Canada: CSA Proposes Significant Changes To Regulation Of Shareholder Rights Plans

On March 14, 2013, the Canadian Securities Administrators ("CSA") published for comment proposed National Instrument 62-105 and the proposed companion policy (collectively, the "Proposed Rule"), setting out a new regime for the regulation of shareholder rights plans in Canada.

Currently, a bidder making an unsolicited takeover bid for a Canadian public company can apply to the applicable provincial securities regulator for an order cease trading the target's rights plan, which effectively terminates the operation of the plan. With a few exceptions, the Canadian securities regulators have cease traded rights plans on the basis of what the Canadian regulators have described as a fundamental principle that ultimately shareholders must be given the opportunity to choose between the offer made by the unsolicited bidder and any alternatives proposed by management – at some point the pill "must go".

The Proposed Rule would shift decision making regarding rights plans from securities regulators to shareholders by allowing a rights plan adopted by a target board to stay in place, provided shareholder approval is obtained within specified times. The Proposed Rule is intended to address concerns that Canada is too bidder-friendly in that there are a limited number of takeover defenses available to Canadian companies in the face of a hostile takeover bid, while ensuring that the majority of shareholders are supportive of the rights plan proposed by management.

The basic elements of the Proposed Rule are the following:

  • a rights plan is effective when adopted by the board of directors but it must be approved by security holders within 90 days from the date of adoption or, if adopted after a takeover bid has been made, within 90 days from the date the takeover bid was commenced;
  • a rights plan must be approved annually by a majority vote of shareholders to continue to remain effective;
  • if an issuer fails to obtain shareholder approval of a rights plan within the prescribed time limits, the issuer cannot adopt a new rights plan for 12 months unless a takeover bid for the issuer is commenced during that 12-month period;
  • shareholders can terminate a rights plan at any time by majority vote;
  • material amendments to a rights plan must be approved by security holders within 90 days of the date of adoption of such amendments;
  • any shares held by the bidder are excluded from a security holder vote to adopt, maintain or amend a rights plan;
  • a rights plan is effective only against takeover bids or an acquisition by a person of securities of the issuer (e.g. it cannot be triggered by a shareholder vote); and
  • a rights plan cannot be used to discriminate between takeover bids, so if it is waived or modified with respect to one takeover bid it must be waived or modified with respect to any other takeover bid.

The materials released by the CSA send a strong signal that the securities regulators no longer want to be responsible for determining when a rights plan should be removed. The securities regulators have, however, reserved the right to intervene where a target company engages in conduct that undermines the principles underlying the Proposed Rule or where there is a public interest rationale for the intervention not contemplated by the Proposed Rule.

Key Implications

The principal implication of the Proposed Rule is that a target company will be able to forestall an unsolicited bid for at least 90 days, which increases the amount of time available to seek out alternatives and provides greater leverage in potential negotiations with an unsolicited bidder. In addition, where a bidder cannot reach agreement with the target board of directors, a shareholder vote to terminate (or fail to approve) a rights plan is essential to the success of the unsolicited bid. As a result, the Proposed Rule and the new approach to rights plans will change the strategies employed by bidders in planning and executing acquisition transactions.

For further discussion regarding the implications of the Proposed Rule, refer to our article " Shareholder Rights Plans – Canadian Regulators Propose Modified U.S. Style of Regulation".

Broader Review of Changes to Canada's Takeover Bid Regime

The Proposed Rule is being released in connection with amendments to the early warning reporting regime proposed by the CSA, which are described in our summary. The interplay of the Proposed Rule, which shifts decision making to shareholders, and the proposed revisions to the early warning regime, which will require disclosure of more information from shareholders at lower ownership thresholds, will have important implications for bidders in designing strategies associated with the successful execution of unsolicited change of control transactions.

In addition, the Quebec Autorité de marchés financiers has concurrently released a consultation paper which is described in our summary. The consultation paper proposes greater deference to the decisions of target boards of directors and a new minimum bid condition which could potentially become an effective substitute for shareholder approval of a rights plan.

Request for Comments

The comment period in respect of the Proposed Rule expires on June 12, 2013.

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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