Canada: Regulation Of Defensive Tactics: A Possible Third Approach

McMillan LLP has today submitted a comment letter in response to the request for comment by the Canadian Securities Administrators (the "CSA") with respect to proposed National Instrument 62-105 Security Holder Rights Plans, proposed Companion Policy 62-105CP Security Holder Rights Plans and proposed consequential amendments (collectively, the "CSA Proposal"). The comment letter also responds to the consultation paper published concurrently by the Autorité des marchés financiers (the "AMF") on an alternative approach to the CSA Proposal (the "AMF Proposal").

In our submissions, we suggest an alternative approach to that of the AMF and CSA for the regulation of defensive tactics, which we believe may better address the critical policy concerns surrounding National Policy 62-202 Take-Over Bids – Defensive Tactics ("NP 62-202").1

our comment letter

Our comment letter reviews the historical basis for, the current approach to, and the policy concerns regarding, the regulation of defensive tactics, including a discussion of the changing circumstances since the adoption of NP 62-202.2 Based on this review, we conclude that the philosophical underpinning of NP 62-202 is flawed and, as a result, NP 62-202 should not continue to apply in respect of any defensive tactic – even if on a temporary basis.

We also consider the CSA Proposal and the AMF Proposal and suggest that each has weaknesses. The CSA Proposal does not effectively enhance the powers of directors to enable them to fulfill their statutory obligations and fails to address defensive tactics other than rights plans. The CSA's focus on providing directors with what is effectively 30 more days to consider hostile bids continues the flawed approach of the past 21 years.3 We would suggest that it is time to consider these issues from a different perspective. The AMF Proposal, in seeking to defer to the decisions of directors, focuses on the process followed by the target company's board; however, in considering the protection of investors and fostering fair and efficient capital markets and confidence in such markets, securities regulatory authorities must focus largely on the impact that a decision of a board would have on the capital markets or shareholders. Accordingly, while a target board could follow a proper process, and reach a decision consistent with the exercise of its fiduciary duties, such decision could still be challenged as impacting negatively on the efficiency of the capital markets or possibly as effecting an abuse of security holders' rights. As a result, additional criteria may well be required to be enumerated in order for this approach to be effective.

In seeking to address those weaknesses, we sought to propose an alternative approach that recognizes the importance of allowing shareholders (where practical) to make the final decision as to whether to accept or reject a bid but also allows directors to carry out their statutorily imposed duties for the benefit of a target corporation both in the short- and the long-term. Our suggested approach also addresses all defensive tactics – not just rights plans.

key policy maxims

It appears to us that the key policy maxims that should be embodied in the regulation of defensive tactics are as follows:

  • Directors, and particularly management, are in a conflict of interest situation when facing a hostile bid.
  • The primary objective of the regulation of defensive tactics should be the protection of the bona fide interests of target company shareholders, which interests may be satisfied by the directors taking steps which are in the long-term interests of the target.
  • Unlike most change of control transactions for public companies, takeover bids are made directly to shareholders of a target and, as the owners of the target, there is a presumption that it is in the public interest that shareholders should ultimately have the right to make the decision to accept or reject the bid. It is best that such shareholder decision be made by a majority of shareholders to avoid coercion.
  • Directors of target companies are subject to significant legal and practical governance restraints and are obligated to act in the best interests of the target – not just its shareholders – and it is in the public interest to not subject directors to liability or conflicting duties in circumstances where they have met their fiduciary duty obligations. Nevertheless, the underlying policies of the takeover bid regime may well impose additional (but not inconsistent) obligations on directors.
  • It is in the public interest for regulations to be clear and definitive in order to ensure that rules are applied consistently across the country and that all market participants know the rules.

basic elements of proposed policy or instrument

If the maxims above were to be accepted, we would propose that the CSA adopt a national instrument or policy which would have the following basic elements:

1.    Rebuttable presumption that any action taken by a target which has the effect of depriving shareholders, or will likely result in shareholders being deprived, of the ability to accept a takeover bid (a "Regulated Defensive Tactic") will be contrary to the public interest unless approved by a "majority vote" of duly informed shareholders either prior to the commencement of the takeover bid or within 90 days of the date of the commencement of such takeover bid.

  • The paramount rule under the CSA Proposal is that shareholders, by majority vote, shall have the final say as to whether a bid should be accepted. However, this makes it difficult to formulate a regime which can effectively regulate all defensive tactics – particularly if any deference is to be given to directors.

  • As a result, we propose a rebuttable presumption that if a Regulated Defensive Tactic is adopted by a board, without shareholder approval being obtained within 90 days of a bid, then such action would be prejudicial to the public interest.4

  • It is critical for the CSA to take this opportunity to formulate a regulation or policy that applies to all defensive tactics, not just rights plans, in order to avoid troubling decisions with respect to the use of other defensive tactics.

  • While the CSA Proposal provides boards with more time to respond to bids if a rights plan is adopted, it does not effectively "empower" boards. For example, notwithstanding that rights plans have to be approved annually by shareholders and within 90 days of their adoption, the CSA Proposal would allow shareholders to revoke rights plans at any time – clearly shareholders, not the board, are being empowered under the CSA Proposal.

  • The creation of this presumption would provide directors with greater flexibility to act in the best interests of the target rather than remain effectively passive – which is appropriate given that directors are not only legally entrusted to protect the interests of all stakeholders but also have access to more information than shareholders.

2.    Shareholder approval of a Regulated Defensive Tactic as aforesaid will prevent a challenge under the new rule; "majority vote" means the approval of shareholders of the target by ordinary resolution, provided that if the vote is taken in circumstances where a tactical rights plan or other tactical Regulated Defensive Tactic is being approved, the votes held by the following shareholders shall not be considered: (i) directors and senior officers of the target, (ii) the offeror(s) against whom the Regulated Defensive Tactic is directed and its directors and senior officers and (iii) the affiliates, associates and joint actors of each of the foregoing.

  • The CSA Proposal notes that because a vote on a rights plan is a referendum on a bid, the bidder should not vote. Our proposal suggests that the only time a vote on a rights plan or other Regulated Defensive Tactic is truly a referendum on a bid is in respect of a tactical Regulated Defensive Tactic.

  • Since the conflict faced by directors and management in responding to a hostile bid is beyond dispute, it would be very troubling to allow such insiders to vote in favour of a rights plan or other Regulated Defensive Tactic which they have adopted to defeat a hostile bid – especially in circumstances where the bidder itself cannot vote. To argue, as the CSA Proposal does, for management voting in proportion to their economic interest in these circumstances misses the point – the very persons who have decided to fight a bid could actually succeed by voting to "just say no" while the bidder they are opposing would be prohibited from voting.

  • Other than on a vote to approve a tactical plan or other tactical Regulated Defensive Tactic – e.g. annual approval of a rights plan – a bidder or management should not be excluded. For example, although allowing a bidder's vote for a bid made at the time of an annual vote may incentivise bidders to launch a bid to coincide with a company's annual meeting, even in those circumstances the policy basis for excluding such vote is not present unless management and director votes are also being excluded. 

3.    If shareholder approval is not obtained as outlined in paragraph 1, and the Regulated Defensive Tactic is challenged, then the onus will be on the target to prove that the Regulated Defensive Tactic is not contrary or prejudicial to the public interest. In order to meet this onus, the target would have to prove that: (i) board of the target exercised its actions pursuant to a proper process meant to mitigate its inherent conflict, including the use of a special committee of independent directors that has been given an appropriate mandate; (ii) board had reasonable grounds for believing that it was in the best interests of the target to implement the Regulated Defensive Tactic and, in connection with a tactical Regulated Defensive Tactic, it was a reasonable response to the takeover bid; and (iii) in the circumstances, it was not practical or meaningful to obtain shareholder approval of the Regulated Defensive Tactic.

· This rule creates a sufficient balance between deference to a board and the rights of bidders and shareholders. It takes into account the fiduciary obligations imposed on boards by adopting key principles from Canadian5 and U.S.6 jurisprudence while keeping the focus on the importance of seeking shareholder approval.

· A board in taking steps to defeat a bid without shareholder approval would have a significant burden to discharge, but in appropriate circumstances it is believed that the burden could be met.7

4.    Prompt disclosure will be required upon the implementation of a Regulated Defensive Tactic, and we would adopt the CSA Proposal disclosure rules.

5.    Rights plans would not be regulated in a manner different than other Regulated Defensive Tactics; however we have accepted that shareholder approval of rights plans on an annual basis should be required. 

  • There is neither a need for, nor a benefit to, allowing rights plans to be terminated at any time by shareholder vote, nor is there a need for requiring the approval of rights plans within 90 days of adoption (since plans would cease to be effective after 90 days from the commencement of a bid without shareholder approval as outlined under paragraph 1 above).

  • It should also not be contrary to the public interest for rights plans to not be automatically waived for other takeover bids (and certainly not exempt takeover bids) if waived for one takeover bid, especially if shareholders have approved the right of directors to waive the application of rights plans for some type of bids and not others.

  • Finally, and consistent with the CSA Proposal, a material amendment to a rights plan would be treated as a new rights plan (though amendments of rights plans are, in our experience, rare).

concluding thoughts

We are grateful for the efforts of the CSA and AMF in seeking to reform the rules regarding the regulation of defensive tactics. This presents a unique opportunity for market participants to provide input in shaping a critical aspect of securities regulations. While we have no doubt that there will be significant debate and disagreement among market participants on the way forward, we are hopeful that sufficient consensus can be reached in order for a new approach to be adopted that better protects investors and fosters fair and efficient capital markets and confidence in such markets.

Footnotes

1 Originally enacted as National Policy No. 38 - Take-Over Bids – Defensive Tactics ("NP 38") on or about August 1, 1986, which was not substantively different than its successor NP 62-202.

2 Such as developments in the areas of corporate governance, directors' fiduciary duties and the oppression remedy.

3 Since the decision of the Ontario Securities Commission in Canadian Jorex Ltd, Re (1992), 15 OSBC 257, takeover bids in Canada have (except in rare circumstances) led to the inevitable sale of public companies within 60 days of the commencement of a takeover bid.

4 As a practical matter, we believe that this presumption already exists.

Maple Leaf Foods Inc v Schneider Corp (1998), 42 OR (3d) 177 (Ont CA); CW Shareholdings Inc v WIC Western International Communications Ltd (1998), 39 OR (3d) 755 at 769.

6 See In re Del Monte Foods Company Shareholders Litigation, 25 A.3d 813 (2011) (Del Ch); Unocal Corporation v Mesa Petroleum Co, 493 A.2d 946 (1985) (Del Sup Ct); Unitrin Inc v American General Corporation, 651 A.2d 1361 (1995); Weinberger v UOP Inc, 457 A.2d 701 (1983) (Del Sup Ct); In Re Tele-Communications, Inc Shareholders Litigation, 2005 WL 3642727 (Del Ch); In re Southern Peru Copper Corporation Shareholder Derivative Litigation, CA No 961-CS (2011) (Del Ch).

7 For example, on the facts in AbitibiBowater Inc v Fibrek Inc 2012 QCBDR 13, finalized on March 6, 2012 (2012 QCBDR 17), we would expect that the board of Fibrek Inc. would have been able to justify its actions and proceed with the transaction that was cease traded.

- See more at: http://www.mcmillan.ca/regulation-of-defensive-tactics-a-possible-third-approach#sthash.d9xDypXX.dpuf

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2013 McMillan LLP

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
Paul D. Davis
Amandeep Sandhu
 
In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.