On March 14, 2013, the Canadian Securities Administrators (CSA) published for comment proposed National Instrument 62-105 Security Holder Rights Plans and related companion policy (the Proposed Instrument). The Proposed Instrument, if implemented, would establish a comprehensive regulatory framework for the treatment of rights plans or “poison pills” in Canada and is part of a broader ongoing CSA initiative to review defensive tactics.

Concurrently with the CSA’s release, the Autorité des marchés financiers (AMF) published an alternative consultation paper that addresses the larger framework of defensive tactics and goes beyond an update of the regulatory framework for poison pills. It proposes replacing National Policy 62-202 – Take-Over Bids – Defensive Tactics with a new policy on defensive tactics that would give deference to boards of directors in responding to unsolicited take-over bids and would redefine regulators’ intervention on the ground of public interest (the AMF Alternative Approach).

The CSA proposal

The proposed CSA regulatory framework’s stated purpose is to provide target boards and shareholders with greater flexibility regarding the use of rights plans and limit the circumstances where regulatory intervention may be necessary, while maintaining an open market for change-of-control transactions. The Proposed Instrument reflects the CSA’s view that the final decision on whether to adopt poison pills should ultimately rest with shareholders. The Proposed Instrument will generally allow rights plans to remain in place provided majority shareholder approval is obtained. In such circumstances, regulators will not intervene to cease trade a rights plan unless an intervention is determined to be in the public interest.

Key elements of the Proposed Instrument

  • An issuer’s rights plan becomes effective when it is adopted by its board of directors, but it must be approved by security holders within 90 days from the date of adoption or, if adopted after a take-over bid has been made, within 90 days from the date the take-over bid was commenced. The Proposed Instrument would allow the adoption of a second tactical plan in the face of a bid.
  • An issuer that adopts a rights plan prior to becoming a reporting issuer is excluded from the requirement to obtain initial security holders’ approval.
  • In order to remain effective, a rights plan must be approved annually by a majority vote of security holders. A pre-approved rights plan does not otherwise have to be approved in the event a take-over bid is made.
  • A rights plan ceases to be effective if it is not approved by the security holders within the prescribed time.
  • The security holders of an issuer can terminate a rights plan at any time by a majority vote regardless of any prior approval.
  • In a take-over bid context, any shares held by the bidder and its joint actors are excluded from a security holder vote to adopt, maintain, amend or terminate a rights plan. However, target management will be permitted to vote.
  • A rights plan must be approved by (a) a majority vote of security holders that excludes the votes of a security holder exempted from the operation of a rights plan pursuant to the terms of the plan (a “grandfathered holder”) and its joint actors, and (b) a separate vote that does not exclude the votes of such grandfathered holder.
  • Any material amendment to a rights plan must be approved by security holders within 90 days of the date of adoption of the amendment.
  • A rights plan would only be effective against a take-over bid or an acquisition by a person of securities of an issuer. A rights plan cannot, for instance, be triggered by a shareholder vote such as contested director election.
  • Rights plans cannot selectively discriminate between take-over bids. If a rights plan is waived or modified with respect to one bid, it must be waived or modified with respect to all outstanding bids.
  • Rights plans must be publicly filed on SEDAR and an issuer must distribute a news release with prescribed disclosure when a rights plan is adopted or materially amended.

CSA request for comments

The CSA will be accepting comments on the Proposed Instrument until June 12, 2013. A copy of the Proposed Instrument can be accessed here.

Competing AMF proposal

The AMF Alternative Approach’s primary objective is to restore regulatory balance between bidders and target boards to reflect the current legal and economic environment affecting unsolicited take-over bids.

The AMF proposes a regulatory framework for unsolicited take-over bids where greater deference would be given to the target board of directors’ actions. The AMF would examine the context in which the take-over bid takes place, the process followed by directors and the basis for their recommendation to security holders.

The AMF believes it would be appropriate to consider, among other things, certain facts in assessing the reasonableness of the target board’s actions in proposing or implementing defensive measures in the face of an unsolicited take-over bid, for instance:

  • 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;
  • 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.

The AMF Alternative Approach suggests the AMF would retain the right to intervene and cease trade a defensive measure on public interest grounds where, in light of applicable circumstances, it believes the directors’ fiduciary duties have not been properly discharged.

In addition, the AMF proposes to change the take-over bid regime to require, as an irrevocable minimum tender condition of any bid for all securities of a class, and for any partial bids, that more than 50% of the outstanding securities of the class held by persons other than the offeror and those acting in concert with it be tendered and not withdrawn on the date the bid would otherwise expire. The AMF also proposes that the bid be extended for 10 days following the announcement that this percentage of securities has been tendered. The AMF believes the two suggested changes allowing security holders to essentially “vote” on a given offer become an effective substitute to the security holders’ approval of a rights plan, or of an amendment to an existing rights plan, under the CSA Proposed Instrument. Also, these changes would have the benefit of applying to all bids, not only those triggering a rights plan.

AMF request for comments

The AMF will be accepting comments on the AMF Alternative Approach until June 12, 2013. A copy of the AMF Alternative Approach can be accessed here.