On March 14, 2013, the Autorité des marchés financiers has published a consultation paper regarding An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics (the “AMF Approach”). Concurrently, 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 AMF Approach 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. It has two major components:
- A principle of general deference to the boards of target companies in the manner in which they exercise their fiduciary duty; only in limited circumstances, such as an inadequately managed conflict of interest, would the regulator intervene to block a defensive measure implemented by a target board:
“… we believe that if the concern with conflicts of interest were addressed, appropriate deference should be given to the manner in which boards discharge their fiduciary duty and implement defensive measures that could contribute to maximize the value of corporations and, ultimately, the value for security holders.
We are of the view that unless security holders are deprived from considering a bona fide offer because the board has inadequately managed its conflicts of interest or those of management, and absent unusual circumstances that demonstrate an abuse of security holders’ rights or that negatively impact the efficiency of capital markets, Regulators should consider that defensive tactics are not prejudicial to the public interest and limit their intervention accordingly.”
- Specific amendments would be made to the takeover bid rules to essentially require that all bids conform to what would now constitute a “permissible bid” under today’s standard rights plans. All bids would have:
“An irrevocable minimum tender condition for bids on all securities of a class, and for any partial bids, of more than 50% of the outstanding securities owned by persons other than the offeror and those acting in concert with it….akin to a collective “voting mechanism”. It would serve to mitigate, if not eliminate, the pressure to tender as the bid can only succeed if a majority of “independent” security holders in effect “vote” for the bid, irrespective of how many securities are taken-up at the end of the process.
To complement this “voting mechanism”, our take-over bid regime would provide that the bid be extended for an additional 10 days following the public announcement that more than 50% of the outstanding securities owned by persons other than the offeror and those acting in concert with it have been tendered.”….
We note that the AMF Approach 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 effective defensive measure. Interestingly, however, and by way of comparison, under Delaware law the judicial standard of review in the case of a board adopting defensive measures, including an SRP, is not the business judgment rule but one of “enhanced judicial scrutiny”, expressed as follows in the recent Airgas decision:
“Because of the “omnipresent specter” of entrenchment in takeover situations, it is well-settled that when a poison pill is being maintained as a defensive measure and a board is faced with a request to redeem the rights, the Unocal standard of enhanced judicial scrutiny applies… Under that legal framework, to justify its defensive measures, the target board must show (1) that it had “reasonable grounds for believing a danger to corporate policy and effectiveness existed” (i.e., the board must articulate a legally cognizable threat) and (2) that any board action taken in response to that threat is “reasonable in relation to the threat posed.”….
When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board’s duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment. There are, however, certain caveats to a proper exercise of this function. Because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.”
While the “business judgement rule” is well entrenched in Canadian jurisprudence (BCE v. Debentureholders, etc.), to our knowledge no Canadian Court has yet applied to board decisions such an “enhanced judicial scrutiny” standard of review…
Do you have a view on the AMF Proposal? If so, be sure to submit your written comments on or before June 12, 2013:
Autorité des marchés financiers
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C.P. 246, Tour de la Bourse
Fax : 514-864-6381