Canada: Québec Securities Regulator Proposes Alternative Approach To Regulation Of Defensive Tactics

Concurrently with the release on March 14 by the Canadian Securities Regulators ("CSA") of Proposed National Instrument 62-105 Securities Holder Rights Plans ("CSA Proposal"), Québec's Autorité de marchés financiers (the "AMF") released a consultation paper setting forth proposals for changes to Canada's take-over bid and defensive tactics regimes (the "Proposal") that it believes should be considered at the same time as the CSA's shareholder rights plans proposal. The CSA Proposal sets out a new regime for the regulation of shareholder rights plans in Canada and would shift decision making regarding rights plans from securities regulators to shareholders, by allowing a rights plan adopted by a target board of directors to stay in place, provided that shareholder approval is obtained within specified times. Our summary and discussion of the CSA proposal can be found here.

The two proposals advanced by the AMF are that:

  • National Policy 62-202 Take-Over Bids – Defensive Tactics ("NP 62-202") be replaced with a new policy on defensive tactics that would, among other things, give greater deference to directors in the exercise of their fiduciary duties in responding to an unsolicited take-over bid. The AMF feels that it is time for a global revision to defensive tactics, rather than only making a change with respect to shareholder rights plans as proposed by the CSA.
  • The take-over bid regime be amended to require that bids contain an irrevocable condition that a minimum of over 50% of securities held by persons other than the Offeror and those acting in concert with it be tendered and a requirement that bids be extended for 10 days once an issuer announces that the minimum tender condition has been fulfilled.

Background

The AMF stated that changes are required to the Canadian take-over regime to address three main concerns: (i) that the regime has become too bidder friendly, (ii) that NP 62-202 essentially limits boards to auctioning off the company in the face of an unsolicited bid, and (iii) that the regime is structurally coercive insofar as individual security holders are pressured to tender to bids they do not support or to sell on the market out of fear of being left behind. The AMF considers that the CSA's proposed changes to the treatment of shareholder rights plans are not broad enough in scope to address these concerns.

The AMF also believes that the defensive tactics regime should be updated to respond to changes in the Canadian corporate landscape that have occurred since its inception in the 1980s, including improvements in corporate governance and the increasing influence of sophisticated and active market participants. The Proposal, therefore, aims to shift the focus of take-over bid defensive tactic regulation away from simply protecting shareholders from conflicted boards towards evening the balance between bidders and target boards.

Deference to Fiduciary Duties

The AMF proposes to replace NP 62-202 with a new policy on defensive tactics that would clearly recognize the fiduciary duty of directors to the corporation when responding to an unsolicited take-over bid and would redefine the Canadian securities regulators' intervention to such bids on the ground of public interest. This new policy would provide, among other things, that actions and decisions taken by the directors of a target board be given appropriate deference by securities regulators who would essentially be limited to examining the context in which the take-over bid takes place, the process followed by directors and the basis for the directors' recommendation to security holders that they accept or reject a bid. The Proposal states that when appropriate safeguard measures are effectively implemented and monitored by boards and their independent advisers, there can be reasonable assurance that the directors' decisions are not tainted by conflicts of interest. The AMF further suggests that it would be appropriate to consider, among other things, certain facts in assessing the reasonableness of the target board's actions in proposing or implementing a defensive measure, such as:

  • the establishment of a special committee of independent directors with the mandate to consider and review the bid and make a recommendation to the board
  • the appointment of independent financial and legal advisers to assist the special committee in fulfilling its mandate;
  • the conclusion of the special committee and the board that, based on their review of the bid and on the advice of legal and financial advisers, it is in the best interest of the corporation to implement a defensive measure; and
  • the completeness of the disclosure provided to security holders in the directors' circular, and any other form of communication used by target directors, on the process followed to provide their recommendation and their reasons in support of the defensive measure.

This proposed guidance would complement the appropriate degree of competence and skill required of directors of a target board discharging their fiduciary duty, including the careful and informed deliberation that directors are expected to demonstrate as part of their duty of care.

Finally, the AMF believes that the guidance currently provided in NP 62-202 limits the ability of target boards and management facing an unsolicited take-over bid to contemplate measures other that the sale of the corporation, even if such measures could maximize security holder value in the long-term. To remedy this, the AMF suggests that unless security holders are deprived from considering a bona fide offer because the target board has inadequately managed its conflicts of interest or those of management, and absent unusual circumstances that demonstrate an abuse of security holders' rights or that negatively impact the efficiency of capital markets, securities regulators should consider that defensive tactics are not prejudicial to the public interest and limit their intervention accordingly. The AMF proposes to include the abovementioned guidance in the new policy in order to provide a level of predictability to market participants and to clarify the context in which policy objectives are applied.

Addressing Structural Coercion

The AMF points out that the current standard form of shareholder rights plans contains "permitted bid" provisions that include, among other elements, an irrevocable minimum tender condition and a bid extension following the public announcement that the minimum tender condition has been met, which provisions are meant to address the structural coercion of Canada's take-over bid regime. Structural coercion occurs when security holders are pressured to tender their securities to a bid they do not support, or sell into the market, out of fear that they might otherwise be left behind (notably in the event that a minimum tender condition is waived to allow for the take-up and payment of deposited securities). To counter such structural coercion, the AMF suggests adopting provisions in Canada's take-over bid regime similar to the terms of standard shareholder rights plans. More specifically, the AMF proposes that the Canadian take-over bid regime be amended to require that all bids (including any partial bids) contain an irrevocable minimum tender condition of more than 50% of the outstanding securities owned by persons other than the offeror and those acting in concert with it. The AMF is of the view that this would serve to mitigate, if not eliminate, the pressure on security holders to tender as the bid can only succeed if a majority of "independent" security holders in effect "vote" for the bid, irrespective of how many securities are taken-up at the end of the process.

To complement this proposed security holder "voting mechanism", the Proposal includes a requirement that bids be extended for an additional 10 days once an issuer publicly announces that more than 50% of the outstanding securities owned by persons other than the offeror and those acting in concert with it have been tendered. The AMF believes that this extension would give less sophisticated or indecisive security holders the opportunity to take into account the tender by more experienced security holders, and would alleviate any pressure such less sophisticated or indecisive security holders have to sell in the market or to a bidder for fear of being left as part of a minority. The position taken in the Proposal is that these two suggested changes, which essentially allow security holders to "vote" on any given offer, become an effective substitute to the security holders' approval of a rights plan or of an amendment to an existing rights plan as contemplated under the current CSA Proposal. The AMF contends that this proposal would ensure that security holders' bone fide interests remain at the core of the Canadian take-over bid regime and that structural coercion would be mitigated, which in turn, from a market perspective, may lead bidders to negotiate more often with target boards or provide greater premiums to security holders to ensure the success of their bid.

Conclusion

The AMF's first proposal would appear to allow boards to "just say no" to unsolicited take-over bids in certain circumstances and up to a point where the AMF felt that it needed to exercise its jurisdiction while its second proposal is aimed at protecting a shareholder's right to choose during a take-over bid in the name of shareholder democracy. The elements of the Proposal will have to be examined and balanced since, once more safeguards are put in place to ensure a balance between the various groups of interested parties (the target, the bidder and the target's stakeholders), there may be a tension between appropriate defensive tactics and a need for regulators to exercise their public interest jurisdiction to ensure that shareholders are able to access a bid and decide for themselves.

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.

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