The New Regime

The Canadian Securities Administrators’ amendments to the Canadian take-over bid regime will dramatically alter contested transac-tions
The New Regime

The provincial and territorial securities regulators – known collectively as the Canadian Securities Administrators (CSA) – are making significant changes to the regime governing take-over bids.

The new rules, announced in late February, are intended to provide the boards of target companies with more time to respond to unsolicited take-over bids and, not incidentally, free the regulators from having to decide on a case-by-case basis how long bids should remain open.

(In Canada, the only way to acquire legal control of a public company without the consent of the target board is to submit a take-over bid directly to the shareholders.)

The new rules, set to take effect in May 2016, are expected to redress the balance between bidders on the one side, and targets and their shareholders on the other. Opinion is divided on whether the changes will significantly affect deal flow.

“I don’t think there’ll be less M&A activity,” says Franziska Ruf, a partner at Davies Ward Phillips & Vineberg LLP in Montréal. “There have been more hostile take-overs in the last 10 years, but they still don’t account for most of the deals.”

“A lack of ‘off ramps’ for a potential bidder may decrease the amount of hostile take-over bid activity in Canada,” says Walied Soliman, a partner at Norton Rose Fulbright Canada LLP in Toronto. This is especially likely in the commodities sector, where short-term volatility may discourage a would-be acquirer from initiating a bid that it cannot pull quickly if price fluctuations warrant.

Speed of execution is always a factor that a hostile bidder wishes to deploy to its advantage, says Noralee Bradley, a partner at Osler, Hoskin & Harcourt LLP in Calgary. “They want to get their deal done quickly. By their very nature, hostile bids are opportunistic. These new rules are going to slow things down, and mitigate the ability to quickly capitalize on an opportunistic bid period.”

“It will definitely change the dynamics [of hostile bids], but it’s an open question as to how much,” says Cornell Wright, a partner at Torys LLP in Toronto. “Everybody – lawyers, bankers – is thinking through and analyzing tactics and how to deal with the new regime.”

The CSA intends to impose a longer period – 105 days – for all take-over bids to remain open. That will be three times the current statutory minimum of 35 days (though, in practice, most take-over bids stay open for 60 to 120 days).

The new rules will also require the bidder to buy 50 per cent of the shares it doesn’t already own – currently, there’s no “minimum tender condition” – and, once that threshold is reached, to extend its bid for at least 10 days to allow other shareholders to tender their shares.

These latter two changes have been relatively free of controversy. The 10-day extension is intended to meet concerns that shareholders felt pressured to tender shares to an offer they did not like rather than risk being left as minority shareholders with no opportunity to sell later.

It is the longer open-bid period that has ruffled some feathers. It will allow target boards more time to find alternatives to hostile bids and to communicate with shareholders — and may lead to more competing bids.

“Canada is already the most shareholder-friendly jurisdiction in the Western world with respect to activists in proxy fights and acquirers in hostile bids,” says Soliman. “We live in a jurisdiction where ‘poison pills’ are simply a tool to delay, but not stop, an acquisition.”

This contrasts with the US, where a poison pill is almost impossible to have cease-traded. If the board of a target company does not wish to be acquired, the bidder must stage a proxy fight at the next annual meeting and replace that board in order to remove the poison pill.

In Canada, how long a securities commission allows a poison pill to linger is situation-specific, says Soliman. “The target must demonstrate that the poison pill continues to serve a useful purpose in unpacking shareholder value, while the acquirer must prove that the pill is merely preventing shareholder choice.”

The CSA’s preliminary proposals had called for a 120-day open bid period. “Many commenters thought 120 days was too long, for practical business reasons,” says Ruf. “If a hostile bidder has to leave a bid out there for 120 days, it’s going to be more likely that a ‘white knight’ is going to come along. So there’s more deal risk to the hostile than in getting it done quickly.”

Fasken Martineau DuMoulin LLP’s empirical analysis of all 143 hostile take-over bids in Canada between 2005 and 2014 found that competitive auctions happened only 37 per cent of the time, but when they did, shareholders were the winners, on average receiving a substantially higher premium. Meanwhile, the hostile bidder was often left empty-handed, prevailing only one-third of the time.

“Also,” says Ruf, “because a Canadian take-over bid cannot have a financing condition, you need to be fully financed as you go in, contrary to the US, so this forces the bidder to have a commitment letter with standby fees out there for 120 days. There was concern about the cost of having financing sitting out there for a four-month period.”

Having the take-over bid period remain open for 120 days also would have collided with corporate statutes in Canada, such as the Canada Business Corporations Act. Under corporate laws, a bidder can do a “compulsory squeeze,” whereby if they persuade shareholders to tender 90 per cent of the shares, they can force owners of the remaining 10 per cent of the shares to sell.

There would have been a clash between the two deadlines, however, since the period during which the bidder has to do the squeeze is 120 days from launch, says Ruf. “Literally, you did not have time to let the bid expire and do the compulsory acquisition. You were going to have a legal impossibility between the two deadlines.” So the regulators decided the bid should remain open for only 105 days.

With these three key provisions in place, the regulators apparently thought they had no need to directly limit shareholder rights plans. “During an open bid period, they make poison pills kind of redundant, but they don’t rule them out,” says Wright.

Wright and other M&A lawyers agree that poison pills will continue to serve a purpose: addressing a “creeping take-over” bid, where a bidder tries to gain control by gradually buying shares in the target company over time through the open financial markets rather than as a direct bid to the shareholders.

Shareholder rights plans may still be useful as a defensive tactic against such moves. “But they are not generally the ones where the bidder would run to a commission to get the pill cease-traded,” says Bradley. “Those have generally been on a time basis — how long do those rights plans stay in place?”

“I don’t think we will be seeing the end of pills with the announcement of the CSA,” says Soliman. “I think we will see a new generation of pills that will supplement the regime.” Wright expects the general dynamics of shareholder rights plans – their resort to dilution – will continue to be used.

If the new rules had been in effect during last year’s take-over battle between bidder Suncor Energy Inc. and target Canadian Oil Sands Ltd., the Alberta Securities Commission’s hearing on COS’s shareholder rights plan would not have been necessary.

The ASC ordered that COS’s rights plan be cease-traded 91 days after Suncor formally commenced its $4.3-billion hostile bid for COS in October 2015. (The two companies eventually agreed on a $6.6-billion friendly take-over.)

“We would have had, under this new regime, a little longer than 90 days to decide” on Suncor’s offer, says Bradley, who was lead counsel for COS at the hearing. “We wouldn’t have had the distraction of having to appear before the ASC to defend the rights plan. Under the new rules, that’s one part of the battleground that you may not have to expend time and resources on.”

Securities regulators have been determining take-over bid rules on a case-by-case basis through hearings on shareholder rights plans.

In 2014, when HudBay Minerals Inc. made a take-over bid for Augusta Resource Corp., the British Columbia Securities Commission ruled that the bid could stay open for 156 days, giving Augusta an unusually long time to find a white knight. (It was unable to do so, despite generating considerable interest, and finally settled for a sweetened offer from HudBay.)

“A lot of target companies end up getting more time,” says Bradley, “but often they’ve had to do it through these rights plan hearings. Where rights plan case law has kind of settled in is in this 90 to 120 days time period.” Now the CSA is effectively codifying the period.

“The securities regulators wanted to get out of the business of adjudicating every case on a one-by-one basis,” says Wright. “This regime should do that.”

Lawyer(s)

Franziska Ruf Noralee M. Bradley

Firm(s)

Davies Ward Phillips & Vineberg LLP Osler, Hoskin & Harcourt LLP Torys LLP