On May 9, 2016, the Canadian Securities Administrators (the “CSA”) implemented new harmonized takeover bid rules. These new rules represent the most significant changes to the securities regulatory regime for takeovers of public companies in Canada since the original adoption of the takeover bid regime in 1966.
Background to the New Rules
The takeover bid landscape in Canada is shaped by the principle that shareholders should be the ultimate decision makers in determining whether to accept a takeover bid or not. That principle underpins the key regulatory guidance on defensive tactics by target companies, National Policy 62-202 Take-Over Bids – Defensive Tactics (“NP 62-202”). This policy reflects the principle that shareholder rights plans (poison pills) and other defensive tactics cannot be used to prevent shareholders from ultimately having the opportunity to tender to a takeover bid, and is primarily focused on protecting the bona fide interests of target shareholders.
This shareholder-centric approach has informed numerous decisions of Canadian securities commissions over the past decades that have, with few exceptions, cease traded (i.e. rendered ineffective) shareholder rights plans after a certain time period (generally 45 to 70 days) to allow a hostile bid to proceed. Prior to the new rules, the regulatory regime clearly favoured bidders and significantly limited a target’s ability to defend against hostile bids. In most cases, once a hostile bid was launched, some form of change of control transaction would become almost inevitable.
Following a number of court decisions confirming that the fiduciary duty of directors of Canadian companies is to act in the best interest of the company (and not any one stakeholder group, including shareholders), capital markets participants began to question whether the shareholder-centric approach to takeover bids unduly restricted the ability of boards to defend against hostile bids. In addition, there ongoing concerns have been expressed in recent years that the bidder-friendly nature of Canadian securities and corporate laws may be contributing to the “hollowing out” out of corporate Canada.
In response, the CSA embarked upon a detailed review of the takeover bid regime, which formed the foundation for the new rules.
Overview of the New Rules
The new rules are intended to enhance the quality and integrity of the takeover bid regime and rebalance the dynamic among bidders, target boards and target shareholders by (i) facilitating target shareholders’ ability to make voluntary, informed and coordinated tender decisions, and (ii) providing target boards with additional time and discretion when responding to a takeover bid.
To achieve these objectives the new rules require all takeover bids to:
- receive tenders of more than 50% of the outstanding securities of the class that are subject to the bid, excluding securities beneficially owned, or over which control or direction is exercised, by the bidder or by any person acting jointly or in concert with the bidder (the “Minimum Tender Condition”);
- be extended by the bidder for an additional 10 days after the Minimum Tender Condition has been achieved and all other terms and conditions of the bid have been complied with or waived (the “10 Day Extension Requirement”); and
- remain open for a minimum deposit period of 105 days unless the target board (a) states in a news release a shorter deposit period for any proposed or outstanding bid of not less than 35 days that is acceptable, in which case all contemporaneous takeover bids must remain open for at least the stated shorter deposit period, or (b) issues a news release that it has agreed to enter into, or determined to effect, an “alternative transaction” (being a transaction that is not a takeover bid, such as an arrangement), in which case all contemporaneous takeover bids must remain open for a deposit period of at least 35 days (the “105 Day Requirement”).
The following table compares the key features of the new rules with the previous regime:
|Provision||Previous Rules||New Rules|
|Minimum tender requirement||No minimum tender requirement. Any minimum tender condition stated in the bid could be waived by the bidder prior to the expiration of the bid.|
“Any and all” bids permitted.
|Bidders are prohibited from taking up securities under a bid unless the bid receives tenders of more than 50% of the securities of the class subject to the bid, excluding those beneficially owned by the bidder.|
“Any and all” bids prohibited.
|Extension of successful bid following the expiration of the bid||No requirement to extend a successful bid, except to satisfy customary “permitted bid” requirements under a shareholder rights plan||Following the initial deposit period, all successful bids must be extended for an additional 10 days to enable any shareholder that had previously not tendered to tender its securities|
|Minimum deposit period||Minimum deposit period of 35 days, with extensions given where variations are made to the bid||Minimum deposit period of 105 days, which may be reduced at the option of the target, upon the acceptance by the target of a shorter deposit period for any other takeover bid or upon acceptance by the target of an “alternative transaction”|
Implications and Issues
Through the new rules, the CSA has accomplished its goal of rebalancing the dynamics among bidders, target boards and target shareholders, and the new rules have a number of important implications.
Hostile Bids Are Now More Challenging
The new rules significantly shift leverage from hostile bidders toward target directors and shareholders. This will make hostile bids more difficult to complete and could, as a result, reduce hostile bid activity in Canada.
Time is generally the enemy of a hostile bidder. The longer a hostile bid remains outstanding, the greater the chance that a competing buyer will emerge, the target company’s circumstances will improve, market conditions will change or some other unexpected development will derail the transaction. The 105 Day Requirement should generally give target boards ample time to respond to an unsolicited offer and, if appropriate, run a thorough sales process to locate potential “white knight” bidders or make a more compelling case that target shareholders reject the hostile bid.
In addition, a longer bid period may mean that third party financing could become harder for bidders to obtain, or at least may be more expensive, as the lender’s commitment will need to be in place for a longer period. Bidders may also find it more challenging to convince key target shareholders to “lock up” to their offer for a minimum of 105 days.
The Minimum Tender Condition and 10 Day Extension Requirement remove what has been one of the most effective tactics available to a hostile bidder – the ability to waive its minimum tender condition and acquire “any and all” tendered shares. That ability permitted a hostile bidder to acquire an effective control position in the target, allowing it to block a competing transaction even if it was unable to gain majority control of the target. This, together with the fact that target shareholders may not know before the tender deadline what the outcome of the bid would be, led to persistent concerns under the previous rules that shareholders could be coerced into tendering to a hostile bid due to the possibility that they may be “left behind” in a potentially illiquid investment with no prospect of another liquidity transaction. Under the new rules, more shareholders may wait to see how the bid plays out before tendering, which could make it even harder for hostile bids to succeed.
Partial bids – offers to acquire less than all of the target company’s outstanding shares – are expected to be much more difficult to execute. Because the Minimum Tender Condition applies to all bids, a bidder that launches a bid for even a relatively small percentage of the target’s shares must still convince the holders of more than 50% of the outstanding shares not owned by it to endorse the offer by tendering to it. However, since partial bids have been quite rare in Canada, the impact of the new rules on partial bids may be of limited practical consequence.
Hostile Bid Tactics Will Evolve
The new rules are expected to cause both bidders and target companies to adjust their hostile bid tactics and commit significant resources to waging hostile bid campaigns. Since a bid’s success or failure will turn on collective, and not individual, decision making by the target shareholders, we expect that bidders will devote more resources to aggressive public relations and solicitation campaigns (e.g., social media, white papers, websites, etc.) to convince shareholders to tender. Proxy solicitors, public relations consultants and social media experts will play an important role on both sides of a hostile bid transaction.
Rights Plans Will Have Limited Utility
Although the need for targets to adopt “tactical” rights plans in the face of a hostile bid is expected to decrease significantly, many issuers may maintain rights plans to prevent “creeping” takeover bids. The latter are still possible through takeover bid exemptions which permit, for example, the acquisition of shares under a private agreement or through limited market purchases, and which are not affected by the new rules.
The new rules are expected to have a significant effect on the manner in which takeover bids are conducted in Canada and the securities regulators’ role in takeover bid transactions. In particular, these rules will eliminate some of the most coercive elements of hostile bids available under the previous rules and significantly increase the time available to target boards to explore potential alternatives to a hostile bid. Yet although the new rules change the playing field, they do not abandon the Canadian principle that a target board cannot indefinitely “just say no.” If there is an offer on the table, shareholders will generally continue to have the final say.