On March 14, 2013, the Autorité des marchés financiers (“AMF”) published for comments a consultation paper (the “AMF Proposal”)i pertaining to defensive tactics in response to take-over bids. This consultation is taking place concurrently with the one launched the same day by the Canadian Securities Administrator (“CSA”) with the release of proposed National Instrument 62-105 Security Holder Rights Plans and proposed Companion Policy 62-105CP Security Holder Rights Plans (collectively, “62-105”). Unlike the CSA’s 62-105, the AMF Proposal addresses all defensive tacticsii, not only security holders rights plans.
The AMF Proposal
By proposing an alternative approach and a broader reflection than 62-105, the AMF is seeking to restore the balance between target boards and bidders. Indeed, according to AMF, the result of the current interpretation of National Policy 62-202 – Take-Over Bids – Defensive Tactics (“NP 62-202”)iii has led inevitably to « the auction of target corporations, making our take-over bid regime too bidder friendly ».
The AMF notes that major changes in the economic and legal environment regarding unsolicited take-over bids have arisen since the adoption of NP 62-202 in 1986, namely:
- significant improvements in corporate governance standards, brought about by more stringent regulation and better practices;
- important court decisions which redefined directors’ fiduciary duties, such as the Supreme Court ruling in BCE Inc. v 1976 Debentureholders ;
- increased involvement by security holders’ in the supervision of directors and the use of remedies to challenge board decisions; and
- the ability of hedge funds and other arbitrageurs to exert significant influence during the take-over bid process.
These changes have led the AMF to reconsider the current approach with respect to defensive measures entrenched in NP 62-202.
The AMF Proposal consists of two principal elements:
- Replacing NP 62-202 by a new policy that will give greater deference to decisions by directors and target boards who adopt defensive tactics while exercising their fiduciary duty; and
Changing the current take-over bid regime by rendering mandatory two measures currently found in most security holders’ rights plans.
- Changes to NP 62-202
The AMF considers that securities regulators should not view defensive tactics as prejudicial to the public interest and therefore should not intervene, unless (i) security holders are deprived from considering a bona fide offer because the board has inadequately managed its conflicts of interest or those of management or (ii) unusual circumstances demonstrate an abuse of security holders’ rights or a negative impact on the efficiency of capital markets;
In determining the reasonableness of a defensive tactic, the AMF proposes to examine, among other things, the following indicators:
- the establishment of a special committee of independent directors with the mandate to consider and review the bid and make a recommendation to the board;
- the appointment of independent financial and legal advisers to assist the special committee in fulfilling its mandate;
- the conclusion of the special committee and the board that, based on their review of the bid and on the advice of legal and financial advisers, it is in the best interests of the corporation to implement a defensive measure; and
- the completeness of the disclosure provided to security holders in the directors’ circular, and any other form of communication used by target directors, on the process followed to provide their recommendation and their reasons in support of the defensive measure.
Ultimately, the AMF Proposal would replace NP 62-202 by a new policy that would recognize the fiduciary duty of directors faced with an unsolicited take-over bid and that would limit the securities regulators’ intervention on questions of public interest.
- Changes to the Take-Over Bid Regime
In order to deal with the issue of structural coercion raised by the current take-over bid regime, the AMF would make mandatory two measures currently found in the “permitted bid” provisions of most security holders’ rights plans.
First, the AMF proposes a « voting mechanism » consisting in an irrevocable minimum tender condition « of more than 50% of the outstanding securities owned by persons other than the offeror and those acting in concert with it ». This mechanism would apply to any bid, including a partial bid. Second, the AMF suggests extending the bid period for an additional 10 days after the public announcement of the completion of the irrevocable minimum in order to give time to indecisive or less sophisticated security holders to deposit their shares.
Although the AMF actively participated in the preparation and publication of 62-105 as a member of the CSA, it is of the view that the regulatory framework surrounding all defensive tactics should be reviewed at this time, not only rights plans. The AMF’s alternative approach will hopefully generate constructive comments and discussions during the consultation period for both proposals.