Written by Paul Barbeau, Brent Kraus, Georges Dubé, John Piasta
The Canadian Securities Administrators Implement New Rules to Strengthen the Ability of Target Issuers and their Shareholders to Respond to Hostile Take-Over Bids
Following a lengthy process involving each of the securities commissions in Canada, industry participants and the legal community, on February 25, 2016, the Canadian Securities Administrators (CSA) adopted amendments to Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids and changes to National Policy 62-203 Take-Over Bids and Issuer Bids (the New Rules). The New Rules represent a significant departure from the historic take-over bid regime in Canada. Under the New Rules, shareholders will have a greater ability to make informed tender decisions and target boards will be provided with more time to identify and pursue alternative transactions and/or other defensive measures. The New Rules will come into effect on May 9, 2016, provided that implementation in Ontario may be delayed beyond that date until the relevant legislation is proclaimed into force.
The Prior Regime
Prior to the New Rules, take-over bids in Canada have been required to remain open for acceptance for not less than 35 days, during which period the acquiror could not yet acquire tendered securities. While this relatively short time period has facilitated the efficient completion of friendly acquisitions, in the case of a hostile take-over bid, the board of directors of a target issuer had little time to identify, negotiate and enter into a value-maximizing alternative transaction or implement certain other defensive measures. In response, it became common practice for a target issuer to adopt a shareholder rights plan, or "poison pill", which operated to secure the target board additional time before any securities tendered to a hostile acquiror's bid could be taken up by the hostile acquiror.
In addition, the prior take-over regime did not provide for an irrevocable minimum tender condition or a mandatory bid extension period, meaning the target shareholders received little transparency with respect to the level of overall shareholder support for a particular bid. As a result, the prior take over regime could arguably have permitted the coercion of target shareholders into tendering to a hostile take-over bid for fear that in refraining from tendering, they could be stranded as part of a minority, and potentially illiquid, position in the target issuer once the bid expired.
The New Rules
The New Rules significantly increase the leverage of the board of directors of the target issuer by requiring that all non-exempt take-over bids for Canadian issuers have the following features:
- 105-day Bid Period – Take-over bids must remain open for a minimum of 105 days, which represents a material increase from the 35-day bid period under the prior regime and the 60-day period typically provided for through the implementation of a shareholder-approved shareholder rights plan by a target issuer. The 105-day requirement is subject to two exceptions:
- The target issues a news release announcing that a shorter deposit period is acceptable to the target board (but not less than 35 days), in which case all outstanding or subsequently launched bids are only required to be open for not less than the shortened bid period. In other words, if the 105-day period is waived for one acquiror, it is waived for all acquirors.
- The target issues a news release announcing that it has entered into, or agreed to give effect to, an "alternative transaction" (such as a plan of arrangement or other acquisition agreement), in which case all outstanding or subsequently launched take-over bids are only required to be open for 35 days from their date of commencement.
As a result, the target board may waive the 105-day requirement to 35 days for a friendly acquisition and, once waived, all subsequent acquirors would be permitted to launch a bid with a 35-day bid period.
While the CSA had previously proposed a 120-day mandatory bid period, the new bid period has been reduced to 105 days to accommodate the compulsory acquisition provisions contained in Canadian corporate statutes.
- Irrevocable Minimum Tender Condition – The New Rules require that at least a majority of all outstanding target securities owned or held by persons other than the acquiror or its joint actors must be tendered and not withdrawn before the acquiror can take up any securities under its bid.
- 10-Day Bid Extension – The New Rules also require that all bids must be extended for an additional 10 days after the acquiror satisfies the minimum tender condition and the acquiror announces its intention to take up and pay for the securities deposited under the bid. In addition, the acquiror must publicly disclose the number of securities deposited and not withdrawn at the end of the initial bid period. This rule allows non-tendering securityholders the opportunity to evaluate the initial bid response and then retain an opportunity to tender as well.
The CSA has not departed from its long-held view that shareholders must ultimately have the opportunity to decide whether or not to tender to an unsolicited take-over bid. However, by imposing a minimum 105-day bid period, the CSA has acknowledged that the playing field was largely tipped in favour of hostile bidders and has introduced a regime that facilitates a more thorough review process by the target board. In addition, by implementing an irrevocable minimum tender condition together with a mandatory 10-day bid extension, the CSA has addressed the aspects of the old regime that permitted coercive tactics. Shareholders may now take a wait and see approach in response to a hostile take-over bid and choose whether or not to tender once initial tender results are known. The CSA's expectation is that the New Rules will result in more value for target shareholders in change of control transactions.
While the New Rules are largely viewed as positive developments for target issuers and their boards, they may deter some potential acquirors from launching unsolicited take-over bids because the New Rules may give rise to higher financial costs due to a longer bid period, may expose the offeror to a longer period of market risk and could increase the cost of acquisition financing. It is also possible that the increased difficulty in executing a hostile take-over bid may result in a greater number of proxy contests for control of the target board.
Use of Defensive Tactics
The New Rules may largely eliminate the use of a shareholder rights plan or "poison pill" as a response to an unsolicited take-over bid because the primary purpose of a shareholder rights plan, securing more time, is achieved with the longer bid period. While it is possible that a "tactical" shareholder rights plan could be implemented to extend the 105-day bid period, we expect that any such plan, absent exceptional circumstances, would be quickly cease traded by the applicable securities regulatory authority. At the same time, a shareholder rights plan may remain useful in precluding "creeping bids", where an acquiror acquires substantial share positions in reliance on exemptions from the take-over bid rules (e.g., the normal course purchase exemption).
The New Rules do not otherwise change the current CSA policy on defensive tactics in the context of take-over bids, such as undertaking an issuer bid, declaring a special dividend, pursuing the purchase or sale of "crown jewels" or issuing securities from treasury (including to a potential "white knight"). These tactics, however, will be scrutinized by the overarching principle that such actions must have a legitimate business purpose. That said, we believe that securities regulatory authorities in Canada may take a more critical view in assessing the business legitimacy of such defensive tactics once the New Rules take effect.