On March 14, 2013, the Canadian Securities Administrators (the CSA) published their much-anticipated reforms on the regulation of shareholder rights plans (poison pills) that would allow a plan to remain in place where it has been approved by shareholders on an annual basis (or within 90 days of a bid). While joining the CSA in its proposal, the Autorité des marchés financiers in Quebec (the AMF) also published a separate consultation paper to solicit feedback on its preferred approach, being a broad overhaul of the policy governing defensive tactics generally in order to give target boards more discretion to use defensive tactics as part of the proper exercise of their fiduciary duties.
The CSA propose to implement a new stand-alone rule regulating poison pills under proposed National Instrument 62-105 Security Holder Rights Plans (the Rights Plan Rule), while carving out the regulation of poison pills from National Policy 62-202 Take-over Bids—Defensive Tactics (NP 62-202). The AMF, in its paper entitled “An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics” (the AMF Consultation Paper), explains that the time has come to replace the securities regulators’ approach to defensive tactics under NP 62-202, and why it believes that specific amendments to the take-over bid regime are required.
These developments are not surprising given recent decisions involving poison pills made by securities regulators in Alberta, British Columbia, Ontario and Quebec that many commentators have found difficult to reconcile.
Since the implementation of the predecessor to NP 62-202 in 1986, the stated position of Canadian securities regulators has been that “tactics that are likely to deny or limit severely the ability of the shareholders to respond to a take-over bid or a competing bid may result in action by the Canadian securities regulatory authorities.” Consistent with this in Canadian Jorex ((1992) 16 O.S.C.B. 257, 267) in 1992, the Ontario Securities Commission (the OSC) stated that poison pills in Canada would be permitted to serve the limited purpose of giving a target board time to facilitate an auction and could not remain in place once the prospect of a better bid no longer existed.
The CSA applied this basic rule in poison pill decisions for the ensuing 15 years. Shareholder rights plans were, therefore, generally cease-traded where there was no substantial likelihood of a better transaction. This approach has been criticized for depriving target boards of the tools needed to defend against hostile bids that they believe, in good faith, are not in the best interests of the company or its shareholders.
However, in the decisions of the Alberta Securities Commission (the ASC) in Pulse Data (2007) and of the OSC in Neo Material Technologies (2009), the commissions refused to cease-trade tactical rights plans that received timely, informed and overwhelming shareholder approval, even though there was no immediate prospect of a better alternative transaction being generated by the target company. By contrast, in 2010, the British Columbia Securities Commission (the BCSC) applied the classic Canadian Jorex approach in deciding to cease-trade a pill adopted by Lions Gate in the face of a hostile bid by Icahn (and we note that the BCSC will have another opportunity to provide its perspective in the upcoming decision in the case of Aurizon, which erected a pill in the face of a take-over bid by Alamos Gold). This was followed by Baffinland (2010), where the OSC, while not making any reference to Pulse Data, attempted to clarify that Neo did not stand for the proposition that the OSC will defer to the business judgment of the target board, nor was it suggesting that the board in the exercise of its fiduciary duties may “just say no,” noting that compliance by directors with their fiduciary duties is a relevant, although secondary, consideration. This return to a more “traditional pill analysis” was subsequently confirmed by the ASC and the OSC, respectively, in other situations including Afexa (2011) and Mosaid (2011).
More recent decisions involving both rights plans and private placements have added further to the confusion. In Petaquilla Minerals (2012), the BCSC cease-traded the target’s rights plan and its prior-announced private placement of notes while acknowledging that the note offering was not a “purely defensive measure.” Similarly, in Fibrek (2012), the Quebec Bureau de la décision et de la révision en valeurs mobilières (the Quebec Bureau) cease-traded both the rights plan and a private placement to a “white knight” on the basis of NP 62-202, notwithstanding that the white knight’s bid represented a significant premium to what was originally offered.
These decisions have created uncertainty as to how much leeway boards of directors have to implement defensive measures and the principles that will apply to judge their conduct when they do. On the questions of whether a board can “just say no” to an unsolicited bid and of the weight to be afforded to informed shareholder approval, differing views by different regulators have, as we have seen, led to varying outcomes. We also cannot ignore the influence of court rulings, most notably of the Supreme Court of Canada’s decision in BCE, which confirmed that the fiduciary duty of directors is owed to the corporation and not to any particular constituency, and is a broad and contextual concept.
The Proposed Rights Plan Rule
The CSA propose to address these issues through the implementation of a stand-alone rule to govern shareholder rights plans that will allow a poison pill to remain in place where it is approved by a majority of the target company’s shareholders within prescribed timeframes. This represents a significant departure from the current regulatory treatment of poisons pills.
Under the Rights Plan Rule, a poison pill would be effective upon adoption by the board, but would have to be approved by shareholders within the earlier of 90 days after adoption or, if implemented in the face of a bid, 90 days after the earliest date that the bid was made (and not from the date it was announced). Approval would thereafter be required on an annual basis. Despite having received the requisite shareholder approval, rights plans could not be used in the event that shareholders subsequently vote to terminate the plan. In this respect the CSA note, in their view, it is preferable to have shareholders vote to terminate a plan rather than vote to replace a majority of the board as an indirect means to ultimately remove the plan.
Securities held by an offeror and any “joint actors” would be excluded from any vote held under the Rights Plan Rule. Further, where a shareholder is grandfathered from the operation of a plan, majority approval would be required on a “dual vote” basis, one including and one excluding the votes held by such shareholder and its joint actors. Once a plan is rejected by shareholders, the Rights Plan Rule would prohibit the board from adopting a new plan for 12 months, unless faced with a take-over bid (an acknowledgement that shareholders who previously rejected a plan may change their minds when faced with an actual bid). Amendments to the plan would be treated similarly, being effective as of the date adopted by the board, with material amendments requiring shareholder approval within 90 days and substantially similar amendments being prohibited for 12 months where they are rejected by shareholders. The CSA also note that a target’s board would not be prohibited from adopting a second tactical plan with different or more restrictive terms, subject to the same 90-day shareholder approval requirement.
The Rights Plan Rule would also impose filing and disclosure obligations, including prescribed detailed disclosure in a press release announcing that a plan has been adopted or amended. It would also require that, where the application of a plan is waived in respect of one bidder, it will be waived for all.
Unlike the approach advocated by the AMF, the CSA proposal does not address the issue of defensive tactics on a broader basis, nor does it propose any amendments to the existing take-over bid regime (other than consequential changes to disclosure requirements, with conforming changes to stock exchange rules governing poison pills also being required). However, the CSA have stated they will consider changes to NP 62-202 and the take-over bid regime as part of their broader review of defensive tactics, including private placements in contested transactions (an issue, as discussed above, that has been subject to great deal of scrutiny following the decisions of the BCSC in Petaquilla and of the Quebec Bureau in Fibrek, and prior to that of the OSC in Hudbay).
AMF Consultation Paper
By contrast, the AMF states that recent decisions, among other factors, have created the proper context to review all defensive tactics and that its primary objective is to alter the balance of power between bidders and target boards while updating the policy framework of Canada’s take-over bid regime.
The AMF’s preferred approach would be to replace NP 62-202 with a new policy on defensive tactics that would focus more on the process followed by the target board, resulting in limited securities regulatory intervention provided conflicts of interest were adequately managed. In assessing the reasonableness of a target board’s actions, the AMF identifies a number of factors that might be considered. These include many of the same safeguards reflected in Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions, such as
- establishment of a special committee of independent directors;
- appointment of independent advisors (legal and financial);
- determination by the special committee and the board that it is in the best interests of the corporation to implement a defensive measure; and
- adequate disclosure to the security holders concerning the process and reasons for implementing the defensive measure.
The AMF states that it is time for NP 62-202 to be repealed because its effects tend to favour bidders rather than targets, whereas appropriate regulation should be more neutral. While the result in Fibrek figures prominently, other factors cited by the AMF in coming to this conclusion include the Supreme Court of Canada’s decision in BCE, improvements in governance practices since NP 62-202 was first established, an increase in shareholder activism (including the influence of institutional investors) and the prevalence of hedge funds and other arbitrageurs with short term interests.
Concurrent with these changes, the AMF would also make certain changes to the take-over bid regime that are inspired by the “permitted bid” provisions typically found in shareholder rights plans. In particular, any take-over bid (including a partial bid) would be required to contain an irrevocable condition that no shares could be taken-up under a bid until a “majority of the minority” tender to the bid, and that the bid be automatically extended for 10 days once such condition is met. These changes would essentially give shareholders a “vote” on a given take-over bid and would have the benefit of applying to all bids, not only to those where the target has implemented a poison pill. These changes are aimed at what some refer to as “structural coercion” in the current regime, which puts shareholders under pressure to act or be “left behind”, particularly where there is a concern that a minimum tender condition may be waived.
Reconciling their differences
Both proposals are based upon the need for a more transparent and predictable regime that recognizes the evolution in corporate governance and take-over bid techniques since the implementation of NP 62-202. The CSA’s approach arguably represents a middle ground between deference to the target’s board of directors and the current shareholder-centric approach, while ultimately leaving the decision of whether a rights plan will remain in place in the hands of shareholders. The AMF’s position is even more deferential to boards and would result in a greater role for our courts to determine whether directors have discharged their statutory duties under corporate law.
The AMF notes that it has published the Consultation Paper concurrently with the Rights Plan Rule to provide a forum for discussion and to seek comments, but has stated that it is committed to maintaining a cohesive and harmonious approach across the CSA regarding take-over bids and the regulation of defensive tactics. Comments are being accepted by both the CSA and the AMF until June 12, 2013.
Given the issues involved, we would expect a further consultation period before any rules are finalized and implemented. In the meantime, these proposals provide valuable insight into how these regulators approach issues that may arise in the context of their on-going consideration of defensive tactics.