On June 7, 2013, the Government of Quebec set up the Task Force on the Protection of Quebec Businesses (the Task Force), composed of experts and chaired by Claude Séguin, former deputy minister of finance for Quebec and current Senior Vice President of Corporate Development and Strategic Investments at CGI. The Task Force’s mandate was, among other things, to recommend measures that would enable Quebec businesses to better protect themselves against hostile takeovers and measures that would foster the maintenance and development of head offices in Quebec.
On February 20, 2014, the government released the Task Force’s report at the same time as the Quebec Minister of Finance and the Economy, Nicolas Marceau (the Minister), tabled the Budget1. A copy of the report is available here. The report proposes nine measures affecting corporate law, securities regulation and taxation. Some of these recommendations draw on American and European models and, if adopted, would be unique in Canada.
Recommendations affecting the Quebec Business Corporations Act (the QBCA)
The Task Force recommends that the Minister introduce safeguards against hostile takeover bids. According to the Task Force, shareholders with a long-term interest in a corporation and the boards of entities incorporated under the QBCA should have the tools needed to make the decisions that are in the corporation’s best long-term interests.
Measure 1 – Amend the QBCA to include provisions allowing for the automatic adjustment of voting rights based on the length of time shares are held (i.e. variable voting rights)
First, drawing inspiration from certain European jurisdictions, the Task Force proposes amending the QBCA to enable the adoption of variable voting rights, i.e. voting rights that increase the longer shares are held. Under the implementation formula proposed by the Task Force, an additional voting right may be included in the voting shares when the beneficial owner has held the shares for two years or more. This measure would benefit longer-term shareholders.
Measure 2 – Amend the QBCA to include provisions prohibiting certain transactions by offerors in hostile takeover bids
Second, in line with an approach taken in certain U.S. states, the Task Force proposes amending the QBCA to prohibit certain transactions by corporations that are the subject of a hostile takeover bid from being carried out without the approval of the target’s board. The Task Force proposes the following implementation formula:
- A merger or other amalgamation of the assets of the corporation with the assets of the offeror or a substantial sale of assets representing 15% or more of the corporation would be prohibited for five years.
- The offeror would be required to give the corporation the profits made in the 24 months following the takeover bid on the resale of the securities of the corporation purchased during the 12 months prior to the launch of the takeover bid.
- The current term of office of a director (maximum duration of three years) could not be revoked before the end of the term.
- The offeror would not be able to exercise its voting rights for the shares it holds after the launch of the takeover bid. This measure would apply until the other shareholders, excluding the directors and executive shareholders, adopt a resolution, by a two-thirds majority vote, restoring the voting rights to the offeror and its associates.
Adoption of measures
Measures 1 and 2 could be included in the corporation’s articles of incorporation or withdrawn at any time by special resolution of the shareholders.
In his Budget Speech, the Minister announced the government’s intention to rapidly act on the recommendation enabling business corporations to adopt variable voting rights based on the length of time shares are held and the recommendation aimed at prohibiting certain transactions by corporations that are the subject of a hostile takeover bid.
Measures 1 and 2, as they currently stand, would only affect entities incorporated under the QBCA and whether they were adopted or not would ultimately be up to the shareholders of those entities.
Measure 3 – Make measures 1 and 2 applicable to all entities incorporated in Quebec that are likely to make a public offering and be the subject of a hostile takeover bid
According to the Task Force, measures similar to measures 1 and 2 should apply to all entities incorporated in Quebec that are likely to make a public offering and be the subject of a hostile takeover bid. They would therefore apply to issuing entities governed by the Civil Code of Quebec, such as certain trusts, but would not apply to corporations headquartered in Quebec that are incorporated under the Canada Business Corporations Act or other federal statutes.
Recommendations concerning securities regulators
The Task Force also recommends that the Minister facilitate legislative and regulatory implementation of the proposal of the Autorité des marchés financiers (AMF) concerning takeover bids, set out in its consultation paper on defensive tactics published on March 14, 2013,2 and that he turn the Bureau de décision et de révision (the BDR) into an administrative tribunal specializing in securities.
Measure 4 – Facilitate the regulatory and legislative implementation of AMF’s proposal regarding hostile takeover bids
The AMF proposal is twofold and seeks to (i) redefine how the Canadian Securities Administrators (CSAs) intervene in takeover defences and (ii) change the takeover bid regime.3 The proposal, if implemented, would enable the boards of target corporations to fully exercise their fiduciary duties in order to restore the balance between the offeror and the target corporation.
According to the AMF’s proposal, which is supported by the Task Force, Notice 62-202 relating to Take-Over Bids – Defensive Tactics (Notice 62-202) should be replaced by a new approach that gives appropriate deference to directors so they can exercise their fiduciary duties in adopting defensive tactics.
Under that same proposal, the CSAs would issue cease trade orders only when the defensive tactic that is adopted results in a clear violation of the securityholders’ rights or undermines the smooth operation of the markets. This would enable the boards of target corporations to exercise their powers without the systematic intervention of the CSA.
In addition, the AMF proposes, as an irrevocable condition of any bid for all securities of a class, and for partial bids, that the minimum percentage of securities to be tendered be set at more than 50% of the outstanding securities belonging to persons other than the offeror. It also proposes extending the bid by 10 days following the public announcement that such minimum percentage has been tendered. This change would have the effect of mitigating the uncertainty surrounding a takeover bid that leads securityholders to tender their securities or sell them prematurely.
Measure 5 – Transform the Bureau de décision et de révision (the BDR) into an administrative tribunal specializing in securities
According to the Task Force, the BDR should be turned into a specialized administrative tribunal made up of Court of Quebec justices. Like Delaware, which has courts specializing in corporate law, Quebec should create a new tribunal known for the quality and consistency of its decisions, which, according to the Task Force, would make it more attractive for companies to incorporate or continue under the QBCA.
Fiscal measures that could help to keep head offices in Quebec or attract new ones
According to the Task Force, to keep head offices in Quebec and attract new ones, the Quebec tax system needs to be competitive in the treatment reserved for businesses, shareholders and senior executives.
Measure 6 – Encourage employees to purchase shares in the companies they work for
First, according to the Task Force, employees should be encouraged to become shareholders of the corporations they work for. To achieve this, matching shares received from the corporation should be given a more favourable tax treatment by taxing employees on those shares when they are sold rather than when they are acquired. In addition to fostering a stronger sense of belonging among employees and providing them with an additional financial return, this measure would enable certain corporations to create blocks of employee-held shares, further complicating any hostile takeover bid.
Measure 7 – Improve the tax treatment of gains obtained through stock options
Second, corporate executives should receive a more advantageous tax treatment of the gains realized on their stock options. This measure is intended to create optimal conditions for the development of head offices and make Quebec as attractive as possible for senior executives who might be drawn to this province and who then might make it their permanent home. According to the Task Force, since stock options often account for a significant portion of executive compensation, the taxation rate needs to be competitive with rates across Canada.
Measure 8 – Re-examining the tax rules for capital gains with a view to enabling the owners and key shareholders of a business to defer the taxation of capital gains at the time of death
Third, the taxation of capital gains at the time of death of an owner or a key founding shareholder should bere-examined with a view to enabling the tax on capital gains normally payable at the time of death of an owner or key founding shareholder of a business to be deferred to the time of transfer of ownership of the business to another generation. This measure would deter a subsequent generation from prematurely selling all of its controlling shares. This, according to the Task Force, would result in more head offices remaining in Quebec.
The Task Force also wants to introduce a measure allowing family trusts to realize the gain attributable to their significant investment in a business at the time of sale instead of every 21 years, for as long as the business remains active.
Measure 9 – Promote the participation of Quebec investment funds
Lastly, the Task Force recommends that legislative and regulatory measures be put in place to promote the financial and operational participation of Quebec investment funds in order to facilitate the transfer of Quebec corporations to a new generation of Quebec owners.
The Task Force’s report is premised on the notion that the presence of head offices – and the related economic benefits – is crucial for the Quebec economy and that the current rules make companies listed in Canada vulnerable to hostile takeover bids. In fact, federal and provincial laws in Canada place our businesses at a disadvantage in relation to businesses incorporated in the United States, where both securities legislation and corporate legislation in more than 30 states provide safeguards against hostile takeovers.
Notice 62-202 states that the primary objective of the takeover provisions of securities legislation applicable in the provinces and territories of Canada is the protection of the bona fide interest of the shareholders of the target company; a secondary objective is to provide a regulatory framework within which takeover bids may proceed in an open and even-handed environment. At no point does the regulation deal with other priorities for the Canadian or Quebec economy, or the vulnerability of target corporations in the absence of adequate defensive measures.
However, since the ruling of the Supreme Court of Canada in BCE Inc. v 1976 Debentureholders,4 the attention has been focused on the role of the board of the company targeted by a hostile takeover bid and the fiduciary duties of the directors. In that ruling, the Court noted that, in determining what serves the best interests of the corporation, the directors may consider, among other things, the interests of various parties, but there is no principle that one set of interests should prevail over another.
There is a growing debate concerning the tension that exists between the primacy of shareholders’ interests espoused in current securities regulations, on one side, and the importance of public corporations for the communities they are located in and the power of boards of directors to determine their fate, on the other.
The report and recommendations of the Task Force are clearly and unequivocally on the side of giving more powers to boards of directors. These recommendations will have to be taken into account in the approach adopted by the CSAs. In fact, in 2013, the comments received by the AMF during its comment period showed strong support from both Quebec issuers and issuers outside the province. The Task Force’s recommendations and the Minister’s initiatives could speed up a compromise among the CSAs regarding the AMF’s position that would allow us to better protect not only our head offices, but all other Canadian public companies as well.
Incidentally, one would have expected the Task Force to propose legislative amendments that would apply immediately, as was the case in certain American states that impose provisions prohibiting certain transactions for offerors in hostile takeover bids but which, at the same time, allow the target companies to opt out of their application. Instead, the Task Force’s recommendations provide for the possibility of opting in to the new measures.
Lastly, the report recommendations (other than the proposed tax measures) apply only to hostile takeovers. In recent years, many companies that have been privatized and whose head offices have been relocated have not been the targets of hostile takeover bids; instead, they have been privatized through negotiated transactions. As such, for these types of transactions, regardless of what the future holds for the Task Force’s recommendations, the shareholders will continue to have the last word.