Canada: The Competing Visions Of The CSA And AMF On Shareholder Rights Plans And Take-Over Bid Defensive Tactics

Davis LLP Securities & Corporate Finance Bulletin

Introduction

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.

Conclusion

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.

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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions