The Canadian Securities Administrators’ amendments to the Canadian take-over bid regime – announced in February and generally welcomed as bringing certainty to issuers and acquirers 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.
“We won’t be seeing as many tactical pills, both because shareholders will get used to the longer period and because it will be some deterrence to hostile bids in general,” says William Gula of Hansell LLP in Toronto.
The changes represent a meaningful rebalancing between the power of boards and the power of shareholders. “They represent a fairly clear standard that will result in regulators stepping out of the fray and removing themselves as arbiters as to when rights plans fall away,” says Matthew Cumming of McCarthy Tétrault LLP in Toronto.
Indeed, Neill May of Goodmans LLP in Toronto believes that the changes to the take-over regime will push M&A activity into proxy contests. “There’s a historical awkwardness in Canada that arises from securities regulators touching on issues, like fiduciary duties, that would better be dealt with by the courts,” he says. “Under the new regime, the issues giving rise to this awkwardness will more likely be played out in proxy contests and, if necessary, resolved in court.”
Walied Soliman of Norton Rose Fulbright Canada LLP is of similar mind, but sees things a little more graphically where the play is in commodities. “Our contention is that commodity-based issuers who are potential M&A targets are looking at an increase in bully M&A tactics and proxy fights,” he says.
Soliman reasons 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 acquirers.
“The 105-day minimum period means that there are no off-ramps for almost four months, during which prices could fluctuate considerably,” he says. “So acquirers of gold or copper or agricultural companies will be seeking ways to achieve their goals outside of the new regime.”
Canada has what Soliman and many others believe is the most activist-friendly regime in the world, making it susceptible to proxy fights and bully tactics as an alternative to traditional takeover tactics.
“You could see bear hug tactics involving big shareholders that send the underlying message that these shareholders are going to replace the current board,” Soliman says. “Or you could launch a proxy battle and replace the board — a tactic that’s common in the US, where poison pills can last forever.”
This scenario, Soliman maintains, is not just the offshoot of speculation. “I’ve tested it with a few CEOs,” he says. “And they’re all reacting with, ‘Like, are you kidding me, I’m going to have keep an offer open for 105 days?”
M&A and securities lawyers predict that exemptions will be hard to come by. “I do think that it will be very hard to get exemptions from the [105-day] period,” says Teresa Tomchak of Farris, Vaughan, Wills & Murphy LLP in Vancouver. “Pills, and the hearings that often accompany them, are going to be appropriate only when the expiry of the bid approaches and there are extraordinary circumstances.”
By many accounts, however, any measures that restrain regulators’ involvement are a good thing.
“I’ve never been a huge fan of securities commissions’ getting in the way of how companies are run in the so-called interests of shareholders because the truth is that it’s really hard for most shareholders to be as informed as the board is in determining a company’s worth,” says William Ainley of Davies Ward Phillips & Vineberg LLP in Toronto.
Ainley, not surprisingly, is no fan of prescriptive bid periods at all. As a case in point, he cites Toronto-based WiLAN Inc.’s (ultimately unsuccessful) $480-million hostile bid for rival patent licensing company Mosaid Technologies Inc. in 2011. “In a situation like that, where bidders have to review thousands of patents to determine value, it makes no sense to impose a definitive period at all,” Ainley says.
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 do not address broader defensive tactics that are available to targets, and securities commissions will still have to deal with these,” Cumming says. “I don’t see securities commissions abandoning their role, for example, in determining whether private placements to white knights are legitimate, nor do I see them pulling back on their tendency to invoke their public-interest jurisdiction to override directors’ decisions.”
Indeed, 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. “The 50-per-cent requirement doesn’t always make sense, and I believe the regulators want to have some discretion in those types of situations,” Tomchak says.
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.
Editor’s Note: A longer version of this article appeared in our March 2016 print issue, which was written before the Canadian Securities Administrators had released their new take-over bid regime. We updated this article to take that into account rather than including the older article on our website.