Since the Supreme Court of Canada’s 2008 decision in BCE, Canadian boards responding to a hostile bid have been faced with a conundrum. On the one hand, Canada’s highest court has enshrined the idea that boards may consider all affected stakeholder interests, not just those of shareholders, in exercising their fiduciary duty to act in the best interests of the corporation. Theoretically, this might permit a board wide latitude in responding to a hostile suitor. On the other hand, in all but the rarest of cases, Canada’s securities regulators have effectively limited the utility of shareholder rights plans (also referred to as “poison pills”), which are the most common tool that boards wield to keep a hostile bidder at bay. In accordance with National Policy 62-202, the CSA’s general policy on defensive tactics which was first adopted in 1986, securities regulators have cease-traded rights plans, rendering them inoperative after 45 to 60 days on the basis that shareholders should have the final say on any bid. Complicating matters, recent rights plan decisions have raised questions of consistency in the approach of securities regulators and the role of directors’ business judgment.
On March 14, 2013, both the Canadian Securities Administrators (CSA) and the Québec Autorité des marchés financiers (AMF) published proposals to address these issues. The two proposals have implications for the conduct of both bidders and target boards and raise fundamental questions about the respective roles of the directors and shareholders in responding to take-over bids.
The CSA published a proposal to establish a specific regulatory framework governing rights plans in all Canadian jurisdictions through the adoption of proposed National Instrument 62-105 and consequential amendments to existing instruments and policies. In a significant departure from existing practice, the CSA proposal would generally allow shareholder-approved rights plans to remain in place for up to a year. The CSA proposal otherwise leaves National Policy 62-202 untouched, although the CSA note that they are undertaking a broader review of defensive tactics. The stated purpose of the CSA proposal is to establish a comprehensive regulatory framework for rights plans in Canada that provides target boards and shareholders with greater discretion over the use of rights plans, to reduce the circumstances where regulatory intervention may be necessary, and to maintain an active market for corporate control.
The AMF published a consultation paper proposing an alternative approach to the role of securities regulators in reviewing defensive tactics, which involves a more fundamental re-evaluation of National Policy 62-202. The AMF proposal reconsiders the current approach to defensive tactics embedded in National Policy 62-202 to recognize the directors’ fiduciary duty to the company in responding to an unsolicited take-over bid and give deference to their decisions when approving defensive tactics. In the AMF’s view, securities regulators should not intervene to render ineffective a target company’s defensive tactics, except in situations where conflicts of interest were not properly managed or in situations that otherwise demonstrate an abuse of shareholders’ rights or negatively impact the efficiency of capital markets. In addition, to address what the AMF refers to as the “structural coercion” of the take-over bid regime, the AMF proposes to introduce two significant changes inspired from “permitted bid” provisions contained in rights plans: (i) a requirement to include an irrevocable minimum tender condition in the bid conditions, and (ii) a requirement to extend a successful bid for an additional 10 days following the public announcement that the minimum tender condition has been satisfied.
The proposals were published for a 90-day comment period. Market participants are invited to provide their comments by June 12, 2013.
We discuss the details of these defensive tactics proposals and will be publishing additional commentary on each of the proposals and the potential implications of each during the comment period.