The Canadian Securities Administrators’ amendments to the Canadian take-over bid regime, announced in February 2016 and generally welcomed as bringing certainty to issuers and acquirors after a long consultation process, will dramatically alter processes and strategies in the hostile M&A marketplace.
The key elements of the changes would mandate a 105-day minimum deposit period, a 50 per cent minimum tender requirement, and a compulsory 10-day extension of bids where a bidder has received tenders of more than 50 per cent of outstanding securities.
What seems clear enough is that the extended 105-day minimum deposit period, a significant uptick from the original 35 days, will reduce targets’ reliance on poison pills as defensive tactics. M&A lawyers say shareholders will get used to the longer period, which will also serve as some deterrence to hostile bids in general.
The changes appear to represent a meaningful adjustment between the power of boards and the power of shareholders, a fairly clear standard that stakeholders say will result in regulators stepping out of the fray and removing themselves as arbiters as to when rights plans fall away.
Some lawyers are concerned, however, that the changes to the take-over regime will push M&A activity into proxy contests and ultimately to the courts, and that in particular commodity-based issuers who are potential M&A targets will face an increase in bully M&A tactics and proxy fights. The logic here is that the value of commodity-based issuers is largely driven by the price of the underlying commodities. In the volatile environment that exists currently, therefore, the new regime presents increased risks for acquirors: in particular, prices could fluctuate considerable during the period of almost four months that the 105-day minimum deposit period represents. Because Canada has one of the most activist-friendly regime in the world, proxy fights and bully tactics could be less risky alternatives than traditional takeover tactics. Even in the US, whose system is not as activist-friendly but where poison pills can last forever, launching proxy battles and threatening to replace the board are fairly common manoeuvers.
M&A and securities lawyers also predict that exemptions from the 105-day period will be hard to come by. Pills and the attendant hearings, they say, will be appropriate only where extraordinary circumstances exist as the expiry of the bid approaches.
By many accounts, however, any measures that restrain regulators’ involvement are a good thing. But undermining the efficacy of poison pills won’t completely dilute the historical tension between judges, who have been prone to give boards a liberal hand on the basis of the business judgment rule, and securities tribunals, which tend to be less deferential to directors. The amendments, after all, do not address broader defensive tactics that are available to targets, and securities commissions will still have to deal with these. It’s unlikely that regulators will abandon their role, for example, in determining whether private placements to white knights are legitimate or in invoking their public-interest jurisdiction to override directors’ decisions.
On the other hand, applications for exemptions from the 50 per cent minimum tender bid required by the proposed amendments may flourish, filling the hearing void potentially left by a prescriptive bid period. It remains to be seen, then, whether the new regime will make hostile M&A any less hostile. It could just move the fight to other venues.
The demise of Superior Plus Corp.’s $982 million deal to acquire Canexus Corp. is not without its upside for M&A stakeholders subject to the Competition Act: the transaction represents the first time Canada’s Competition Bureau has approved a transaction based upon the efficiencies defence.
It’s also one of the rare occasions on which the Bureau didn’t go along with a US Federal Trade Commission’s decision to challenge a merger. The deal aborted when the parties could not reach an extension agreement following the FTC’s announcement that it would challenge the deal.
Both Superior and Canexus are Canadian companies headquartered in Alberta. But both also operate in the US, making the merger subject to FTC review. If the deal had gone through, the new company and competitor AkzoNobel would have controlled 80 per cent of the total sodium chlorate production capacity in North America. Sodium chlorate is a chemical used to bleach wood pulp that is then processed into paper, tissue, diaper liners and other products.
On June 27, 2016, the FTC announced it was challenging the transaction because it would significantly reduce competition in the North American market for sodium chlorate. The next day, the CB reached much the same conclusion regarding the Canadian market, but it cleared the acquisition on the basis of the efficiencies that the merger would have created.
The upshot appears to be that the efficiencies defence has become meaningful in Canada. Historically, the Bureau tended to litigate any reliance by merging companies on the defence. This despite the fact that the Supreme Court of Canada’s 2015 decision in in Tervita Corp. v. Canada (Commissioner of Competition) had validated the defence.