In connection with the release of its 2014-15 budget on February 20, 2014, the Government of Quebec announced the tabling of the report of the Task Force on the Protection of Québec Businesses (Task Force). The government also announced its intention to implement the Task Force’s main recommendations to amend the Business Corporations Act (Quebec) (QBCA or the Act) to allow companies subject to such Act to adopt protective measures that provide for:
- conferring variable voting rights depending on the length of time that shares have been held;
- including in their articles provisions prohibiting, in the case of hostile take-over bids, a number of subsequent actions such as an amalgamation, a sale of assets or the removal of a director before the expiry of his term of office; and
- removing an offeror’s voting rights on shares acquired since the commencement of an acquisition transaction until otherwise decided by the other shareholders.
These measures would not be mandatory but companies governed by the QBCA could elect to adopt them by amending their articles, an action requiring shareholder approval by way of special resolution (two-thirds majority). Any subsequent repeal of such amendments would require similar shareholder approval, unless the amended articles conferred upon the board of directors the power to repeal or waive the measure.
The Task Force was created in June 2013 at the request of the Government of Quebec following the acquisition or proposed acquisition of a number of prominent reporting issuers headquartered in Quebec, such as Rona, Alcan and the Montréal Exchange. The Government of Quebec, along with various economic players in Quebec, such as the Board of Trade of Metropolitan Montreal and the Quebec Chapter of the Institute of Corporate Directors, expressed concern about the exodus of head offices from the Quebec economy.
The government and the Task Force noted that several U.S. states and other jurisdictions have adopted similar measures to allow companies to resist hostile take-over bids. For instance, the unsolicited take-over bid of Alimentation Couche-Tard for U.S.-based Casey's in 2010 was abandoned due to, among other reasons, defensive measures permitted under Iowa corporate law.
Acknowledging that these measures do not provide a complete solution to its concerns – among other things, the measures will apply to only a limited number of companies headquartered in Quebec – and that it is essential to maintain the competitive position of these companies and the Quebec legal environment, the Task Force has also recommended other measures. These include providing more favourable tax treatment with respect to stock options held by senior executives residing in Quebec to facilitate the attraction and retention of senior business managers to Quebec, and thereby encourage the development of head offices.
VARIABLE VOTING RIGHTS
The first measure proposed is to allow companies governed by the QBCA to provide in their articles for voting rights that vary depending on the length of time that a shareholder has held the issuer’s shares. Thus, the beneficial owner of a share who has held it for at least two years would have an additional vote, resulting in two votes per share. This would favour shareholders that take a long-term interest in a company at the expense of shareholders considered opportunistic (i.e. hostile foreign buyers, hedge funds, arbitragers and other speculative investors).
This additional voting right would be relevant in the case of a take-over bid where the offeror must make a second-step business combination and obtain shareholder approval in order to acquire the outstanding target company shares not tendered under the offer.
The Task Force’s report does not specify the mechanics for achieving this objective, such as whether this right is limited to registered shareholders (as opposed to those holding shares through an intermediary) so that the company can determine that the shares have been held for the requisite two-year period.
PROHIBITION OF CERTAIN TRANSACTIONS
Under the second category of proposed changes to the QBCA, a company governed by the Act would be able to prohibit certain transactions in the context of a hostile take-over bid if it has taken the necessary steps to amend its articles. In such case, following a hostile bid, the target company – and indirectly, the purchaser – will be unable to proceed with:
- an amalgamation or other business combination of the target with the purchaser or a substantial sale of assets representing at least 15 per cent of the target company, for up to five years from the date of the acquisition; and
- the removal of a director before the end of his term of office. The relevance of this measure is more limited for issuers, such as those listed on the Toronto Stock Exchange, that are prohibited from adopting staggered board terms. See our October 2012 Blakes Bulletin: TSX Adopts, and Proposes, New Director Election Requirements for further details.
The third category of proposed amendments, which relate to the purchaser, provide that:
- the purchaser would not be able to vote its target company shares until other shareholders, excluding directors and officers, adopted a special resolution restoring the purchaser’s right to vote; and
- the purchaser would have to pay to the target any profits made during the 24-month period following the take-over bid from the sale of target shares acquired by it during the 12-month period preceding the take-over bid.
The Task Force recommends that these protections be extended to entities other than corporations, including trusts under the Civil Code of Québec used in public income trust structures. In addition, and consistent with its approach to the issue of protective measures, the Task Force supports the proposal of the Autorité des marchés financiers (AMF) in the context of recent regulatory initiatives by the Canadian Securities Administrators (CSA) regarding shareholder rights plans (poison pills). See our March 2013 Blakes Bulletin: Securities Regulators Propose Alternative Approaches to Defensive Tactics for more details.
According to the Task Force, the AMF proposal, unlike the proposal of the other CSA jurisdictions which the Task Force views as inadequate, should enable the board of directors of a corporation subject to a hostile bid to fully exercise its fiduciary powers by declining the offer, thereby making Quebec companies less vulnerable to unsolicited offers.
Under the QBCA, which came into force in 2011, a company incorporated under the laws of another jurisdiction may be continued under the QBCA. It remains to be seen whether these proposed protections against hostile take-over bids will encourage public companies governed by other corporate statutes to pursue a continuance under the QBCA.
Commentators on the Quebec political scene predict the imminent call of a provincial election. If this happens, it would raise serious doubts that these measures will be implemented any time soon. However, this is a topic that could remain relevant, particularly if the current government, which initiated the Task Force, is re-elected, and given that hostile bids involving Quebec-based reporting issuers, such as Goldcorp’s bid for Osisko, continue to garner media and political attention.