there is no empirical evidence which indicates that the disclo-
sure requirement and the majority of the minority voting requirement lead to higher
prices for minority shareholders on a GPT.”‘ Second, if fairness is defined by price
and price alone, then why do shareholders need to receive a disclosure document and
have the right to vote at a shareholders’ meeting? If they are not offered a price which
they consider to be fair, they should simply refuse to tender to the offer. After all,
shareholders usually have a dissent right which enables them to receive the fair value
of their shares.”7
The argument for retaining the disclosure requirement and majority of the minor-
ity approval requirement is derived from the efficiency principle. If it is accepted that
capital markets in Canada are not strong-form efficient, then there should be a re-
quirement compelling a corporation to disclose information which is not publicly
available but which could effect the market price of the shares. Otherwise, minority
shareholders would be unable to make a decision with respect to whether a particular
offer is fair because they would not have all relevant information at their disposal. If
shareholders are presented with information, on the basis of which they formulate a
decision to tender to the GPT, then it follows that they ought to be provided with a fo-
rum within which they can vote against an unfair price. Dissent rights are insufficient
in such a context; the exercise of these rights is complex and technical which explains
why these rights are rarely exercised. In addition, dissent rights force the courts to
‘0 See Daniels & Macintosh, ibid. at 931. See also Anisman, supra note 47 at 473.
lThe issue of empirical evidence is discussed in the conclusion below.
10 Most Canadian corporate statutes provide for an alternative remedy through the exercise of dis-
sent rights if one of the minority shareholders does not wish to receive the consideration being offered
by the acquiror as part of a GPT. Common shares held by the dissenting shareholders are not con-
verted into preferred shares but are acquired by the target. The shareholder is entitled to apply to a
court to have the fair value of the shares determined if the shareholder and the target cannot agree on
a price. See e.g. the CBCA, supra note 5, s. 190(3) and the Business Corporations Act, R.S.O. 1990,
c. B-16, s. 185(4).
MCGILL LAW JOURNAL/REVUE DEDROITDE MCGILL
(Vol. 43
determine the fair value of the dissenter’s shares and it is questionable whether the
court system is the appropriate forum for deciding fair value.
While the argument above underscores the importance of the disclosure and ma-
jority of the minority voting requirements, it does not call for the retention of the
valuation and special committees provisions of Policy 9.1. Admittedly, these two
provisions may be responses to concerns of perceived unfairness. However, in light of
the revised conception of fairness based on price proposed in this article, it must be
asked whether these aspects of Policy 9.1 are effective and, if so, whether the costs
imposed by this regulation are justified by the benefits it creates for minority share-
holders.
Conclusion
There is no empirical evidence which definitively responds to the question of
which, if any, provisions in Policy 9.1 should be retained. In fact, the implementation
of regulation without supporting empirical evidence is a weakness which pervades se-
curities regulation in Canada generally. Without the benefit of empirical evidence, it is
impossible to know whether proposed regulation is necessary and, if so, whether it
will be effective in achieving the desired results. As a general practice before imple-
menting regulation, securities regulatory authorities should solicit, commission or
conduct empirical studies with the objective of enabling regulators to assess the costs
of the proposed regulation. They should also consider whether these costs outweigh
the benefits of the regulation to market participants. In some cases, it may be impos-
sible to assess the usefulness of regulation unless the regulation is implemented and in
force. In these cases, the regulation could be “sun-setted” for a limited period of time.
Such a testing period would enable regulators to repeal implemented regulation which
proved to be ineffective or too costly when compared to the benefits it provides.
For market participants, empirical evidence is necessary because as regulation
becomes more stringent and more complex, it also becomes more costly. Under Pol-
icy 9.1, costs stem from the obligation to hire an independent valuer, to form a special
committee of independent directors, to compile an information circular and circulate
it to shareholders, and to hold a shareholders’ meeting. The existence of these costs
does not mean that GPTs should not be regulated. But they do raise the question of
the effectiveness of Policy 9.1. Does it fulfill its objectives and do the benefits of the
regulation outweigh the costs?’ 8
‘ See Anand, supra note 69. See also MacIntosh, supra note 103 at 322, where it is stated that,
regulation which seeks to completely eliminate all failure, or to eliminate all wrongdo-
ing, is not cost-effective regulation. All regulation is costly, both because of the direct
and opportunity costs of compliance. The question is, and must always be, whether
additional regulation is cost-effective. The cost-effectiveness criterion essentially re-
duces to this: does the new regulation produce at least as much wealth as it costs to
implement? [emphasis in original].
1998] A.L ANAND – GOING-PRIVATE TRANSACTIONS IN OSC POLICY 9.1
137
Unlike securities regulatory authorities in Canada, the U.S. Securities and Ex-
change Commission (“SEC”) explicitly recognizes the usefulness of empirical data.
In soliciting comments on its proposals, the SEC urges commenters to provide em-
pirical evidence relating to the issues considered by the particular proposal in order to
assess whether proposed regulation will promote the efficiency of securities markets
and the confidence of market participation.” With such evidence, the SEC focuses on
and attempts to evaluate the economic impact of proposed rules.
Securities regulators in Canada should follow the approach of the SEC in this re-
gard. In order to justify regulation, regulators bear some burden of providing tangible
evidence that the regulation is necessary, that it will accomplish the desired results
and that the benefits received by market participants will justify the costs imposed by
the regulation. Otherwise, regulation may be inappropriately and unnecessarily im-
plemented. Ultimately, it will be market participants who bear the costs of such
practice.
“9 See e.g.: SEC Release No. 33-7393, “Delayed Pricing for Certain Registrants” SEC (20 February
1997) 383 (LEXIS/NEXIS); SEC Release No. IC-22530, “Investment Company Names” SEC (27
February 1997) 472 (LEXIS/NEXIS); SEC Release Nos. 33-7399, IC-22529, “Proposed New Disclo-
sure Option for Open-End Management Investment Companies” SEC (27 February 1997) 474
(LEXIS/NEXIS); SEC Release Nos. 33-7398, 34-38346, IC-22528, “Registration Form Used by
Open-End Management Investment Companies” SEC (27 February 1997) 485 (LEXIS/NEXIS).
