Canada’s antidote to the poison pill
December 2014 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Since its inception in the 1980s, the poison pill has proven to be a controversial tactic. While it has never successfully blocked an unsolicited takeover attempt, the poison pill approach has provided many companies with a strong negotiating position. By diluting the acquiring company’s ownership stake in its target, the poison pill can be effective for both shareholders and management alike. Companies have been quick to adopt this flexible defence when management has sought to protect their position or when the target firm is not interested in selling to a particular party.
Yet the tide appears to be turning against poison pills, at least in Canada. The Canadian Securities Administrators (CSA) recently proposed a number of changes to the country’s takeover legislation which would dramatically impact the effectiveness of poison pills. The proposed changes have arisen from a prolonged period of uncertainty within the regulatory body. Indeed, the CSA has been divided on the issue of poison pills for years, going back and forth over which group should be allowed the greater input into a company’s future – the target’s board or its shareholders. The CSA noted in the past that “there is a possibility that the interests of management of the target company will differ from those of its shareholders”.
This is not the first time that regulators in Canada have moved to reform the country’s shareholder rights plans. Both the CSA and the l’Autorité des marchés financiers (AMF) launched proposals aimed at overhauling the existing system. The AMF released a paper called An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics concurrently with the recent CSA proposals, both of which aimed to address the same issue, albeit through different methods. The AMF has suggested regulating all defensive tactics employed by target companies. It believes the domestic takeover bid regime has become too ‘bidder friendly’ and is inconsistent with its stated goal of neutrality between bidders and target boards and their management. Further, the existing Defensive Tactics Policy is being applied to inappropriately limit the target board’s ability to exercise its fiduciary duty, including to maximise security holder value in the long term. Finally, the takeover bid regime is structurally coercive to target security holders, as it does not permit them to make a collective decision about the transaction.
To remedy this situation, the AMF has proposed that the Defensive Tactics Policy be replaced with a new policy that recognises the fiduciary duty of the target board to the issuer when responding to a hostile bid. Furthermore, the AMF has proposed that a minimum tender condition of more than 50 percent of all outstanding target securities owned or held by persons other than the bidder and its joint actors be imposed, along with a mandatory 10 day extension of the bid following the announcement that the minimum tender condition has been met, to give the remaining security holders the opportunity to tender the bid.
The new CSA proposals, which are not expected to be published for comment until the first quarter of 2015, will represent a sea change from the existing regime in Canada. Under the proposals, target boards will not be permitted to simply block an unsolicited or hostile bid. Instead, board members will be granted more time to respond to hostile offers. Shareholders will also maintain the right to make a voluntary and informed decision about tendering their shares to the bid.
Existing legislation requires takeover bids to remain open for just 35 days, but the new legislation would see that window extended to 120 days. This jump would roughly double the period typically mandated by the ‘permitted bid’ provisions of most rights plans. Target boards would be authorised to waive this period in a non-discriminatory manner when there are multiple bids, to not less than 35 days, once again replicating the typical waiver provisions of most rights plans.
Should the regulations be passed, they would make it markedly more difficult for hostile bidders to acquire companies than under the current regime. The CSA hopes that new legislation will foster greater communication and engagement between acquirers and target companies.
Clearly, the provisions set forth by the CSA are the most important developments in takeover bids in Canada for a number of years. The regulations will require target companies, prospective bidders and their respective boards and management to re-evaluate their position and strategy for dealing with hostile bids. The new CSA guidelines won’t ban poison pills outright, nor will the CSA permit any changes to be made to existing takeover bid exemptions or the Defensive Tactics Policy. However, it seems increasingly likely that poison pills may be phased out of the Canadian takeover regime in the future.
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