The Canadian Securities Regulators (the CSA) have just agreed on major changes that are set to transform the take-over bid regime that has prevailed in Canada during the last three decades. CSA Notice 62-306 (the CSA Proposal), issued on September 11, 2014, reconciles the competing proposals for poison pill reform initially introduced in March 2013 by the CSA and Autorité des marchés financiers (the AMF) by amending the take-over bid rules themselves rather than changing the CSA’s policy on defensive tactics set out in National Policy 62-202 – Defensive Tactics (the Defensive Tactics Policy). The proposed changes legislatively mandate key elements from the “permitted bid” regime in most poison pills, thereby strengthening a target board’s ability to respond to a hostile bid while still giving shareholders the final say.
Previously, both the CSA and the AMF published proposals to modify the Defensive Tactics Policy to address concerns raised with the CSA’s approach to reviewing defensive tactics taken in response to hostile bids. In essence, the CSA proposal preserved the current Defensive Tactics Policy while introducing specific rules governing rights plans and mandating their lifespan (90 days or, if approved by shareholders, up to a year). The AMF proposal proposed a more dramatic rethinking of the Defensive Tactics Policy by proposing greater deference to the directors’ exercise of their fiduciary duty to the company in responding to a hostile bid, opening the door to a “just say no” defence.
What are the changes being proposed?
Under the CSA Proposal, take-over bids would be required to remain open for a 120-day period, a substantial increase from the current 35-day period and roughly double the period typically mandated by the “permitted bid” provisions of most rights plans. Target boards would be empowered to waive such 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.
The CSA Proposal also introduces amendments to address concerns about potentially coercive elements of the current regime by permitting take-up under a bid only after a majority of the securities not held by the bidder and its joint actors have been tendered. Moreover, bidders would be required to extend their bid for an additional 10 days after achieving the minimum tender condition and announcing their intention to take up and pay for the securities tendered under the bid. Such measures are referred to below as the “Anti-Coercive Measures”.
The foregoing requirements would not apply to exempt take-over bids, and the CSA advised in their notice that they are not considering making any changes to current take-over bid exemptions, or the Defensive Tactics Policy.
Does this signal the end of poison pills in Canada?
Shareholder rights plans in Canada typically mandate a 60-day period and include the Anti-Coercive Measures described above for a bid to be a “permitted bid” under the rights plan.
By extending the bid period to 120 days and introducing the Anti-Coercive Measures, some might argue that rights plans are bound to disappear from the Canadian landscape. However, the CSA Proposal does not address other circumstances in which a rights plan may serve a purpose, including by preventing creeping takeovers that will still be possible through exempt take-over bid transactions and preventing “hard” lock-up agreements that could precede a bid.
Moreover, tactical rights plans may still prove useful to a target board faced with circumstances similar to those in the Neo Material and Pulse Data decisions. In that regard, it is conceivable that if a rights plan is adopted and overwhelmingly supported by shareholders, securities regulators might be willing to allow the plan to remain in place. In the Neo Material case, regulators allowed a tactical rights plan to remain in place following its ratification by an overwhelming number of shareholders. The target board adopted the plan to fend off a bid it considered opportunistic, without a sufficient premium for control and launched in market conditions that were not considered favourable to an auction of the company. The target board considered in the circumstances that the company’s long-term interests would be best served by pursuing the company’s business plan rather than engaging in a transaction with the bidder or other potential suitors.
However, the CSA Proposal clearly seeks to preserve the shareholder choice model on which the Defensive Tactics Policy is based, such that a “just say no” defence, absent very special circumstances, appears unlikely to find favour with the CSA.
What are some other potential implications of the CSA Proposal?
Will target boards faced with an unsolicited bid be permitted to simply wait out the 120-day period by “sitting on their hands”? Given their fiduciary duties, it would seem unadvisable for directors to take such an approach and we would expect boards to continue to diligently assess the bid and consider alternatives. In addition, it would not be unreasonable to expect a board, in furtherance of its fiduciary duties, to waive the remainder of the 120-day period if itcame to the conclusion prior to the expiration of such period, after canvassing the market, that there were no better alternatives available, in order to allow shareholders to accept the offer without further delay.
It will also be interesting to see if the detailed amendments reflecting the CSA Proposal will extend the period allowed for target boards to send out their directors’ circular containing their recommendation on the take-over bid (currently fixed at 15 days following the bid) and if such additional period is adequate in light of the shareholders’ right to receive timely feedback on the bid from the directors.
When will the changes be effective?
The CSA intend to publish detailed take-over bid amendments for comment in the first quarter of 2015.
In the meantime, it will be interesting to see if the CSA Proposal will translate into greater tolerance for pills by regulators.