On September 11, 2014, the Canadian Securities Administrators (CSA) published CSA Notice 62-306 – Update on Proposed National Instrument 62-105 Security Holder Rights Plans (Notice) and the Autorité des marchés financiers (AMF) Consultation Paper An Alternative Approach to Securities Regulators' Intervention in Defensive Tactics. The notice indicates that the CSA intend to publish for comment a new harmonized proposal based on amendments to the takeover bid regime which will aim to facilitate the ability of shareholders to make voluntary, informed and coordinated tender decisions and provide target boards with additional time to respond to hostile bids, with the objective of rebalancing the current dynamics between hostile bidders and target boards.
It appears that the new proposal will draw on elements of the earlier CSA and AMF proposals and can be seen as settling on a middle ground between the two (the earlier CSA and AMF proposals are discussed, respectively, in our publications Shareholder Rights Plans – The CSA Proposal and Defensive Tactics – The AMF Alternative Approach). The new proposal will retain a key premise of the earlier CSA proposal (and the current regime), namely that shareholders should ultimately have the opportunity to determine the outcome of an unsolicited takeover bid (and, as a corollary, that target boards do not have the ability to "just say no").
However, as was put forward by the earlier AMF proposal, rather than regulating rights plans, the new proposal would seek to modify the underlying takeover bid regime in a way that would make rights plans, in their current form, of more limited practical use. As a whole, it appears that the proposal seeks to strike a balance between providing target boards with more leverage in their negotiations with bidders without unduly discouraging bids or stripping shareholders of the ability to tender.
WHAT ARE THE KEY PROPOSED CHANGES TO THE TAKEOVER BID REGIME?
(1) Extension of the minimum bid period
The CSA propose to require that all non-exempt takeover bids remain open for a minimum of 120 days (rather than the 35 days under the current regime). Currently, rights plans are employed by some issuers to buy more time than the 35 days provided by regulation (which are, upon application, generally cease traded by the regulators between 45 and 55 days following the commencement of the bid). The new proposal, by extending the minimum bid period, would provide all target boards with more time to evaluate a takeover bid, communicate with shareholders, seek to generate an enhancement to the bid and attract alternative offers prior to securities being taken up under the bid.
The new proposal would permit the target board to waive, in a non-discriminatory manner when there are multiple bids, the minimum period to a period of no less than 35 days.
(2) Irrevocable minimum tender condition and mandatory bid extension
The new proposal requires that all non-exempt takeover bids (i) be subject to a mandatory tender condition that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered and not withdrawn before the bidder can take up any securities under the bid, and (ii) be extended by the bidder for an additional 10 days after the bidder achieves the mandatory minimum tender condition and the bidder announces its intention to immediately take up and pay for the securities deposited under the bid. These changes, which are common features of "permitted bids" under rights plans in Canada, would reduce the potential for coercive bids by ensuring that shareholders are not required to act individually in deciding whether to tender and do not feel pressured to tender for fear of being left in an illiquid position. With this change, all bids would effectively be required to obtain collective shareholder support (in effect replacing the approval mechanism previously served by shareholder votes on whether to maintain a rights plan in the face of a bid).
(3) Other changes
In the Notice, the CSA indicated that they are not contemplating any changes to the current takeover bid exemptions or Defensive Tactics Policy.
WHAT ARE SOME POTENTIAL IMPLICATIONS OF THE CHANGES?
(1) Would the role and duties of target boards in the context of a takeover bid change?
The proposal would not change the responsibilities of a target board in the context of a takeover bid, that is to act in good faith and in the best interests of the corporation. While a target board would be assured of a longer period of time to take required action in the best interests of the corporation, the proposed changes would not permit it to "just say no" to a bid. It will be interesting to see how willing target boards will be to waive the 120-day minimum period at the risk of being criticized for not having taken full advantage of the extended period of time to find value-enhancing alternatives or even simply to allow more time for unsolicited proposals to emerge subject to typical deal protection features.
(2) Would rights plans still be useful?
The new proposal would make rights plans, as currently constructed and regulated, of more limited practical use. Current "permitted bid" concepts in rights plans will be of no value if the proposals suggested by the Notice come into effect. It is notable, however, that the Notice does not indicate that rights plans will be prohibited nor specify if rights plans drafted to survive beyond 120 days would be allowed (and the CSA indicate that they are not contemplating a change to the Defensive Tactics Policy). Rights plans may therefore continue to exist for more limited purposes (such as defending against creeping bids). It would appear, however, that by putting more time in the hands of the target board, applications to the regulators to cease trade rights plans will be a much less common practice and the uncertainty as to the duration of a bid when a rights plan is in play would be eliminated.
(3) Will partial bids still be possible?
Partial bids have often been seen as potentially coercive to shareholders. As a result of the introduction of the 50% minimum tender condition, it seems likely that the proposal will significantly reduce the likelihood of success for partial bids.
NEXT STEPS
The CSA intend to publish the proposed bid amendments for comment in the first quarter of 2015. The more detailed amendments may address some of the foregoing questions or raise additional issues or implications. We look forward to updating you when that publication becomes available.
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