One of the key questions in connection with the decision to adopt a poison pill, or shareholder rights plan, is whether the rights plan should be “shareholder-approved” or “tactical”. A shareholder approved plan is implemented for an extended period of time to serve as general protection against future unsolicited bids. A tactical plan, on the other hand, is adopted in response to a particular bid (or threat of a bid). Historically tactical plans typically had a term of less than six months and would not be submitted to shareholders for approval, though there have been recent instances in which issuers have sought shareholder approval for tactical pills with extended terms. Each type of pill has its advantages and disadvantages, the most significant of which are outlined below.
The major advantage of a shareholder-approved plan is that it provides ongoing protection against “creeping bids” (the accumulation of more than 20% of the shares of an issuer through purchases exempt from Canadian take-over bid rules) which could give a shareholder effective control of the issuer or in any event serve as a “blocking position” to a third party bidder. In addition, the existence of a shareholder-approved plan typically prevents a bidder from entering into lock-up agreements with existing shareholders prior to launching a bid, except for soft “permitted lock-ups” within the parameters prescribed by Institutional Shareholder Services (ISS). On the other hand, a shareholder-approved plan may restrict an issuer’s ability to issue shares through private placements in certain circumstances (in cases where such a financing would result in a shareholder breaching the triggering threshold of the plan). Shareholder-approved plans also require Toronto Stock Exchange approval, need to be ratified by shareholders within six months of adoption and need to conform to certain parameters in order to satisfy ISS policies on rights plan adoption. These policies limit a board’s ability to amend or waive the operation of a rights plan without shareholder approval and require that “permitted bids” and “permitted lock-ups” be included in the plan and possess certain specific features.
The major advantage of a tactical plan is much greater flexibility with respect to its content. This flexibility results from the fact that the TSX typically defers its review of a tactical plan and that ISS policies are not relevant to the extent the plan is not intended to be approved by shareholders. A tactical plan can therefore be tailored to address the circumstances of a particular bid and can include features that would not be supported by ISS in connection with its review of a shareholder- approved plan (such as broad discretion of the board to amend or waive the plan and customized “permitted bid” features).
One disadvantage of a tactical plan is that it does not provide the same protection with respect to creeping bids and lock-ups as a shareholder-approved plan. Another purported disadvantage of a tactical pill is often said to be the absence of shareholder approval, which is a positive factor that securities regulators consider in determining whether the time has come to cease trade a rights plan. While the Ontario Securities Commission has recently signalled it is considering changes to the rules with respect to shareholder rights plans that would give significant protection to plans approved by shareholders, for the moment shareholder approval is merely one of a number of factors that securities regulators take into account in determining whether or not to cease trade a rights plan. Accordingly, in current practice, when a rights plan is contested shareholder approval in and of itself is not terribly relevant and the emphasis is on making the case to securities regulators that the rights plan continues to serve shareholder interests by facilitating the development of value maximizing alternatives.
Although each situation requires its own analysis, even though tactical pills do not provide certain of the protections of shareholder approved plans, the flexibility they provide is often attractive to issuers in the current regulatory environment. To the extent that securities regulators change the rules to provide greater deference to pills that have received shareholder approval, the advantages and disadvantages associated with each type of plan will need to be re-examined and shareholder approved plans may well increase in popularity.
Next time in Poison Pill 101: Mechanics – How Pills Actually Work.