This is the first instalment of a three part article that will appear in the Securities Law Update. In this first part, we will discuss the basic concepts and guiding principles applied by Canadian securities regulators when they are asked to invalidate defensive measures taken against a take-over bid. In the second and third parts we will discuss two recent decisions, one by the British Columbia Securities Commission and the other by the Alberta Securities Commission, in which these guiding principles were applied.
Canadian Securities regulators leave the decision to tender to a take-over bid to a target's shareholders. Once a bid is made, the target is 'in play' (for sale) unless and until the shareholders say it is not. Once the target is in play, management is encouraged to focus on obtaining the best sale terms and informing the shareholders, and discouraged from taking action that would prevent shareholders from having the choice. This can put management at odds with both bidders and shareholders, as management's fiduciary duties or its own self-interest, especially where there are multiple competing bids or where a bid is unsolicited or hostile, might lead it to conclude that the company should not be sold at all. The reasons vary – one bidder might want new management while another wants to keep current management, another bidder might be trying a low bid on for size, a corporate 'raider' might be looking to strip vital assets or take other action that management believes it has a duty to prevent. Whatever the reason, management often feels compelled to take defensive action.
Defensive actions fall into two broad categories – strategic efforts taken before any bid is made and tactical actions taken in the face of a specific bid. Strategic efforts, often referred to as "shark repellant", consist of charter and bylaw provisions adopted at a time when the company is not subject to a bid or other specific threat – these include the use of staggered boards, change of control and rights plans, super-majority voting, advance notice, limitations on the use of written consent resolutions and blank check preferred stock. Tactical defenses include rights plans, asset sales, white knights, recapitalizations or spin-off transactions and even the 'pac-man' defense (where the target offers to acquire the bidder). Most of these tactics are discouraged or even prohibited in Canada but rights plans, which can be used either strategically or tactically, have gained popularity in recent decades and are widely used.
A rights plan is a "poison pill" designed to discourage bidders by making the target less attractive or more expensive (through dilution of equity at low prices to existing shareholders, sale or distribution of assets at discounted prices, etc.). Rights plans can be strategic or tactical but, in Canada, they are allowed to remain in effect only for the limited purpose of buying time for the target to consider and respond to a specific bid or seek alternatives. As a general rule, regulators decide "when", not "whether", a rights plan must go. That said, although limited in scope, rights plans are one of, if not the most, effective tools in a target's war chest.
Canadian securities regulators exercise their public interest jurisdiction to limit defensive tactics with reference to National Policy 62-202, Takeover Bids - Defensive Tactics ("NP 62-202"), which sets the stage as follows:
"[t]he 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."
Recently, Canadian securities regulators acknowledged that the take-over bid environment might not be "open and even-handed". In 2013, the Canadian Securities Administrators ("CSA") published proposed National Instrument62-105, Securities Holder Rights Plans together with a proposed companion policy (collectively, the "CSA Proposal") and the Autorité des marchés financiers ("AMF"), which also participated in publication of the CSA Proposal, concurrently published a Consultation Paper titled An Alternative Approach to Securities Regulators' Intervention in Defensive Tactics (the "AMF Proposal"). The CSA Proposal focused on rights plans, while the AMF Proposal focused on defensive tactics in general, including rights plans, the role of target boards and management's fiduciary duties, but both proposals recognized a need for change. However, after expiration of the comment periods, CSA and AMF decided not to proceed with either proposal. Instead, CSA announced that it intended to pursue a new harmonized proposal (the "Proposed Amendment") based on amendments to the take-over bid regime. The Proposed Amendment was published for comment on March 31, 2015 and, although the comment period expired on June 29, 2015, it has not been adopted.
One of the concerns expressed in both the CSA Proposal and the AMF Proposal was that take-over bids can be coercive in that shareholders, who act individually, might feel pressure to tender to a bid they do not support rather than risk being left behind. The Proposed Amendment proposed to correct this by requiring that all non-exempt take-over bids:
- be subject to a mandatory condition that a minimum of more than 50% of all outstanding target securities owned by persons other than the bidder be tendered;
- be extended by the bidder for an additional 10 days after the bidder receives the mandatory minimum number of securities tendered and has announced its intent to take up tendered securities; and
- remain open for a minimum of 120 days, subject to limited exceptions.
It was in this context that the British Columbia Securities Commission ( "BCSC") decided in Re Red Eagle, 2015 BCSECCOM 401, and the Alberta Securities Commission ("ASC") decided in Re Suncor Energy Inc. 2015 ABASC 984. These decisions confirm that the Proposed Amendment has not been adopted and both the CSA Proposal and the AMF Proposal rest in peace.
This is the end of the first instalment of this article. In the second instalment, we will take a look at the BCSC's decision in Re Red Eagle.
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.