On March 14, 2013, the Canadian Securities Administrators (otherwise known as the “CSA”) published a request and notice for comments regarding Proposal National Instrument 62-105 – Security Holder Rights Plans, the purpose of which is to introduce the CSA’s proposed regulatory regime for rights plans.
The proposed rule, which is discussed in more detail in our publication Securities Regulators Proposed New Rules for Shareholder Rights Plans, does not address other defensive tactics.
In addition, the Autorité des marchés financiers has published An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics, (the “AMF Proposal”), which will be the subject of a separate publication by McCarthy Tétrault. The AMF Proposal is more general and far reaching in that it applies not just to Rights Plans but to all defensive measures adopted by a board to fend off a hostile bid, and does not contemplate any shareholder approval or ratification requirement. The AMF approach in particular would bring the Canadian regime as regards defensive measures more in line with the US (Delaware) regime, where boards have generally been able to “just say no” to a hostile bid by implementing a rights plan or other defensive measures.
The CSA Proposal – Why is the Change Necessary?
There has been much recent comment in Canada that our rules have been a little too kind to hostile bidders at the expense of target companies, their Boards of Directors and their shareholders. Everyone agrees that hostile bids have a legitimate role in a free-market system in allocating economic resources to their best use, but the absence of robust defence options generally means that once a hostile bid is launched a sale becomes inevitable. The current regime, which allows the target Board a mere 45-55 days to canvass alternative transactions after a surprise announcement of a hostile bid is seen by many to create an environment which is too bidder friendly.
How will the Proposed New Rule Work?
The basic elements of the proposed rule are as follows:
- a rights plan will be effective when adopted by the board of directors but it must be approved by security holders within 90 days from the date of adoption or, if adopted after a take-over bid has been made, within 90 days from the date the take-over bid was commenced;
- a rights plan must be approved annually by majority vote of securityholders to continue to remain effective;
- security holders can terminate a rights plan at any time by majority vote;
- any shares held by the bidder are excluded from a security holder vote to adopt, maintain or amend a rights plan;
- material amendments to a rights plan must be approved by security holders within 90 days of the date of adoption;
- a rights plan is effective only against take-over bids or an acquisition by a person of securities of the issuer (e.g. it cannot be triggered by a proxy contest to change the board of directors or some other shareholder vote); and
- a rights plan cannot be used to discriminate between take-over bids, so if it is waived or modified with respect to one take-over bid it must be waived or modified with respect to any other take-over bid.
What Will Change?
We expect the consequence of this proposed rule will be that target Boards of Directors will have more time to seek out a white knight or to canvass other potential transactions to increase shareholder value. Instead of working within a 45-55 day time period, a target Board will have 90 days or more to identify alternatives. Potentially, if shareholders agree, the Board could now “just say no” and hold off a hostile bidder indefinitely.
Under the proposed rule, if the target company does not have a rights plan in place that has been approved at the most recent AGM, its first reaction to a hostile take-over bid will likely be to adopt a Shareholder rights plan and to call a meeting of shareholders to be held on the 90th day following the commencement of the bid (as opposed to the announcement). The CSA is stating that barring extraordinary circumstances, the provincial securities commissions will not step in to cease-trade the rights plan. If a value maximizing alternative is identified within the 90 days, the target could cancel the shareholder meeting and waive the rights plan, as it will have served its purpose. If not, the target will be waging a proxy battle with the hostile bidder over the vote to approve or terminate the rights plan and the Plan will either remain in place or die at the shareholders meeting. Or, the target might conclude that 90 days is sufficient to canvass alternatives and not call the shareholders meeting or engage in a proxy battle. In that scenario, if there is no alternative transaction identified, shareholders will indicate their support (or not) for the hostile bid by tendering (or not) their shares to the bid.
One implication of the proposed rule is that public companies with rights plans currently in place may want to amend those Plans to change the “permitted bid” definition. It will be interesting to see whether Canadian companies follow the route of U.S. style rights plans and eliminate altogether the concept of a “permitted bid”, or whether the common 60 day permitted bid period becomes 90 days or longer.
At the moment, it is not clear to us that Canadian public companies will routinely submit a rights plan for approval by the shareholders at each annual general meeting. It may be easier to put a tougher “tactical” rights plan in place upon the commencement of a hostile bid and not have to worry about the restrictive guidelines of the shareholder advisory services when seeking advance shareholder approval. The advantage, however, of obtaining advance shareholder approval would be that, provided the shareholders approve the Plan, the target Board would potentially have much longer than 90 days to defend against a hostile bid. The annual general meeting of many public companies is held in March. A hostile bidder that commences a bid in April may have to wait 11 months or more before the shareholders have the opportunity to vote down the rights plan so that they can tender to the bid.
It will be open to a hostile bidder to buy some shares of the target (typically at least 5%) and requisition a shareholders meeting to vote on the termination of the rights plan. A hostile bidder offering a substantial premium to market might be confident of winning that vote. Although the corporate statutes require the target company to call that meeting, they do not specify when the meeting must be called. You can be sure that in the context of a hostile bid, where the target Board is canvassing alternatives, they will be in no hurry to call a shareholders meeting to vote again on a previously shareholder approved rights plan. Litigation concerning the timing for calling a shareholders meeting is highly likely.
If issuers decide to submit a rights plan for approval by their shareholders at an annual meeting, they may or may not receive that approval. We can imagine some institutional shareholders, and some retail shareholders, feeling that arming the board of directors with a 90 day tactical rights plan is sufficient, and that a rights plan that could potentially be effective for 12 months is more power in the hand of directors than they prefer. We shall see.
The CSA have said that where a company puts a rights plan to its shareholders for a vote at its AGM, and the shareholders vote ”no”, that company may still adopt a rights plan following the announcement of a hostile take-over bid provided another shareholder meeting is called within 90 days. That means there may be little downside to asking the shareholders to approve a rights plan at each AGM. If shareholders decline to approve the rights plan, the Board can still achieve a 90 day window to canvass alternatives by adopting a tactical rights plan after the announcement of the hostile bid.
Do you have a view on the regulation of shareholder rights plans? If so, be sure to submit your written comments on or before June 12, 2013:
Ontario Securities Commission
20 Queen Street West
19th Floor, Box 55
Toronto, Ontario, M5H 3S8
Fax: 416-593-2318 e-mail: email@example.com
Autorité des marchés financiers
800, square Victoria, 22e étage
C.P. 246, Tour de la Bourse
Montréal, Québec, H4Z 1G3
Fax : 514-864-6381 e-mail: firstname.lastname@example.org