CSA proposes amendments to rules surrounding shareholder rights plans and take-over bids.
By: Ralph Shay
Regulators Poised to Make Life Difficult for Hostile Bidders
The Canadian Securities Administrators (CSA) have published draft legislation that would bring about fundamental changes to the securities regulatory take-over regime in Canada. For almost a quarter of a century, the regulators have generally taken a bidder-friendly approach in the course of their interventions when take-over targets have attempted to defend against hostile bids with shareholder rights plans. The proposed changes, despite leaving the regulators’ published policy on take-over defensive tactics intact, would shift much of the advantage away from bidders, with the likely result that there will be fewer hostile bids.
For a number of years, securities industry participants and others have expressed concern about the restricted ability of Canadian public companies to defend themselves against hostile take-over bids. The issues relate to National Policy 62-202 - Take-over Bids - Defensive Tactics (NP 62-202) - of the CSA and the manner in which it has been applied by the regulators. NP 62-202 emphasizes shareholder choice and has been used by hostile bidders on numerous occasions to successfully limit the use of shareholder rights plans as a defensive tactic by take-over targets. Detractors of NP 62-202 have argued, among other things, that NP 62-202 has been applied in a manner that impedes the ability of a target’s directors to exercise their fiduciary duty to act in the best interests of the target where those interests may call for a strong defence to the hostile bid. For example, the target’s management may need more time to find superior alternatives to the bid than the regulators allow, or management may determine that the long-term interests of the target would be better served by mounting a defence that amounts to a “just say no” position with respect to the bid.
In March 2013, the securities regulators responded to these concerns with two alternative proposals for change. One proposal was from the CSA and was confined to shareholder rights plans, the most common Canadian take-over defensive tactic. The other proposal was from the Quebec Autorité des marchés financiers (AMF) and covered defensive tactics generally.
Under the CSA’s proposal, a take-over target could keep a shareholder rights plan in place against a hostile bid if the plan was approved by shareholders (excluding the shares held by a current hostile bidder, if any, and its joint actors) within 90 days of its adoption by the board of directors or within 90 days of the commencement of a current take-over bid, whichever was earlier. The shareholder rights plan would have to be approved by the shareholders at each annual meeting in the financial years following the financial year of the initial shareholder approval in order to remain in effect. These requirements would take the form of a new national instrument, and National Policy 62-202 would be amended to exclude shareholder rights plans from its general application.
The AMF proposal would give deference to boards of directors of target companies, limiting intervention by securities regulators to where the target board failed to adequately address conflicts of interest in adopting a take-over defensive tactic, or in circumstances that were abusive of shareholder rights or negatively impacted the efficiency of the capital markets. In addition, the AMF proposed that all take-over bids (other than exempt bids, such as bids that qualified for the normal course purchase or private agreement exemption) would be required to have an irrevocable minimum tender condition of more than 50% of the outstanding shares of the target not owned by bidder and its joint actors, and the bid would have to be extended for 10 days following the public announcement that the minimum tender condition had been met.
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