The Canadian Securities Administrators (“CSA”) have announced that they intend to publish a new proposal for changes to the regulation of take-over bids, replacing the two alternative proposals published for comment in March 2013. One of the previous proposals was put forward by the entire CSA and addressed shareholder rights plans specifically, while the Quebec Autorité des marchés financiers (“AMF”) had presented for consideration a less regulatory framework dealing with take-over defensive tactics generally. The new proposal calls for amendments to the take-over bid legislation which would not change the existing CSA policy on take-over defensive tactics but would alter the rules of the take-over game to address long-standing concerns that the current regulatory regime tilts the playing field too far in favour of hostile bidders, impeding the ability of target boards to exercise their fiduciary duties in defending against bids and pursuing superior alternatives.
Current regulation of take-over defences
Take-over defences by Canadian public companies are currently regulated under the CSA’s National Policy 62-202 – Take-Over Bids – Defensive Tactics (“NP 62-202”). The most common defensive tactic is the shareholder rights plan. NP 62-202, while not specifically referring to shareholder rights plans, emphasizes the importance of shareholders having the ability to choose whether to accept a take-over bid. Securities regulators have consistently applied NP 62-202 to limit the power of take-over targets to use shareholder rights plans to impede hostile bidders. Through the use of their public interest jurisdiction, the regulators have, with few exceptions, either cease traded shareholder rights plans immediately following a hearing requested by the bidder or shortly thereafter. While there is no specified period during which the regulators will allow a shareholder rights plan to remain in place, the plans have been typically cease traded 45 to 55 days after the commencement of the hostile bid. In recent years, there has been some relaxation of this strict approach in the case of shareholder rights plans that have been approved by the target’s shareholders during the hostile bid, but the regulators have not been consistent in providing that accommodation.
The March 2013 proposals
Under the CSA’s March 2013 proposal, target companies would be permitted to keep a shareholder rights plan in place against a hostile bid if the plan was approved by the shareholders (excluding the shares of any hostile bidder and its joint actors) within 90 days of its adoption by the board of directors or within 90 days of the hostile bid, whichever was earlier. The rights plan would also have to be approved by the shareholders at each annual meeting in the financial years following the financial year of the initial shareholder approval in order to continue in effect. NP 62-202 would be amended accordingly.
Unlike the CSA proposal, the AMF proposal addressed take-over defensive tactics generally, not just shareholder rights plans. The AMF proposed to limit any intervention by securities regulators to where the target board failed to adequately address conflicts of interest or in circumstances that were abusive of shareholder rights or negatively impacted the efficiency of the capital markets. In this regard, target boards would be expected to take measures that have become largely standard in hostile bid situations, such as the formation of a special committee and the engagement of independent advisers. Generally, the AMF proposal would give deference to boards of directors of target companies and the exercise of their fiduciary duties in the absence of unusual circumstances. NP 62-202 would be replaced with a new defensive tactics policy that would reflect this approach.
The AMF also proposed legislative changes to implement features of the “permitted bid” concept contained in standard shareholder rights plans, in order to address the coercive element of take-over bids existing under the current regulatory regime. Under this proposal, all non-exempt take-over bids (i.e. bids that must be made to all shareholders pursuant to securities legislation) would be required to have an irrevocable minimum tender condition of more than 50% of the outstanding shares of the target not owned by the bidder and its joint actors. The bid would have to be extended for 10 days following the public announcement that the minimum tender condition had been met. This mechanism would, in effect, allow shareholders to vote on the bid without being pressured to tender to the bid for fear of possibly being left with shares that would be illiquid and/or discounted in price due to the loss of a potential control premium.
The new harmonized proposal
On September 11, 2014, the CSA announced that it would not be proceeding with either of the proposals published for comment in March 2013. Instead, the CSA, including the AMF, now propose legislative changes that appear to constitute a compromise between the two earlier proposals.
Under the new proposal, and consistent with the March 2013 AMF proposal, all non-exempt take-over bids would be required to be subject to a mandatory condition that a minimum of more than 50% of the outstanding shares of the target not owned by the bidder and its joint actors be tendered to the bid and not withdrawn, and the bid would have to be extended for 10 days after the minimum tender condition had been met and the bidder announced its intention to immediately take up and pay for the securities deposited under the bid.
In addition, the new proposal calls for a requirement that take-over bids remain open for at least 120 days, rather than the current minimum of 35 days, but the board of the target could waive this requirement so as to reduce the period to a minimum of 35 days. This waiver right of the board would have to be exercised in a “non-discriminatory manner” in the case of multiple bids. (It is not clear how that would work in practice if, for example, a bid has been outstanding for 60 days when a second bid is launched and the directors waive the second bid down to 35 days, but presumably this will be clarified in the subsequent draft legislation.)
The CSA are not contemplating any changes to NP 62-202 at this time.
The CSA intend to publish the complete details of the proposed amendments for comment in the first quarter of 2015.
Practical effects of the proposal
The adoption of the mandatory minimum tender condition and 10-day extension would make some take-over bids more difficult to be completed successfully, because the coercion element of the bids would be largely eliminated. However, the increase in the minimum bid period from 35 days to 120 days would be the more significant change, representing a major alteration to the existing regime. It would discourage at least some hostile bids and likely cause more potential suitors to negotiate with their targets in order to reduce the bid period, thereby giving possible competing bids less time to materialize.
The proposal for an increased bid period is somewhat reminiscent of amendments to the Canadian take-over bid legislation proposed by a securities industry committee in the 1990s and ultimately implemented. These amendments included an increase in the minimum bid period from 21 days to 35 days. Some industry observers had suggested that the longer period would remove the justification for rights plans, but this clearly proved not to be the case from the perspective of target boards and their advisers. This time, although the regulators do not propose to amend NP 62-202 in conjunction with the increased minimum bid period, it is reasonable to expect that targets will have a more difficult time justifying the use of a shareholder rights plan against a non-exempt take-over bid, given the significant extra time provided to find alternatives to the bid.
What does not appear to be addressed by the new proposal is the circumstance where the target board determines that it would be in the best interest of the target to stay the course and “just say no” to the bid without seeking an alternative transaction. Both the March 2013 CSA and AMF proposals accommodated this possibility, through shareholder ratification of a shareholder rights plan (not necessarily in the course of a hostile bid) or through the proper exercise of the board’s fiduciary duties, respectively. In that sense, it is not clear that the new proposal would address two of the main criticisms of the current regime: that the regulators are not consistent in their approach to shareholder rights plans (e.g. in the significance attached to shareholder ratification of a plan during the course of a hostile bid) and that NP 62-202 is misaligned with the interpretation of the Canadian courts regarding the fiduciary duties of boards (as set out by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders). However, the proposal does recognize that target boards who are seeking superior alternatives to hostile bids may need substantially more time to do so than the current regime allows and is therefore a significant improvement on the status quo.