The Future of Poison Pills

Securities regulators grasp for compromise in the lead-up to a new takeover bid regime
A pair of decisions on shareholder rights plans by two securities regulators have cast light on how so-called “poison pills” will be dealt with in the lead-up to the Canadian Securities Administrators’ newly proposed takeover bid regime.

The late November decision by the Alberta Securities Commission in Canadian Oil Sands and, earlier in the month, by British Columbia Securities Commission in Red Eagle will go some way to answering two key questions: first, what should targets and acquirers involved in hostile bids do while the old rules remain in force and the new rules loom? And, second, what final form are the rules likely to take?

Under the proposed “just say slow” regime, takeover bids must remain open for a minimum of 120 days. The extended bid length gives other interested bidders a longer period to intervene, creating uncertainty for the initial bidders, especially if they are hostile. That, in turn, can give boards more negotiating leverage.

Under the existing regime, by contrast, bids must remain open for only 35 days. And while defensive measures such as poison pills can be used to buy time, bidders can generally obtain regulatory orders to cease-trade the pills within 60 days (although regulators have upheld much lengthier periods, up to 156 days).

In its bid for Canadian Oil Sands, the company sought to benefit from the new proposals. Suncor originally structured its bid as a permitted bid under a pre-existing
COS poison pill. That bid was open for 60 days and featured a minimum tender condition of over 50 per cent that, if met, would require Suncor to extend its bid for a further 10 days. Canadian Oil Sands then enacted a new pill that would keep the bid open for 120 days while it sought white knights, which prompted Suncor to apply to the ASC for a cease-trade order.

The
ASC refused to allow COS the benefit of a 120-day minimum period, but it also refused to allow Suncor to take up tendered shares after 60 days. Instead, the commission came up with a middle ground of 91 days as the life of the rights plan.

By contrast, the
BCSC in Red Eagle ordered the termination of CB Gold’s rights plan. The pill had been approved by shareholders before Red Eagle Mining’s bid and implemented in response to that bid. At the time of the decision, the plan had been outstanding for 72 days.

The differing results don’t necessarily signal different regulatory approaches. To begin with, the evidence in each case was markedly different. The testimony in Red Eagle, where two competing bidders had emerged, strongly supported the conclusion that no further bidders would emerge. By contrast, the evidence in
COS found that the target was in discussions with four credible buyers, so the extension to 91 days could well produce a better offer.

Neither commission applied the principles of the proposed new regime. “As the
BCSC said in an earlier case, proposals are still only proposals,” says Jeremy Fraiberg of Osler, Hoskin & Harcourt LLP, which represented COS. “In its oral explanation of its decision in this case, the ASC made a point of noting that the proposed amendments are not yet in force.”

Which is not to say that the status quo has been preserved. “Canada’s securities policymakers have all indicated that the traditional 45 to 60 days isn’t sufficient, and in effect the ASC acknowledged that by leaving COS’s rights plan in place for 91 days,” Fraiberg says.

Though the BCSC refused to extend CB’s rights plan beyond 72 days, the decision reflects the  mindset of policymakers. “The commission would not give effect to forward-looking arguments about extending the rights plan that would have affected the potential auction between the competing bidders who had already come forward,” says David Brown of Stikeman Elliott LLP, who represented CB Gold. “In that way, Red Eagle is consistent with the relatively non-interventionist, hands-off philosophy behind the proposed rules.”

The amendments, says Fraiberg, “are a blend of competing proposals from various securities regulators. So while it’s clear that 60 days isn’t enough, and while the proposed amendments currently adopt 120 days, it still could turn out to be 90.”

The delay before the proposals’ presumed 2016 implementation might be even longer if the
CSA decides to seek further public comments. That’s an issue for Teresa Tomchak of Farris, Vaughan, Wills & Murphy LLP, who represented Red Eagle and who has two other clients who are both targets.

“[Targets] should assume that the commission will not enforce the proposed amendments until they are actually in force. At the same, we would advise them to implement a pill along these lines.”