Last week the Canadian Securities Administrators issued for comment National Instrument 62-105 Security Holder Rights Plans which would establish a new framework for handling rights plans in Canada that would give a target company’s board and shareholders greater discretion in the use of such plans known as “poison pills.”
At the same time, the Autorité des marchés financiers in Quebec also launched a consultation on intervention by Canadian securities regulators in respect of defensive tactics adopted in response to unsolicited take-over bids.
The CSA and AMF are both proposing regulators back away from getting involved in shareholder rights plans or poison pill disputes and give companies a longer period of time to respond to takeover bids. The CSA proposal will move to give the target board 90 days, rather than the previous average of 40 to 50 days, to find an alternative transaction or to negotiate with the first bidder.
Under the AMF proposal, intervention by the regulator would be “restrained to situations where boards’ actions or decisions are clearly abusive of security holders’ rights or negatively impact the efficiency of capital markets.”
“The [CSA] proposal is a good one because I would say currently our regime in Canada is a little bidder friendly,” says Graham Gow, a partner with McCarthy Tétrault LLP in Toronto. “I think it’s a move in the right direction.”
While not “a seismic change,” Gow says it would shift the balance of power between the hostile bidder on the one hand, and the target board of directions on the other.
“The important message coming out of the CSA and Quebec is the securities commissions are re-thinking the role they should be playing in hostile takeover bids,” says Robert Yalden, a Montreal-based partner with Osler Hoskin & Harcourt LLP. “Historically they’ve been quite interventionist and quite prepared to strike down rights plans in particular — the most common defensive tactic targets use in Canada when faced with a hostile bid.”
A rights plan deters a bidder from buying up target shares by granting shareholders of the target company, other than the bidder, the right to purchase additional shares at a discount if an acquirer exceeds a specified share ownership threshold.
The CSA is proposing if shareholders approve a rights plan, regulators will not intervene and allow it to stay in place for a full year before going to shareholder vote. It is also proposing to increase the frequency of when shareholder rights plans are issued. Right now, if adopted, a plan can be kept in place for three years — the proposed change would require companies to take them to their shareholders once a year.
Under the existing framework, securities regulators in Canada will generally cease trade a shareholder rights plan after a limited period of time once the rights plan has given the target board sufficient time to respond to the bid. The CSA proposal would see that regulators not intervene to cease trade a rights plan that has complied with the proposed framework. It’s being viewed as an important step in empowering the target board and shareholders in responding to a bid.
The AMF consultation presents an alternative approach to that contemplated by the CSA proposal and initiates broader reflection on the Canadian take-over bid regime and defensive tactics.
Both proposals give companies more time to deal with bidders and the securities commissions would largely be getting out of the business of regulating such matters. In the U.S., securities commissions don’t intervene and rights plans and disputes go before courts.
“I think there is a lot of merit in where the AMF is trying to take the debate,” says Yalden. “I think there is a lot to be said for standing back some. Rights plans have become more a part of the landscape and I think there is real merit in taking a look at whether there is a need to rebalance the equation between bidders, shareholders, and boards. I think it’s a very healthy thing the AMF is doing.”
Neither proposal would take Canada to the same place as in the U.S., where boards have a lot more room to maneuver in responding to hostile bids. The CSA’s proposed rules reflects certain elements of both the U.S.-Delaware and U.K. regimes.
“It would take us a little in the direction of the U.S., but not entirely,” says Yalden. “If a bidder wants to try to get rid of a pill that was otherwise in place for a year, really the only option would be to convene a shareholder meeting to have shareholders vote to remove the pill. That is another feature the CSA is proposing — the shareholders should be able to remove the pill through a shareholder vote.”
In the United States, a rights plan can be used to stop someone from buying the shares of a company, even if shareholders are saying they want to sell.
“There have been a couple of cases in the U.S. — Airgas being the most famous one — where the directors said: ‘It’s the wrong time to sell the company, if you wait a year or two the stock price is going to be higher. We hear you, shareholders, saying get out of the way but we’re going to use the shareholder rights plan to just say no,’” says Gow.
In 2011 Air Products & Chemicals Inc. dropped its $5.9-billion hostile bid for the packaged-gas supplier after a Delaware judge upheld Airgas Inc.’s anti-takeover defence.
The AMF proposal comes closer to that model. It says an elected board of directors should be trusted to do the right thing, as they know more about the company than all the shareholders do. If they say it’s the wrong time to sell the securities commission won’t intervene.
What is being proposed is seen as a complete reversal of 20 years of law in Canada, says Gow. “Whether that’s going to be acceptable in Canada I think is an open question.”
“If I was acting for a pension fund who is a big shareholder of a target company who wants to sell, they would probably say, ‘I put up $100 million to buy 10 per cent of the company, shouldn’t I be the one to decide whether to sell it, not the board of directors?’” says Gow.
The consultation period is open until June 12.