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 boards.
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 unattractive bids.
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