Canada: Canadian Securities Regulators Propose To Rebalance The Take-Over Bid Rules

On September 11, 2014 the Canadian Securities Administrators (CSA) announced their intention to publish for comment in early 2015 new harmonized rules that will significantly alter the Canadian take-over bid regime. For years, that regime has been criticized as too slanted in favour of hostile bidders, undermining the ability of target-company boards to maximize shareholder value. The CSA have said that they intend the proposed amendments to rebalance that dynamic.

Significantly, all 13 Canadian securities regulators have signed on to the proposal, which comes after much discussion of two competing proposals for reform advanced by the CSA and the Autorité des marchés financiers (AMF) last year. The earlier proposals sought to address in different ways concerns raised with the securities regulators' review of defensive tactics adopted by boards of companies facing hostile bids. The proposed new rules will address the key issues identified in those proposals by amending the take-over bid rules, leaving unchanged the national policy on defensive tactics.

The harmonized rules are to include three new requirements for formal bids:

  • Mandatory minimum tender condition. For a bid to succeed, a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors must be tendered.
  • 10-day extension. If the mandatory minimum tender condition is met and the bidder intends to take up and pay for the securities deposited, it must leave the bid open for a further 10 days to permit additional shares to be tendered.
  • 120-day bid period. The bid must remain open for a period of 120 days, subject to the ability of the target board to reduce the minimum period to not less than the current minimum of 35 days. Where there are multiple bids, any such waiver must not unfairly discriminate between them.

Under the current framework, target boards rely on shareholder rights plans, or poison pills, to afford them extra time to seek alternatives to a hostile bid, and hostile bidders routinely challenge their ability to do so by appealing to the regulators to cease-trade the rights plan at the first opportunity. Time and again, the regulators are asked to resolve in different fact situations two critical points of tension: the rights of individual shareholders versus the collective, and the rights of the target board versus the hostile bidder.

The proposed amendments seek to address both those areas of conflict. As stated by the CSA, the proposed rules are "designed to provide target boards with additional time to respond to hostile bids while reserving for shareholders the ability to make voluntary, informed and co-ordinated tender decisions."

By requiring a longer deposit period, a minimum tender condition of more than 50% and a 10-day extension if that condition is met, the proposed amendments will satisfy the key objectives of shareholder rights plans in the hostile bid context – giving the board more time to develop value-maximizing alternatives and avoiding the most coercive feature of a hostile bid, the pressure on a shareholder to tender even to an unsatisfactory bid for fear that it will be left holding a less-valuable rump position in a controlled stock.

That said, we do not expect that the new rules will spell the end for rights plans. While it is highly unlikely that the regulators would permit a target to rely on a rights plan to hold off a hostile bidder who has complied with the new rules in a formal bid situation, we expect that rights plans will continue to play a role in preventing creeping bids for control.

Although the new rules will also apply to negotiated bids, we do not expect them to effect much change in that arena. The support agreement for a friendly bid invariably includes a minimum tender condition of more than 50% and a 10-day extension if that condition is met, but it is not usual for the initial bid period to extend beyond the current minimum of 35 days. Under the proposed rules, the new 120-day minimum can be waived down to 35 days by the target board. While the target board may well prefer a longer period to allow unsolicited competing bids to emerge after the initial bid is announced, we would expect friendly bidders to insist on 35 days.

Stopping short of permitting the "just say no" defence that would have flowed from the AMF's earlier proposal, the new rules proposed by the CSA will go a long way toward levelling the playing field for hostile bidders and target boards.

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.

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