Davis LLP Securities & Corporate Finance Bulletin
The Canadian Securities Administrators have published proposed National Instrument 62-105 Security Holder Rights Plans and the proposed companion policy (the "CSA Proposal") with the aim of establishing a new regulatory framework for dealing with shareholder rights plans (poison pills). If the CSA Proposal is enacted, it would mean that a rights plan which has been approved by the shareholders within certain time frames could remain in place in the face of a hostile take-over bid and not be ordered cease traded by a securities regulator. If implemented, the CSA Proposal would therefore bring an end to the Canadian era of "there comes a time when the pill has got to go."
Although the CSA has stated that the proposed new rules are part of a broader attempt to review defensive tactics in the face of hostile take-over bids generally, the CSA Proposal applies to rights plans only. The Autorité des marchés financiers in Quebec has taken a broader approach and has published a consultation paper regarding a new proposed regulatory framework applicable to take-over bid defensive tactics generally (the "AMF Proposal").
Current Regime and Criticism
The current Canadian regime relating to take-over defences is largely based on National Policy 62-202 Take-Over Bids - Defensive Tactics ("NP 62-202") (which provides guidance to securities regulators regarding how they should treat defensive tactics) and the decisions of Canadian securities regulators. NP 62-202 is premised on the view that (i) take-over bids play an important role in our economy, (ii) regulatory policies should protect the interests of target security holders and (iii) the interests of security holders and directors conflict in a take-over bid context.
The application of NP 62-202 through the decisions of the securities regulators has generally resulted in rights plans being ordered cease traded after a certain period of time has elapsed in the course of a contested take-over bid. As such, when an unsolicited take-over bid has the potential to trigger a rights plan, on the application of the bidder to the securities regulator the rights plan is usually ordered cease traded after about 45 to 55 days. The 45 to 55 day time period has been criticized as insufficient time for a target board to negotiate with a bidder or find alternative buyers. There has also been some inconsistency in the treatment of rights plans by securities regulators when those plans are approved by shareholders in the face of a take-over bid. In some cases, rights plans were upheld and shareholder approval was a significant factor driving the decisions; however, there have also been decisions to the effect that majority shareholder approval is insufficient to interfere with the individual rights of shareholders to freely tender to a bid.
Another major critique of the current regulatory regime is that it no longer fits in the current legal and economic environment that has developed since the adoption of the predecessor to NP 62-202 over two decades ago. These developments include:
- increased shareholder activism, such as the increasing prevalence of proxy contests;
- the collective action problem – as shareholders are not able to act by collective vote in a bid and tender situation (as compared to a merger or arrangement), shareholders may feel pressured to tender in all circumstances due to the fear of being left behind;
- the structural imbalance between bidders and target boards – the measures that target directors can take are generally limited to finding a better offer for the sale of the corporation;
- the growing influence of hedge funds and arbitrageurs who may acquire shares of target corporations as a short-term investment with little consideration of the long-term interests of the corporation;
- the decision of the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders which held that in looking at what is in the best interests of the corporation, directors may look to a broad group of stakeholders which does not just include shareholders; and
- the implementation of more rigorous corporate governance standards (including the adoption of national policies), leading to an increased confidence in the ability of directors to appropriately respond to take-over bids within the exercise of their fiduciary duty, while avoiding conflicts of interest.
It has been argued that these developments, along with the current policy, have resulted in an overly bidder-friendly regime, leaving issuers in Canada too vulnerable to take-overs.
The New CSA Proposal for Rights Plans
The CSA Proposal includes a number of changes and would allow a rights plan to remain in place in the face of a take-over bid, provided that:
i. the rights plan has been approved by security holders of the target company within 90 days from the date of adoption or, if adopted after a take-over bid has been made, within 90 days from the date the take-over bid was commenced; and
ii. the rights plan is approved annually by security holders and not later than at each annual meeting following its initial approval.
The company would be able to distribute securities under the rights plan prior to the plan being approved at a meeting of security holders or until the relevant time frame in which to get such approval had passed.
If a rights plan exempts a security holder from participating in the rights plan (usually a so-called "grandfathered" holder of a large block of shares), then the approval of the rights plan must be obtained by both a majority vote of security holders, excluding the exempted security holder and any joint actors, as well as a majority vote of security holders that does not exclude the votes cast by the exempted security holder and any joint actors.
Security holders would also be able to terminate the rights plan at any time by majority vote at a shareholder meeting. Note that this allows for the strategic possibility of a bidder requisitioning a shareholder meeting in order to try to get a rights plan removed. If a rights plan was terminated, the board of directors would not be able to enact a new one for a period of one year from the date of termination. The one year restriction would also apply if a rights plan was not approved by security holders. An exception to that rule would be if a take-over bid was commenced after the rights plan became ineffective or was terminated. In that case, the board of directors would be able to adopt a new rights plan, subject to the requirement mentioned above for shareholder approval within 90 days.
A rights plan must be limited in scope to take-over bids or an acquisition of securities, and therefore would not apply to transactions or circumstances involving a shareholder vote such as contested elections. In addition, any waiver or modification of the application of the rights plan granted to one bidder must be granted to all bidders.
The CSA expects that it would rarely intervene in cases where the proposed instrument has been complied with. However, the CSA has stated that securities regulators may intervene if the target company engages in conduct that undermines the principles underlying the instrument or if there is a public interest rationale for intervention.
The AMF Proposal Relating to Take-Over Bid Defensive Tactics
While the CSA Proposal relates only to rights plans, the AMF Proposal relates to all take-over bid defensive tactics. The AMF Proposal advocates for a wholesale replacement of NP 62-202 with a new policy on defensive tactics.
The AMF is of the view that absent evidence of an abuse of the rights of the shareholders to consider take-over bid offers or behaviour that would undermine the efficiency of capital markets, securities regulators should not view defensive tactics as prejudicial to the public interest. If a securities regulator has to adjudicate on the use of defensive tactics, it should consider such factors as whether such tactics were approved and recommended by a committee of independent directors mandated to review the bid (who had the assistance of independent legal and financial advisers), as well as the level of disclosure provided to shareholders by the target directors on the process used to determine the defensive measures taken and reasons in support of those measures.
The AMF also proposes to require bidders to comply with the following two conditions when making a bid:
i. a bid for all the securities of any class, and partial bids, would require an irrevocable minimum tender of 50% of the outstanding securities owned by persons other than the offeror and those acting in concert with the offeror; and
ii. such a bid would have to be extended for an additional ten days following the public announcement 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 an irrevocable minimum tender condition would function as a voting mechanism on the bid, while the bid extension would eliminate some of the pressure shareholders feel to tender to a bid in order not to be left behind should the bid succeed.
Although the AMF and CSA have released competing proposals, the AMF has stated that the purpose of the AMF Proposal is to provide a forum for discussion of the broader issues regarding defensive tactics generally. However, the AMF has also stated that it remains committed to a "cohesive and harmonious approach" across Canadian jurisdictions. Whatever the result of the CSA and AMF proposals, it is clear that Canadian securities regulators are leaning towards a more deferential attitude towards directors of target companies, with a corresponding hands-off approach to the review of defensive tactics.
The comment periods on the CSA and AMF proposals are open until June 12, 2013.
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