On March 31, 2015, the Canadian Securities Administrators issued their highly anticipated proposal to make the most significant changes to the Canadian take-over bid regime in years, one of the stated goals of which is to “rebalance the current dynamics” between bidders, boards and shareholders. The three principal changes would (i) mandate a 50% minimum tender requirement for all formal bids, (ii) require a ten-day extension of the bid once the minimum tender requirement is satisfied and all other conditions of the bid have been satisfied or waived, and (iii) extend the minimum bid period from 35 days to 120 days, subject to the target board’s ability to shorten the period. While the desire to mitigate the potentially coercive elements of the current bid rules that inform the first two amendments appears uncontroversial, we believe that the proposal to more than triple the current minimum bid period in order to increase leverage for target boards merits further review.
As we note in our 2015 Canadian Hostile Take-Over Bid Study, which analysed all 143 unsolicited take-over bids for legal control of Canadian-listed public companies during the ten-year period ended December 31, 2014:
- A sale of the company was by no means inevitable: while a first-mover hostile bid succeeded almost 55% of the time, 28% of the targets of first-mover bids remained independent. Since the release of our study, this finding has garnered the most attention, perhaps as it may call into question the received wisdom that informs much of the debate about levelling the playing field.
- Our study provides evidence that the current 35-day period is insufficient to allow competition to emerge (as competition emerged an average of 41 days after the initiation of a bid and almost two-thirds of competing transactions emerged on or after the statutory minimum bid period); however, it remains to be seen whether a 120-day period strikes the balance needed to ensure sufficient time for a board to find alternatives while not dissuading bidders from coming forward in the first place.
- The increased uncertainty inherent in a longer bid period, most notably due to the spectre of increased competition, will surely cause bidders to carefully evaluate the potentially lower odds of success and the higher premium that may be required to ultimately prevail in assessing whether to proceed with their bid at all. In that regard, our study found that competition cut a bidder’s odds of success in half and resulted in a 69% increase, on average, in the final premium offered by a hostile bidder.
Given the increased risks and potential costs to bidders if the proposed changes are enacted, we may well witness a decrease in the number of unsolicited bids, and perhaps of equal importance, a significant weakening of the very threat of a bid, which could lead to a decrease in M&A activity more generally. To the extent that the reforms seek to enhance the auction dynamic with a view to increasing shareholder choice and maximizing shareholder value, that objective can only be achieved if bidders believe they have a reasonable prospect of success, justifying the risks inherent in launching a bid.