The Canadian Securities Administrators (CSA) have proposed a new rule governing shareholder rights plans, or "poison pills", that would provide target boards with the ability to unilaterally delay a take-over bid for a minimum of ninety days. Under the proposed rule, the target may leave a rights plan in place in the face of a hostile bid indefinitely, provided that a majority of the target's security holders approve the rights plan. If implemented, the proposed rule would be a significant development for M&A practice in Canada and would likely make the process of completing a hostile bid in Canada more expensive and subject to considerably more uncertainty from the point of view of a bidder.
On March 14, 2013, the CSA published proposed National Instrument 62-105 Security Holder Rights Plans and its Companion Policy for a ninety-day comment period.
The current Canadian rules are premised on a policy that recognises the important role of take-over bids as a discipline on corporate management and in re-allocating economic resources. National Policy 62-202 Take Over Bids – Defensive Tactics (NP 62-202) explicitly recognises that the interests of management of a target company will differ from those of its security holders and limits the actions that management may take in response to a bid it opposes. Accordingly, if a hostile bidder asks a Canadian securities regulator to cease trade a rights plan the regulator will almost always do so, generally within 45 to 55 days.
The proposed rule would mean the end of the traditional view in Canada that there comes a time when a rights plan "must go" once it has accomplished its legitimate purpose of allowing directors to try to maximize security holder choice and value by encouraging competing bids or transactions. Underlying this approach, which has developed in a line of decisions since the early nineties, is an emphasis on the rights of target security holders to make individual decisions regarding whether or not to tender their securities to a hostile bid.
The CSA are responding to concerns that the traditional approach unduly favours bidders, particularly when compared with the legislative approach taken in other jurisdictions, notably the U.S., and that this leaves Canadian companies comparatively vulnerable to hostile bids. Moreover, even when viewed from the traditional perspective of leaving take-over decisions to security holders, the CSA recognize that, under the current rules, target security holders may feel coerced into accepting a bid because they have no means of taking collective action to decide against a hostile bid or to permit directors to control the process. The CSA have also indicated that the existing rules have been inconsistently applied and do not provide sufficient latitude to those target boards that are supported by a majority of security holders.
The proposed new rule would take the ultimate decision-making authority regarding the adoption or maintenance of rights plans away from regulators and allow target boards to adopt rights plans, even in the face of a hostile bid, provided that their decisions are supported by target security holders. Although the CSA are leaving NP 62-202 in place for other defensive tactics, the proposed rule, if adopted, would limit its application in future since the policy has primarily been used to address rights plans in the past and the proposed rule may suggest greater tolerance of defensive tactics in general.
ELEMENTS OF THE PROPOSED RULE
The basic elements of the proposed rule are:
- a rights plan will be effective when it is adopted by the board of directors but it must be approved by security holders within ninety days from the date of adoption or, if adopted after a take-over bid has been made, within ninety days from the date the take-over bid was commenced;
- a rights plan must be approved annually by majority vote of each class of voting security holders to remain effective;
- a rights plan that has been approved by security holders before a take-over bid is made will remain effective until the next annual meeting and there is no requirement for re-approval if a take-over bid is made;
- a rights plan may be terminated at any time by majority vote of the target security holders;
- any securities held by the bidder are excluded from a security holder vote to adopt, maintain or amend a rights plan;
- material amendments to a rights plan must be approved by security holders within ninety days of the date of adoption;
- a rights plan is effective only against take-over bids or an acquisition by a person of securities of the issuer (e.g. it cannot be triggered by actions such as security holder votes to approve a transaction); and
- a rights plan cannot be used to discriminate between take-over bids, so if it is waived or modified with respect to one take-over bid it must be waived or modified with respect to any other take-over bid.
EFFECT OF THE PROPOSED RULE
Under the proposed rule a target board would have the unilateral ability to delay a take-over bid for a minimum of ninety days, and the ability to leave a rights plan in place indefinitely where majority security holder approval has been obtained within the required time frame. The role of our securities regulators would be limited to enforcing the proposed rules, and intervening only where a target issuer engages in conduct that undermines the principles underlying the proposed rule or where there is a public interest rationale for intervention. For bidders, the proposed rule would make the take-over process more time consuming, more expensive and less certain, which may ultimately discourage hostile bids and lead to lower premiums.
COMMENTARY
By shifting the theatre for contesting rights plans from administrative hearings in front of securities regulators to meetings of target security holders, the success of the proposed rule will be tied to the strengths and weaknesses in our security holder voting system. Security holder meetings can be expensive and time consuming, the process is controlled by management, and security holder participation can be low (particularly retail security holders). Furthermore, once a company becomes the target of a take-over bid, there can be a significant shift in the composition of the security holder base as a result of arbitrage opportunities. The proposed rule appears to be premised on an assumption that the result of a security holder vote reflects the views of a majority of the actual security holders of the target. In our experience, that is frequently not the case. The proposed rule may also lead to increased litigation regarding contested security holder meetings.
The CSA have tried to strike a balance between allowing security holders to deal with their economic interests in an enterprise, while giving boards more latitude to perform their fiduciary duties to the corporation as a whole (as mandated by the Supreme Court of Canada in the BCE decision). Under the current rules simply putting a company "in play" by making a bid almost inevitably leads to its acquisition, if not by the original bidder, then by another. The proposed approach to rights plans would appear to make a change of control at least somewhat less inevitable. However, time will tell if the proposed approach will have a significant impact on the conduct of take-over bids in Canada and the defensive tactics employed by target boards.
ONGOING REVIEW OF DEFENSIVE TACTICS
The proposed rule is part of a broader and on-going initiative of the CSA to review defensive tactics issues, including the use of private placements. The CSA have indicated that they will consider potential changes to NP 62-202 as part of this ongoing review. The Quebec Autorités des Marchés Financiers has concurrently released a proposal to replace NP 62-202 with a proposed rule that would clearly recognize the fiduciary duty of directors, and restrict regulatory intervention to situations where a target board's actions or decisions are clearly abusive of security holders' rights or negatively impact the capital markets. The proposed rule has also been released in connection with proposed changes to early warning reporting rules, summarized here.
COMMENTS
Comments on the proposals are due by June 12, 2013. The CSA have also included several questions regarding the proposals in the notice and request for comment, which is available here.
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