Why Does Ontario Require Equal Treatment in Sales of Corporate Control?

There is a long-standing controversy over the question of whether controlling and minority shareholders should be treated equally in sales of control. Ontario securities law adopts a mandatory ‘equal opportunity rule’ that requires acquirers in most cases to extend a premium offer to purchase controlling shares to minority shareholders and controlling shareholders on equal terms. This article concludes that, having regard to theory, empirical evidence, and the specific rules in place, the most coherent explanation for Ontario’s mandatory approach is that it assists target shareholders in extracting gains from acquirers of control. As a matter of theory, there is no need for a mandatory rule if the purpose of the rule is to deter inefficient sales of control to buyers interested in diverting value from the minority, but a mandatory rule makes sense if the purpose is to increase the purchase price of control blocks. The extraction hypothesis is consistent with existing empirical evidence, as well as with this article’s event study based on the possible sale of control of Canadian Tire in the 1980s (the case that provided the impetus for the mandatory equal opportunity rule we observe today in Ontario). Finally, the particulars of the rule in place, such as the exemption for firms existing when the rule was imposed, are consistent with the extraction theory but not with other theories, especially a ‘fairness’ theory of equal treatment.