Canada: At The Crossroads: Where Does Canada Go With Defensive Tactics?

Defensive tactics employed by boards of target companies in response to unsolicited ("hostile") take-over bids have once again become the topic of mainstream discussion.  Significant merger and acquisition activity, a number of conflicting regulatory decisions and a growing dissatisfaction in recent years with the inflexibility of the securities regulatory approach to shareholders rights plans have driven this discussion.

The members of the Canadian Securities Administrators (CSA) have joined the discussion by publishing  for comment a number of proposals to amend their approach to the most popular defensive tactic, the shareholder rights plan (a Rights Plan, a.k.a. a "poison pill"). However, there is no agreement amongst Canadian regulators about how to reform the regulatory approach to this defensive tactic.  Although Québec's Autorité des marchés financiers (AMF) participated in the publication of the CSA's proposed National Instrument 62-105 Security Holder Rights Plans (Proposed NI 62-105), the AMF has also published its own consultation paper (An Alternative Approach to Securities Regulators' Intervention in Defensive Tactics, or the AMF Proposal) as an alternative model to consider.

It is easy to get bogged down in the language of these proposals -- concepts such as "structural coercion" and "the market for corporate control" rarely flow off the tongue with ease – but the issues and proposed solutions remain important for all market participants, as the direction in which securities regulators proceed can have important consequences for merger and acquisition activity in this country.  We therefore encourage everyone to participate in this debate.  To assist you in understanding the proposals and the context in which they have been made, we have prepared this brief summary of the proposals and set out some of our preliminary thoughts on their implications.

The Situation Today

The CSA have long been concerned with the use of "defensive tactics" by the board/management of a target company.  On one hand, defensive tactics protect a company and its shareholders from "predatory" purchasers, and may help ensure that, when a target company is sold, its shareholders receive top dollar for their investment. On the other hand, defensive tactics can also be abused, and used to simply "entrench" the board and management in their positions with little or no benefit resulting to shareholders.

The CSA has treated defensive tactics as a "public interest" issue and expressed their views in National Policy 62-202 Take-Over Bids – Defensive Tactics (NP 62-202) where they state:

The primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fide interests of the shareholders of the target company. A secondary objective is to provide a regulatory framework within which take-over bids may proceed in an open and even-handed environment. The take-over bid provisions should favour neither the offeror nor the management of the target company, and should leave the shareholders of the target company free to make a fully informed decision. The Canadian securities regulatory authorities are concerned that certain defensive measures taken by management of a target company may have the effect of denying to shareholders the ability to make such a decision and of frustrating an open take-over bid process.1

The defensive tactic that has been considered most often by the CSA members is the Rights Plan.  Over the course of recent decades, securities regulators have cease traded Rights Plans, (effectively eliminating them) in substantially all instances in which they have been put in place in response to an unsolicited bid2.  The dominant rule that emerged from these cases is that while Rights Plans can serve a legitimate purpose (providing the Target's board with time to develop alternatives to an unsolicited bid) ultimately "there comes a time when a pill must go".  Although this approach has provided some certainty to the market and ensures that the owners (the shareholders) rather than management determine the fate of a public company, this approach has also been criticized as inflexible and as making Canadian companies "too vulnerable" to hostile take-overs.  When the successful bidders are foreign companies, critics argue that the result has been the "hollowing out" of corporate Canada.

It has also been suggested that the current approach of the securities regulators, which does not permit a board to implement structural defences that would allow it to "just say no" to a take-over bid, means that a corporation's directors may not be able to fully discharge their fiduciary duties.  Under corporate law, directors owe a fiduciary duty to the corporation (and not the shareholders).  The Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders reiterated that this duty continues to exist, and is not modified when directors are responding to an unsolicited take-over bid.  The duty is not reduced to simply obtaining the best price available in the circumstances.

Two relatively recent decisions concerning Rights Plans, Pulse Data and Neo Materials, appeared to signal a change in the traditional approach of the securities regulators to Rights Plans and suggested that the regulators would allow Rights Plans to remain in place in certain well-defined circumstances even if doing so meant that the shareholders were never given an opportunity to respond to the hostile bid.  Some commentators saw these decisions as the start of a new era in the regulation of defensive tactics, however these decisions were quickly followed by a decision of the B.C. Securities Commission in Lions Gate and of the Ontario Securities Commission in Baffinland4, in which the regulators reverted to their traditional position on Rights Plans.

The current approach of the regulators to Rights Plans has not been the result of an overall policy review, but merely the application of the existing general policy regarding defensive tactics (NP 62-202) by various regulators in particular circumstances.  The end result has been confusion over how and when these rules will apply.  To many observers, these criticisms and developments have cried out for the policy makers to revisit the approach to defensive tactics generally and poison pills in particular.

Proposed NI 62-105

On March 14, 2013, all members of the CSA (including the AMF) published for comment Proposed NI 62-105. This proposal was designed to provide clear rules pertaining to Rights Plans.

Under Proposed NI 62-105, Rights Plans may be adopted by issuers and will generally remain effective (i.e., would not be cease-traded) provided they are approved by a majority of security holders.  More particularly:

  • a Rights Plan would become effective when adopted by the target's board, however it must be approved by shareholders
    • within 90 days from the date of adoption, or
    • if adopted after a take-over bid has been announced (a so-called "tactical plan"), within 90 days of the date the take-over bid was commenced,
  • to remain effective, shareholder approval of a Rights Plan would be required at each annual meeting following initial shareholder approval.  However, if an approved Rights Plan is in place at the time an unsolicited bid is commenced, it would not have to be re-confirmed in the face of the hostile bid,
  • shareholders would be able to terminate a Rights Plan at any time by a majority vote,
  • a bidder or its joint actors that owned shares of the target company generally would not be permitted to vote their shares for the purpose of approving or terminating a Rights Plan, and
  • if a Rights Plan is either not approved or is terminated, the issuer would be prohibited from adopting a new Rights Plan for at least 12 months, except in particular circumstances (for example, if a subsequent take-over bid for the securities of the target is launched).

If implemented, Proposed NI 62-105 would give target boards more power and latitude to reject an unsolicited bid and provide greater certainty about the rules that apply, all while remaining true to the CSA's long-held policy objective of protecting the ability of the shareholders of the target company to choose.

Some of our initial reactions to the proposal are as follows:

(a) If the proposal is adopted in its current form, we believe that there will be an increase in proxy contests.  If a Target corporation has a "pre-approved" Rights Plan in place, we expect that the commencement of an unsolicited bid will also be accompanied by a requisition for a shareholders' meeting to have the Rights Plan terminated and/or the Board of Directors replaced.  While requisitioned meetings have not always been held in a timely manner, an increase in requisitions may see new judicial scrutiny of tactical attempts to delay meetings. In addition, it may be that since a "pre-approved" Rights Plan will not automatically be cease-traded by securities regulators, institutional shareholders or activist investors may be more reluctant to vote in favour of them at annual shareholders meetings.   Of course, with respect to Rights Plans that are adopted in the face of an unsolicited bid, we expect that the shareholders' meeting at which approval of that Rights Plan is sought will be contested by the bidder.

(b) Currently, the terms of Rights Plans are closely monitored by proxy advisory firms such as ISS and Glass Lewis.  These firms recommend that their clients vote against approval of Rights Plans that do not conform to their accepted models/standards.  This raises a number of issues in the context of the proposal:

  • First of all, with respect to the approval of tactical Rights Plans within the 90-day period following their adoption, it is not clear whether ISS and Glass Lewis will continue to recommend against non-standard plans if they are adopted in the face of unsolicited bids.  Most tactical Rights Plans are significantly more "target friendly" than pre-approved plans.  Many of the common features of "tactical" Rights Plans are not consistent with ISS/Glass Lewis guidelines.   We expect that these firms will move to a case-by-case assessment of tactical Rights Plans that are put in place in these circumstances, thus increasing their already considerable influence.
  • With respect to "pre-approved" Rights Plans, the form of such plans that are acceptable to ISS and Glass Lewis contain the concept of a "permitted bid" which allows an unsolicited bid to proceed so long as it conforms to the requirements of the plan (must be open for a minimum of 60 days, must be made to all shareholders, must be extended if the minimum condition is met).  To the extent that ISS and Glass Lewis continue to insist that all plans must contain such "Permitted Bid" provisions, the "pre-approved" plans will not constitute a complete defence to an unsolicited bid.  An unsolicited bid made as a "permitted bid" would not be blocked by the plan.

(c) Even if a company has a "pre-approved" Rights Plan in place, because of the "permitted bid" concept discussed above, a board of directors may determine that it is necessary to enact a new, more restrictive, Rights Plan in the face of an unsolicited bid that they perceive as being coercive.  For example, pre-approved Rights Plans do not typically prohibit partial bids, which most boards regard as inherently coercive.  If an additional Rights Plan that deals with this coercive aspect of the bid is adopted, the unsolicited bid will have to remain open for a minimum of 90 days while shareholder approval for the new plan is sought.

The AMF Proposal

On the same day the CSA published Proposed NI 62-105 for comment, the AMF published its proposal for consideration. As with NI 62-105, the primary objective of the AMF Proposal is to strike a balance between bidders and target boards. However, in so doing the AMF Proposal goes beyond Proposed NI 62-105 (which only addresses Rights Plans) by addressing other potential issues, such as the structural imbalance between bidders and target boards, the lack of deference to the decisions and actions of boards, the inability of directors to contemplate measures other than the sale of the target corporation, and the prevalence of security holders' decision to tender in all circumstances once a bid has been announced.

The AMF Proposal is comprised of two significant components:

  • Change existing NP 62-202, to provide that unless security holders are deprived from considering a bona fide offer because the 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, regulators should consider that defensive tactics are not prejudicial to the public interest and limit their intervention accordingly.
  • This change would result in more deference being given to boards of a target company.
  • Amend the take-over bid rules to:

(a) require all bids (even partial bids) to have an irrevocable minimum tender condition of more than 50% of the outstanding securities, other than those held by the bidder and its joint actors, and

(b) require that once a public announcement that the minimum tender condition has been met, the bid must be extended for an additional 10 days.

These amendments – which are based upon conditions typically found in Rights Plans – are designed to address "structural coercion", which might cause shareholders that do not support a bid to nevertheless tender to a bid, in the fear of being left in a minority position with a possibly illiquid security.

To the AMF, an apparent flaw with the existing system (even as modified by Proposed NI 62-105) appears to be too much emphasis on shareholder approval.  As the AMF Proposal notes, following the announcement of a take-over bid, it is not uncommon for hedge funds and other arbitrageurs to acquire securities in the market:

These investors acquire securities with a short-term investment horizon, giving little consideration to the interests of the corporation in which they invest. They are the ones who effectively tender their newly acquired securities with the intent of obtaining the highest possible value, or will vote against a tactical rights plan implemented by target boards, that could delay or even jeopardize the realization of their profit. It is therefore unlikely that they will support any measure proposed by target directors in the exercise of their fiduciary duty, other than an auction resulting in the sale of the target corporation.5

The AMF Proposal can therefore be described as focused more on the target company, and less on the shareholders, who are the focus of the securities regulators currently (and would continue to be so with Proposed NI 62-105). Coming from Quebec, this may not be surprising given the protectionist reaction in that Province following last year's unsuccessful bid by U.S. based Lowes Companies, Inc. for Quebec based Rona Inc6.  It also reflects, indirectly, a growing sentiment among some observers that the views of long-term shareholders should be given more weight than short-term shareholders. 

While the AMF Proposal moves towards a fuller recognition of the directors' fiduciary duties in the context of mergers and acquisitions, it still permits intrusion into director judgment by provincial securities regulators to determine when the board of a target company is (or is not) acting in "the public interest". While this approach may provide for greater regulatory nuance, (e.g. to provide key Quebec companies with greater ability to just say no to protect the public interest), it also leaves the regime open to potentially conflicting determinations made across Canada resulting in deal uncertainty and an uneven playing field for merger and acquisition activity.

Both Proposed NI 62-105 and the AMF Proposal are open for comment until June 12, 2013. A copy of NI 62-105 is available here, while the AMF Proposal may be found here.

Footnotes

1 National Policy 62-202 was adopted in 1997, but the policies were largely based upon the National Policy #38, which was introduced in 1987.
2 The factors typically considered in a poison pill case were famously compiled and set out in
Re Royal Host Real Estate Investment Trust, a 1999 decision of the Alberta Securities Commission.  
3 [2008] SCC 69.
4 See
Icahn Partners LP v. Lions Gate Entertainment Corp.  2010 BCSECCOM 432 AND In the Matter of Baffinland Iron Mines Corp. (Re), (2010) 33 OSCB 11385.
5 AMF Proposal, page 14.
6 See, for example, the comments of Yvan Allaire, chairman of the Institute for Governance and Public Organizations, available
here.

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
Gregory Hogan
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