In a much anticipated development, the Canadian Securities Administrators today provided an update on the status of their proposals to regulate take-over bids and shareholder rights plans. While not publishing any detailed amendments at this time, all CSA members have joined together to announce that they are taking a harmonized approach that will ultimately result in amendments to take-over bid rules across Canada.
Mandatory “permitted bid” features
Specifically, the regulators propose to introduce amendments to the current take-over bid regime that would require all formal bids for Canadian public targets to contain the following mandatory features:
- a minimum bid period of 120 days (60 days longer than the standard permitted bid period);
- an irrevocable minimum tender condition requiring that more than 50% of the outstanding securities owned by persons other than the bidder and any joint actors be tendered and not withdrawn before the bidder can take up under the bid; and
- a 10-day bid extension period after the minimum tender condition is achieved and the bidder announces its intention to take up and pay.
While CSA Notice 62-306 clarifies that the 120-day period could be waived (to a minimum of 35 days) by the target board, provided it is in a non-discriminatory manner in the face of multiple bids, if applicable, it is not clear whether the remaining two features could be subject to a board waiver.
With the stated objective of rebalancing the current dynamics between hostile bidders and target boards, the proposal aims to make it easier for shareholders to make voluntary, informed and coordinated tender decisions, while giving target boards more time to respond to hostile bids. Notably, these proposed changes to the take-over bid regime were recommended in the comment letter submitted by the Ad Hoc Senior Securities Practitioners Group. However, other recommendations of the Group were not included in the proposal, namely, amendments to current formal bid exemptions such as the “normal course purchase exemption” and the “private agreement exemption”, which have been criticized as facilitating creeping bids that deny shareholders the ability to share rateably in control premiums.
As we discussed last year, the CSA and AMF each published separate consultation papers in March of 2013 advocating for different changes to the regulatory regime. The CSA paper proposed the implementation of a stand-alone rule that would have permitted a rights plan to remain in place where it was approved by a majority of the target shareholders within prescribed time frames. Other than consequential changes to disclosure requirements under the bid regime, the CSA proposal would not have involved any changes to the bid regime itself, or directly addressed the issue of defensive tactics. The CSA had indicated, however, that they would consider changes to National Policy 62-202 Takeover Bids - Defensive Tactics (the Defensive Tactics Policy) and the take-over bid regime as part of their broader review of defensive tactics.
While the CSA proposal focused on the use of rights plans by target boards, the AMF proposal raised fundamental issues regarding the regulation of defensive measures in Canada, including the role of boards of directors when faced with unsolicited take-over bids and the perceived structural imbalance between bidders and target boards. The AMF proposed two changes to address these concerns. First, it suggested replacing the Defensive Tactics Policy with a new policy that would recognize the fiduciary duty of the target board when responding to a hostile bid and limit the intervention of securities regulators to circumstances where security holders are deprived from considering a bona fide offer because the target board failed to take measures to address its conflicts of interest and risk of entrenchment. The second part of the AMF’s approach would have been to amend the take-over bid regime to include a mandatory minimum tender condition and a 10-day extension prior to take-up upon achieving it (two of the features forming part of the current harmonized proposal).
It appears that the desire of the CSA members to achieve a harmonized approach in all of the provinces have led the CSA members to agree to the revised approach without any changes to the Defensive Tactics Policy.
While the specific details accompanying the permitted bid features remain to be seen, the CSA have indicated that they are not currently contemplating any changes to existing take-over bid exemptions or the Defensive Tactics Policy. As we have discussed, while acknowledging that defensive tactics may be employed by a target board in a genuine attempt to obtain a better bid, the Defensive Tactics Policy provides that tactics likely to deny shareholders the ability to respond to a bid may invoke regulatory intervention. Consistent with the Ontario Securities Commission’s decision in Canadian Jorex, this position is often described as advocating that “there comes a time when a pill must go” once it has served its legitimate purpose (a position most recently reconfirmed by the BCSC in cease-trading the pill adopted by Hudbay).
Presumably, as the proposed amendments to the take-over bid regime afford target boards more time and remove some of the coercive features of the current regime, target boards would face a stiffer battle in defending a poison pill. Since the Defensive Tactics Policy would remain in place (for now), the regulators have left open the possibility for regulatory intervention in appropriate circumstances.
Another question today’s announcement raises is the impact it will have on take-over bids until the expected amendments are formally implemented. Given that the announcement can be construed as signaling the CSA’s perspective on the underlying policy considerations, bidders and targets alike would be well advised to consider these “permitted bid” features and the impact their absence could have in a hearing before the regulators.
The CSA intend to formalize their approach in the future by publishing proposed amendments to the take-over bid rules in the first quarter of 2015. On account of this being a status update only, no comments are being solicited at this time. For more information, see CSA Notice 62-306.