Canada: Target Boards will Consider More Aggressive Defensive Tactics When Facing a Hostile Bid

To read "M&A: Tory's Top Trends for 2011" in full, please click here.

Two well-known Canadian companies dominated the M&A headlines last summer and fall, one as the hunter and one as the hunted. Although the outcomes in both situations were similar – hostile bidders turned away – the cases highlight an important question: whether directors of Canadian companies facing a hostile bid find themselves with a relatively empty toolbox compared with directors in other jurisdictions.

As the battle for Potash Corporation of Saskatchewan was waged, only three possible outcomes appeared evident:

  1. BHP Billiton would be successful in its bid;
  2. Potash Corporation would find some alternative transaction led by a "white knight"; or
  3. The Canadian industry minister would refuse to grant Investment Canada Act approval for the BHP transaction.

We all know now that it was a failure to win Investment Canada approval that ended BHP's deal (See Trend 1). However, at no time during the Potash saga did observers really expect that, unless the federal government intervened, Potash Corporation would never manage to simply turn away BHP without an alternative transaction in hand. In other words, without unusual government intervention, Potash Corporation was "in play" and therefore a transformational outcome was imminent one way or another.

Meanwhile, Quebec-based convenience store operator Alimentation Couche-Tard Inc. embarked on a hostile bid for Iowa-based Casey's General Stores Inc. The range of possible outcomes in that case was far from certain, and both sides employed many different tactics during the fight. Those tactics included

  • the issuance by Casey's of a substantial amount of debt on a private placement basis, with terms that included a "poison put" in the event of a change of control;
  • a buy-back of approximately 26% of Casey's outstanding shares using the proceeds of the debt issuance; and
  • a proxy battle launched by Couche-Tard for control of Casey's board.

At the end of the day, after losing its proxy battle by a wide margin and with Casey's board dangling the prospect of a higher offer from 7-Eleven, Couche-Tard refused to raise its bid and walked away. Ultimately Casey's board received a higher offer from 7-Eleven, but still declined to take the offer to shareholders – deeming it inadequate.

The Casey's board was able to use the protection of a shareholder rights plan, but also benefited from a corporate statute in Iowa that prevented Couche-Tard from acquiring 100% of Casey's unless Couche-Tard received the support of Casey's board or was able to obtain 85% of the outstanding shares under its tender offer.

The Canadian Approach: "There Comes a Time When the Pill Must Go"

Securities regulators in Canada have long held the view that the best approach in a hostile bid is to have an unrestricted auction for control. They regard this approach as consistent with their mandate to protect the interests of investors – shareholders should not be deprived of the ability to sell their shares as they see fit. The securities regulators make clear in their national policy on defensive tactics that these tactics may be used only "in a genuine attempt to obtain a better bid." Historically, there has been no room in the regulators' minds for any tactics that would "deny or limit severely" the ability of shareholders to respond to a bid.

In the takeover bid context, the securities regulators have wielded enormous power to implement this philosophy. Through their authority to issue cease trade orders, the regulators have the power to pull the plug on rights plans, the most commonly used Canadian defensive tactic. The regulators' approach, however, is hard to reconcile with the Supreme Court of Canada's interpretation of the duties of directors in a change-of-control situation. In the BCE decision in 2009, the Supreme Court expressly rejected the notion that the directors' only role in a change- of-control transaction is to maximize value for shareholders; the Court instead reiterated the principle that directors' duties are owed to the corporation and that directors must consider the impact of a transaction on all stakeholders. Although the BCE decision certainly suggests that there may be appropriate circumstances for a board to "just say no" and employ defensive tactics to turn away a hostile bidder, rather than simply to buy time to find a white knight, the securities regulators are likely to reject that board decision and turn the decision regarding the company's future over to the shareholders.

Recent rights plan decisions of the Ontario and Alberta securities regulators (in Neo Material Technologies and Pulse Data, respectively) suggested that perhaps the old way of thinking about defensive tactics may be changing in light of BCE. In both those cases, securities regulators refused to cease trade a rights plan in the face of a hostile bid. However, in both cases, shareholders, with full knowledge of the hostile bid proposed to them, voted to ratify the rights plan. The OSC's most recent decision in the Baffinland Iron Mines case, however, makes clear that its previous Neo decision turned on shareholder approval of the plan in the face of the bid and should not be viewed as recognizing any right of the board to use a poison pill to deny shareholders access to a bid. The decision of the British Columbia Securities Commission in Lionsgate is also unequivocal in its conclusion that the position of securities regulators in Canada should not change as a result of Neo and Pulse Data and that there will always come "a time when the pill must go."

The "Just Say No" Defence in the United States and a Shifting International Mood

Foreign takeovers of domestic companies are a rising concern in all jurisdictions, particularly as the global financial crisis has made targets vulnerable to opportunistic buyers. Part of the concern in Canada has related to a track record of broken promises by foreign acquirors, but Canadian companies have also not fared that well recently in attempting hostile transactions in other jurisdictions (in addition to Couche-Tard's abandoned bid for Casey's, Agrium Inc. was forced after a year to abandon its bid for CF Industries in early 2010). The concern expressed during the Potash debate about Canada being a "boy scout" when it comes to foreign takeovers may be driven less by the federal government's position on foreign investment and more by Canadian directors' inability to do much more than initiate an auction for control of the company once a company is in play.

In the United States, directors have the well-known "Revlon duty" to maximize shareholder value, but that duty arises only after a board has made a decision to sell control of the company. Until that decision is made, the board is free to implement defences against a takeover bid, including adopting a rights plan or a panoply of other "shark repellents." However, in Delaware and most states, the Unocal "enhanced scrutiny" standard applies to a board's action to implement or amend a rights plan after the company is put in play by a third-party bidder or by a board decision to sell a controlling interest in the company. Under this enhanced scrutiny standard, in order to receive the protection afforded by the business judgment rule, the directors must show that they had reasonable grounds to believe that a danger to corporate policy and effectiveness existed and that the defensive response was reasonable and proportionate to the perceived threat.

Unlike the Canadian securities regulators, the U.S. Securities and Exchange Commission has stayed out of the regulation of defensive tactics, leaving them to the courts to police as a matter of fiduciary duties under applicable state laws governing the fiduciary obligations of directors. The SEC has instead focused on ensuring that shareholders have adequate information with which to make a decision. For example, while Casey's was able to maintain its rights plan in place throughout its contest with Couche-Tard without regulatory interference, in Canada the rights plan would almost certainly have been nullified by the regulators after 45 to 60 days.

Even the United Kingdom is rethinking its approach to takeover bids after Kraft's acquisition of the iconic British candy maker Cadbury. That deal and the surrounding publicity have prompted the U.K. regulator to propose new rules intended to reduce the tactical advantage of bidders in takeover situations.

Continued Debate in Canada

Despite the debate over the sufficiency of the tools available to directors of Canadian companies facing a hostile takeover, it is doubtful that we will see any significant movement on the issue from securities regulators in the near future, particularly given the lack of a national securities regulator.

In light of Lionsgate and Baffinland, it now seems clear that Neo and Pulse Data do not herald a real shift in policy by securities regulators and do not open the door to a "just say no" defence. However, we expect that directors facing a hostile bid will continue to try to test the "old" thinking of securities regulators by attempting to keep rights plans in place longer or by obtaining shareholder approval of plans in the face of a hostile bid.

We also anticipate that boards and their advisers will look to develop innovative defensive tactics that, unlike rights plans, are not susceptible to the cease trade powers of securities regulators and that would require intervention by the courts. The courts are a preferable venue for targets to defend defensive tactics since courts are more likely than securities regulators to be deferential in their review of target board actions, particularly in light of the new fiduciary duty framework established in the BCE decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions