The recent amendments to Canada's takeover bid regime may
have rendered the shareholder rights plan or "poison
pill" – traditionally the most powerful weapon in a
board's arsenal of defensive tactics – obsolete. The new
amendments, which became effective on May 9, 2016, require a
majority of shareholders to tender their shares before an
unsolicited offer can be successful, thereby giving shareholders an
effective veto over any hostile bid. The amendments also greatly
extend the time a bid must remain open, eliminating the standard
rationale for adopting a rights plan. With the poison pill out of
play, could the tactical private placement take its place?
When defending against a hostile takeover bid,
a board can use a tactical private placement to unilaterally assign
a significant percentage of a company's outstanding equity to a
party or parties that will not tender to the bidder. A recent
article for The M&A Lawyer titled "The Role of
Private Placements in Canada's New Takeover Bid Regime"
canvassed the available case law on the issue, concluding that
regulators express far more hesitation to intervene in private
placements on public interest grounds. While poison pills are used
only as a takeover defence, a private placement can be pursued for
any number of reasons and may not be "tactical."
The tactical private placement can take
advantage of the long lead time offered by the minimum tender
period enshrined by the new amendments. It takes time to find
interested investors, negotiate terms, and seek approval from the
stock exchanges (in the case of any sale of listed securities).
Now that bidders have to keep their offer open
for at least 105 days, target companies have the leeway to pursue a
private placement as an alternative. Furthermore, the considerable
length of the minimum tender period creates a degree of uncertainty
that might make more readily available options attractive to
For a private placement to be a viable
defensive tactic, a target company must have or be able to find
investors willing to accept such a deal on reasonable terms.
On a separate but related note, the tactic will be most effective
when a relatively small proportion of the total outstanding equity
is required to block the hostile bid. If neither of these
conditions are present, a target company might end up striking a
bargain that would be deleterious for the company and thus a breach
of their legal duty.
Companies considering or negotiating merger
transactions should inform themselves of appropriate defensive
tactics once they are in play. Now that the poison pill has far
more limited utility, new mechanisms such as the tactical private
placement must fill the void to counteract unwanted and
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