The Canadian Securities Administrators (the "CSA") have published a request for comments on a proposal to change the way that Shareholder Rights Plans are regulated (the "Proposed Rule"). The Proposed Rule will shift the balance of power in a hostile bid in a meaningful way from the hostile bidder to the target company Board, while still leaving the ultimate decision as to whether or not the target company should be sold to its owners, the shareholders. In effect, the proposal is that a target Board would be permitted to retain a Rights Plan and thereby block a hostile bid if a majority of its shareholders have approved the Rights Plan at a prior annual meeting or in the face of the bid (at a meeting called within 90 days of the commencement of the bid). Under the Proposed Rule, the shareholders also have the right to remove the Rights Plan by majority vote at any time.
Where the board of directors of a Canadian company is faced with an unsolicited and possibly unwelcome take-over bid for the company, the directors have a very limited range of defenses available to them. The CSA is working on a broader review of defensive tactics generally, but has initially proposed new rules dealing specifically with rights plans. 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. Both proposals provide for a comment period until June 12, 2013.
Currently, where a hostile bid is made in Canada, the target company Board can use a Rights Plan to buy it some additional time, beyond the 35 day minimum tender period for a take-over bid, to solicit white knights or to pursue other alternatives to maximize shareholder value. The 35 day period can typically be stretched by the target company to 45 to 55 days with the protection of a Rights Plan, but securities commissions in Canada until now have been clear that the Rights Plan cannot remain in place indefinitely.
As a result, a Canadian Board has not been able to "just say no" to the hostile bidder even where a Rights Plan is in place.
How Does a Rights Plan Work?
Under a Canadian style Rights Plan (which is different from Rights Plans in the United States) a "right" is issued for each outstanding share that allows all holders of those rights, other than a hostile bidder that crosses over a defined threshold of ownership (usually 20%), to purchase additional shares from the corporate treasury at a deep discount to their market price if the hostile bidder proceeds to cross that threshold. Effectively, this prevents the hostile bidder from crossing the threshold unless and until the Rights Plan is terminated either by the target company Board waiving the Plan or a securities commission or court ordering that it be terminated.
Canadian Rights Plans have a "permitted bid" concept that allows even a hostile bidder to proceed without Board approval provided that:
- the bid must remain open for shareholders to accept for a minimum period of time that will be longer than the 35 day statutory minimum (often 60-90 days);
- at least a majority of the target outstanding company shares must be tendered into the bid; and
- once a majority of the shares have been tendered, the bid must be extended for at least 10 days to allow other shareholders to tender.
Is a 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 are Rights Plans Currently Used?
The recent transaction for the sale of Primaris Retail Real Estate Investment Trust is an excellent example of how Rights Plans are used and their limitations. Primaris is a TSX listed REIT that owns 43 shopping malls across Canada, with an aggregate market capitalization of approximately $3.8 billion.
Late on the evening of December 4, 2012, the CEO of Kingsett Capital met with the CEO of Primaris to advise that Kingsett would be announcing publicly an unsolicited bid for Primaris the next morning. As is not uncommon with hostile bids, there was no notice, and no negotiation.
Primaris had a Rights Plan in place, previously approved by its unitholders, and it issued a press release responding to the Kingsett announcement to the effect that the Board believed the initial $26.00 offer undervalued Primaris, that the Board intended to canvass alternatives, and that the unitholders did not have to rush to decide whether to tender or not, because Primaris had a Rights Plan in place that would buy Primaris at least some additional time beyond the 35 day period of the Kingsett bid. No one knew exactly how much time might be available before the regulators required that the Rights Plan be waived. Needless to say, a hostile bid announced in December creates obvious challenges for a target Board of a company with widely dispersed assets and potentially interested third parties in different time zones around the world.
While Primaris retained financial advisers, got them up to speed, created a data room and identified potential third parties to meet with, Kingsett, very sensibly from its perspective, was pressing the Ontario Securities Commission to set an early date to hold a hearing to determine whether the OSC should order that the Primaris’ Rights Plan be cease traded. Kingsett’s opening position was that Primaris should require no additional time and the Rights Plan should be terminated at the expiry of the 35 day statutory bid period. That would, of course, effectively mean that the Rights Plan had no effect whatsoever and would severely limit Primaris’ ability to find other buyers so as to maximize value for unitholders. Some potentially interested parties declined to seriously consider bidding for Primaris given the time of year (the holiday season) and the potentially short time available.
After some debate, it was agreed that an OSC hearing would be scheduled for January 30, 2013 (51 days after the start of the Kingsett bid, which occurred on December 10). Prior to that date, Primaris entered into an agreement with a white knight, H&R Real Estate Investment Trust, at $27.00 per unit, so that the OSC hearing became unnecessary and Primaris voluntarily waived the Rights Plan. If that had not happened, the OSC most likely would have cease-traded the Rights Plan on or shortly after the hearing date (given that by then 51 days would have elapsed since the commencement of the Kingsett offer), and in the absence of an alternative unitholders may well have sold their Primaris units for $26.00. In the end, H&R and Kingsett joined forces and the bid was raised to $28.00 per Primaris unit. In this circumstance, the Rights Plan served its purpose, but it was fortunate for the Primaris unitholders that H&R came forward over the holiday season to enter the auction process quickly. While Primaris was comfortable that no better offer could be found even with the benefit of more time, boards often find that 45-55 days is insufficient to conduct a successful value maximization process
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;
- securityholders 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.
The CSA’s Request for Comments is dated March 14, 2013 and is available here. Comments have been requested by June 12, 2013.