In their first decision to consider Canada's new takeover bid rules, securities regulators have signaled that they are reluctant to make piecemeal changes to the bid regime, providing clarity on the new bid process and relative role of defensive tactics.
The decision, like the bid regime, strikes a balance between bidders and targets, with a view to protecting investor choice in the context of hostile takeover bids. Targets and bidders alike will find that the decision has noteworthy implications for deal tactics.
New Bid Regime
Canada's new takeover bid regime took effect in May 2016, following an extensive consultation process that included competing regulatory proposals and significant market input. An impetus for the regulatory change was a desire to address the regulators' case-by-case consideration of targets adopting shareholder rights plans (or poison pills) as hostile bid defenses, and the resulting uncertainty surrounding timing and the bid process.
While the revised bid rules do not address poison pills, they codify "permitted bid" terms found in most pills adopted under the previous regime. The rules extend the minimum deposit period for takeover bids to at least 105 days and introduce a mandatory minimum tender condition of over 50% of the target's outstanding shares. These timing rules are addressed in the regulators' reasons in the Aurora/CanniMed matter.1
The rules do not modify Canada's defensive tactics policy (NP 62-202), leaving as a question how poison pills fit into the new bid regime. That question is addressed in the Aurora/CanniMed case.
The Regulators' Decision
The Aurora/CanniMed matter is the first regulatory decision to consider the new bid regime, including the relationship between the regime and the regulators' defensive tactics policy.
The Ontario and Saskatchewan regulators cease traded the poison pill adopted by the board of CanniMed Therapeutics Inc. in response to Aurora Cannabis Inc.'s hostile bid. The pill had been designed to protect CanniMed's proposed acquisition of Newstrike, which was supported by management, and prevent CanniMed shareholders from being able to support the Aurora bid through hard-lock up arrangements.2 The CanniMed board had decided to proceed with the Newstrike transaction despite objections raised by the locked-up shareholders.
The decision not only addresses the role of poison pills, but also the bid rules more generally, and the function of lock-up agreements in the takeover bid process.
Reluctance to Alter Bid Rules
Aurora argued that CanniMed's proposed acquisition of Newstrike was effectively an "alternative transaction" under the bid rules, affecting the time that its bid was required to be outstanding. The regulators rejected that argument. They decided that Aurora was not entitled to rely on the "alternative transaction exemption" under NI 62-104, which would have permitted Aurora to shorten the 105-day bid period so that CanniMed shareholders could consider the Aurora and Newstrike transactions simultaneously. According to the regulators, the Newstrike transaction would not result in a change of control of CanniMed, and therefore it fell outside the scope of the regulatory exception.
In reaching their decision, the regulators indicated a "[reluctance] to make piecemeal changes to timing requirements that affect planning by bidders and target companies and that would make bid pricing and secondary market price determinations less predictable."
The new bid regime aims to strike balance between empowering target boards by giving them more time to evaluate a bid and explore alternatives, and enabling bidders to proceed with their bids.
In the same vein, the regulators rejected CanniMed's application seeking to prevent Aurora from making market purchases of CanniMed shares while the hostile bid was outstanding. The regulators held that in the absence of public policy interests, Aurora should not be prevented from making market purchases under the 5% exemption in NI 62-104, acknowledging that the exemption is an established feature of the bid regime. The circumstances in which that exemption will be removed for a bidder are very rare, and the regulators' decision signals that it will not likely remove the exemption in aid of a target's defense strategy.
Are Locked-Up Shareholders Joint Actors?
The regulators found that the shareholders (holding approximately 38% of CanniMed) that entered into lock-up agreements with Aurora were not joint actors with Aurora as a result of the terms of the agreements and the circumstances in which they were negotiated. If granted, this order would have meant that the Aurora offer was an insider bid, leading to formal valuation and other requirements.
Importantly, the regulators' reasons acknowledge the valid role that lock-up agreements play in takeover bids. Among other things, lock-up agreements provide a degree of deal certainty to bidders, encouraging them to come forward and make a bid, especially in a hostile context. That function is particularly important as an offer must remain outstanding for at least 105 days. Consistent with this, the regulators concluded that an agreement to vote in favour of the bidder's transaction, and to vote against any alternative proposal, does not, in and of itself, render the locked-up shareholder a joint actor with the bidder.
In this case, the locked-up shareholders, who had access to CanniMed's material non-public information, shared that information with Aurora to assist it in timing and structuring its bid. That, also, did not result in joint actor status with the bidder. The regulators' reasons highlight a number of important considerations to draw this conclusion, including whether the interests of the disclosing shareholder aligned with those of the bidder and there was evidence of benefits to the shareholder beyond an increased price and liquidity for its investment; whether the bidder used that information to trade or make a toehold purchase; or if the disclosure prevented an auction process or denied shareholders a choice of transactions.
Extensive and clear sharing of material non-public information might suggest a heightened level of cooperation between the parties, triggering concerns of joint actorship, but not in this case. While not affecting the bid process, conduct of this kind could result in enforcement proceedings, however.
State of Poison Pills Under New Bid Rules
The tolerated function of poison pills within securities law in Canada had been to allow the target time to find an alternative to the hostile bid, facilitating an opportunity for investors to choose between alternatives. In this case, the regulators found that there was no evidence that CanniMed's poison pill was adopted to give CanniMed more time to conduct an auction or allow higher bids to emerge; in fact, without the pill, shareholders maintained the right to choose whether to support the Aurora offer or proceed with the Newstrike transaction. CanniMed's poison pill was accordingly cease traded by the regulators.
Tactical poison pills adopted by target boards to extend the 105-day minimum bid period are now largely redundant; the longer bid period solves for the problem that pills had previously addressed, namely the target board's desire for more time to respond to a hostile bid. There may be unusual situations where the regulators would allow a target board to maintain a poison pill in place in order to encourage an unrestricted auction for the target or promote shareholder choice in respect of a change-of-control transaction, but the Aurora/CanniMed case was not such a situation. The outcome of the Aurora matter may have been different if CanniMed had already had in place a shareholder-approved poison pill which regulated hard lock-up agreements, and was otherwise compliant with Institutional Shareholder Services' approved terms.
Regulators will continue to review tactical poison pills against the policy considerations underlying NP 62-202, in particular whether the defensive tactic enhances shareholder choice.
It is clear the new bid regime aims to strike a balance between empowering target boards by giving them more time (105 days) to evaluate an unsolicited bid and explore alternatives, and enabling bidders to proceed with their bids. Although the regulators will continue to examine a target's defensive tactics in light of Canada's national policy on defensive tactics, it remains clear that they are unlikely to deviate from the bid rules or allow market participants to do so, especially in circumstances where a shareholder choice in respect of a bid or competing bid may be compromised.
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