Analysis compared the last four years with the four years preceding changes to takeover bid rules
Since 2016 there has been a sharp decrease in acquisitions of Canadian-listed public companies, according to a recent report by Davies Ward Phillips and Vineberg LLP.
The report compared public M&A activity during 2016-2020 with that of 2012-2016 and found hostile takeover bids have declined by 50 per cent, friendly acquisitions are down by 24 per cent and acquisitions by strategic purchasers dropped by 30 per cent. The report also found acquirors paid 30 per cent more on average in first-mover hostile bids and enjoyed better odds of success, while the average premium for friendly acquisitions fell by 16 per cent.
The report sought to assess the impact made by the “quite fundamental” changes to Canada’s takeover bid rules, says Davies partner Aaron Atkinson.
In 2016, the Canadian Securities Administrators produced amendments to Canada’s takeover bid regime, which came into force in May of that year. The changes sought to give more leverage to target boards faced with takeover bids in order to address the issue that the system favoured bidders, said the Davies’ report.
The CSA’s amendments tripled the minimum bid period from 35 to 105 days and gave the target board the discretion to reduce the period to as few as 35 days. The changes mandated that if all bid conditions are met, the bidder had to extend the bid by another ten days, to give shareholders more time to tender an offer. The new rules also set a minimum tender requirement of more than 50 per cent of the outstanding securities that are subject to the bid.
The tripled bid period and target board’s ability to shorten it gives boards a “huge lever in negotiations,” says Atkinson, whose practice focuses on M&A and includes corporate finance and corporate governance.
“If plan A for a potential buyer is a negotiated acquisition on a reasonably expedited timeframe, Plan B – if the target board doesn't want to play ball – is to go over the heads of the target board directly to shareholders,” Atkinson says.
The longer bid period means more uncertainty for the bidder, he says. If the bid is financed, the costs of that financing will accumulate and, if paying in shares, the shares will have longer market exposure, he adds.
“All the while, of course, you've got a target board throwing darts at you and poking holes in your disclosure and attacking, in defence, if you will,” Atkinson says.
While the drop in hostile bids was unsurprising given the rule changes, the 24 per cent drop in friendly deals was “more interesting,” he says. One possible explanation is that boards – emboldened by their new powers – are pushing for better deal terms and bidders are walking away or not bidding, says Atkinson. Another relevant factor is the turbulence experienced by the mining and energy industries. The report states that those sectors accounted for 70 per cent of all public M&A acquisitions before the 2016 changes, but only 54 per cent, since 2016.
“Uncertainty in an industry is going to probably drive down deal-making, regardless of what the regulatory rules are,” says Atkinson.
He adds that the overall decline in public M&A activity runs counter to global M&A trends – both public and private – and to private M&A in Canada.
“It's fair to say the last several years have been pretty robust in that regard,” he says. “So, certainly the decline in public M&A transactions in Canada seems to be a bit of an outlier. Whether that is due to the bid rules or industry specific issues, hard to tell.”
The largest decline in M&A activity was with companies with a market cap of $50 million or less, which saw a 50 per cent drop in the number of friendly and hostile bids.
If the rule changes were a factor in the decline in Canadian M&A activity, a reversal of the trend will, arguably, require a readjustment of the relative leverage between target boards and bidders, says Atkinson. If this happens, it will likely come from market conditions forcing target boards to reassess their leverage, rather than regulatory changes, he says.
“A target board may be willing to fight tooth and nail in regular market conditions to get the best premium, to get the best protection for their employees,” Atkinson says.
But in a recession, with a squeeze on consumer demand, long-term prospects may be compromised, shareholders may demand liquidity and a weakening balance sheet may lead creditors to prefer consolidation, he says. Employees may want to be acquired by a larger company, to protect as many jobs as possible.
“Compare all that to potential insolvency or long-term poor returns, targets might think twice about exercising their leverage and maybe more willing to strike a deal with a bidder.”
Atkinson adds that M&A is already rebounding, with the mining sector seeing a “flurry” of deal activity since March.
He says that when he began practising nearly 20 years ago the minimum bid period was 21 days and there was a “big hue and cry” that the period needed to be lengthened to allow boards to find alternative bidders. After the bid period was increased to 35 days, the length was still viewed as inadequate, he says. To defend against hostile takeovers, target boards began to adopt shareholder rights plans, known as “poison pills.”
The poison pills would extend the bid period to around 55 to 65 days before parties would settle, or the regulator would effectively terminate the shareholder rights plan and allow the shareholders to decide on the bid, says Atkinson.
“You had a statutory minimum period of 35 days, but when you're advising clients, you'd tell them that you're probably looking at 55 to 75 days or so, before you're actually going to be able to potentially have shareholders tender to your bid and take up shares in the bid.”
In 2007, in Re Pulse Data Inc., the Alberta Securities Commission allowed a poison pill to defeat a hostile takeover bid by allowing it to remain in place indefinitely. The Ontario Securities Commission followed with a similar decision in 2009, with Re Neo Material Technologies and Pala Investments Holdings Limited.
“After [the 2008 financial crisis], we had a number of decisions that were all over the map, in different parts of Canada, allowing rights plans to last longer and longer. It started introducing this uncertainty into the process,” says Atkinson.
Years of debate among the 13 securities commissions to determine a harmonized policy followed, until the amendments came in 2016.