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.

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
 
In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.