The September proposals by the Canadian Securities Administrators (CSA) will significantly change the regime governing takeover bids in Canada. The proposals represent a shift in methodology from the approaches presented by the CSA in March 2013, which focused on the use of “poison pills” in response to hostile takeovers. In recent years, the CSA had appeared divided on this issue, which has often been framed in terms of the question: who should have the biggest say on responding to a hostile takeover, the target company’s directors or its shareholders?
In the context of hostile bids, the purpose of a poison pill is to put greater control in the hands of the target’s board. Poison pills have often been considered necessary in light of the current takeover bid regime, which is generally viewed as being favourable to bidders.
In Canada, since 1992 at least, the prevailing view has been that at some point “the pill has to go” to “let the shareholders decide.” The time period was typically 45 to 55 days after a hostile bid commenced, on the basis that the only legitimate use of a poison pill in response to a bid was to buy time for the board to seek a better offer.
If within that time the board had not come up with an alternative, then shareholders would have the right to decide whether or not to tender to the bid.
An underlying premise of this approach was that it was not acceptable for the board to take the position that no sale at all was appropriate or to use the pill to bargain with the bidder for a higher price, in the absence of an alternative offer. This approach meant that, once a hostile bid was commenced, the only question was likely to be who was to acquire the company and for how much.
The idea of a “free vote” by shareholders in which they might decide not to tender was often illusory, given the positions taken by arbitrageurs and the fear of being left in a minority, devalued and less liquid position if the bidder achieved its minimum tender condition.
Despite the prevailing regulatory position, in a number of instances securities commissions allowed pills to remain outstanding for a longer period where the shareholders of the target had approved or reconfirmed the pill, in the face of the bid.
Instead of addressing the question of whether the board or the shareholders should have the biggest say, these cases in effect contrasted the individual right of the shareholder to tender to the bid with the collective right of the shareholders to authorize the board to block the bid. Reference to collective action was included in the March 2014 proposal of the Quebec securities regulator, which described the existing takeover regime as being “structurally coercive to target securityholders as it does not permit them to make a collective decision about the transaction.”
The 2013 CSA proposals focused on how to regulate poison pills. The CSA has now abandoned the approach outlined in the 2013 proposals in favour of proposing changes to the takeover regime itself.
It proposes that the minimum time for which a bid must remain outstanding be extended from 35 days to 120 days, and that any bid must be subject to a “mandatory tender condition” that a minimum of more than 50% of all outstanding target securities be tendered to the bid. The first of those provisions gives the board more time to solicit other offers, and to attempt to have the bidder increase the bid. The second means that, if a majority of shares are tendered to the bid, there can be no argument that a majority of the shareholders want the board to have the ability to continue blocking the bid.
A third change will require the bidder to extend the bid for 10 days after achieving the minimum tender condition and announcing that it will take up deposited securities. This change eliminates the concern that if it does not tender its shares before the set expiry date of the bid, a shareholder may miss out on selling its shares and be left in a diminished position.
Assuming they become law, these provisions may effectively put an end to the use of poison pills in response to hostile takeovers. If after 120 days and a tender of over 50%, the board continues to try to block the bid, there would need to be exceptional circumstances to persuade a regulator not to cease-trade the pill. This would mean that putting a “tactical” pill in place following commencement of a bid would likely be ineffective.
Issuers may still adopt pills at an earlier stage to prevent offerors from effecting “creeping takeovers” without making a formal bid. •
John Smith ([email protected]) is a partner at Lawson Lundell practising commercial law, including a focus on corporate finance and securities and mergers and acquisitions.
