The Canadian Securities Administrators (CSA) are making significant changes to Canada's takeover bid regime. The reforms are designed to obviate the need for overly aggressive and coercive behaviour on both the offensive and defensive sides of hostile takeovers. When the amendments come into force on May 9, 2016, it will mark the first time that the takeover bid rules have been harmonized across the entire country, as the formerly recalcitrant Ontario securities regime has agreed to abandon its own rules and adopt National Instrument 62-104 Take-Over Bids and Issuer Bids.
The most notable change is the new 105-day minimum bid period, which requires buyers to keep an offer open for seventy days longer than under the previous rules. By allowing target boards more time to respond to bids, they will in theory no longer need to resort to aggressive defensive tactics such as poison pills. Furthermore, a buyer's minimum tender must be for at least 50% of the outstanding securities of the particular class that is the subject of the bid (e.g., common shares). This requirement should reduce the ability of buyers to make "any-and-all" bids and take the pressure off of shareholders to tender or be left behind in the face of a hostile offer. By making hostile takeovers more difficult, the CSA hopes, among other things, to facilitate more friendly deals.
Despite the best intentions of the regulators, the new takeover bid regime may encourage the use of even more aggressive and bullying tactics in M&A transaction. As discussed in a recent report by Norton Rose Fulbright and Financial Post article, many bidders that would have launched a hostile bid under the current regime will now pursue "bully" tactics in ostensibly friendly transactions to achieve the same result.
One such tactic is the use of a "bear hug" letter, which involves a potential buyer announcing its interest in making a bid for a target company. The letter typically includes basic terms and a preliminary price (often at a hefty premium). The more aggressive "grizzly bear hug" entails going public with the letter, while the comparatively friendlier "teddy bear hug" keeps the letter confidential outside of the board and the suitor. Since the prospective buyer is not legally bound by the offer, it does not constitute a proper bid and therefore does not trigger the onerous takeover rules. However, the board is duty-bound to consider the offer, putting pressure on it to negotiate with the buyer.
Other aggressive tactics that will gain traction under the new takeover bid regime include creeping acquisitions and lock-up agreements. A creeping acquisition involves the acquisition of over 20% of a target company through a series of exempt purchases (e.g., exemption for private agreements) so as not to trigger the takeover bid rules. Alternately, multiple shareholders of a company can enter into a legally binding lock-up agreement whereby they cannot sell their shares for a defined period of time. The effect of the lock-up agreement is to effectively block a takeover bid by another party. While falling short of a proper bid, both tactics give buyers an upper hand in negotiating a transaction with the target.
Now that boards have regained power in what has historically been called an overly buyer-friendly regime, hostile bidders will need to use less conventional tactics to gain leverage under the new rules. The tactics that will be favoured under the new rules are ones that circumvent the takeover bid rules altogether while putting enormous pressure on the target. Expect to see more such bullying tactics after the amendments come into force.
The author would like to thank Markus Liik, articling student, for his assistance in preparing this legal update.
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