"Just Say Slow" or "Just Say No": Alternative Proposals for Reforming Poison Pills
The Canadian Securities Administrators have released proposed new rules for shareholder rights plans (or "poison pills"). Under the CSA proposal, target boards will be free to deploy a poison pill for a longer period than is currently permitted in the face of an unwanted bid, subject to obtaining shareholder approval. Quebec’s securities regulator, the AMF, is proposing an alternative new regime governing all defensive tactics (not just poison pills) that would give target boards even greater discretion to defend against hostile bids. We expect that only one proposal would be implemented in order to ensure harmonized rules.
Both proposals signal a significant departure from securities regulators’ longstanding approach to poison pills. The current regime prioritizes individual shareholder choice in response to takeover bids. And to differing degrees, the CSA and AMF proposals shift decision making away from shareholders to directors. The CSA proposal would give target boards a "just say slow" defence, with more time to respond to a hostile bid, provided that shareholders vote to approve a poison pill. The AMF proposal could, in appropriate cases, allow directors to "just say no."
The CSA and AMF proposals remain open for comment until June 12, 2013. Under either of these proposals, bidders should expect hostile bids to become more challenging because target boards will have broader scope to defend against hostile bids.
The CSA Draft Rules
Highlights of the CSA’s draft poison pill rules are set out below:
- Shareholder approval. To remain in effect following the board’s adoption, a poison pill would need approval by a majority vote of the target’s disinterested shareholders within 90 days of the board’s decision or of the commencement of the bid, whichever is earlier. Otherwise, it would automatically lapse after 90 days.
- Pill terms. A poison pill could only be effective against takeover bids or other acquisitions of securities of the target. As a result, it could not affect the ability of shareholders to vote their shares, make proposals or enter into irrevocable (‘hard’) lock-up arrangements with bidders. The CSA is not otherwise dictating poison pill terms.
- Waivers. If a target waived the application of a poison pill to a particular takeover bid, the target would also be required to grant the waiver to any other outstanding takeover bid as of the date of the waiver.
- Material amendments. If the target board made a material change to an existing pill, shareholder approval would be required within the above 90-day time frame for the change to remain effective.
- Annual renewal. If a poison pill were approved by shareholders, the target board would need to seek shareholder approval annually after that, at the target’s annual meeting, for the pill to remain effective.
- Termination.Shareholders could terminate the pill at any time with a majority vote. The bidder and its joint actors would be barred from any shareholder vote to adopt, amend or terminate a poison pill.
The proposal does not change the current requirements under Canadian corporate law for a shareholder to requisition a meeting. These requirements allow a requisitioning holder of 5% of the outstanding voting shares to require the corporation to call a meeting, but in general terms leave timing to the board’s discretion.
- Restriction on new pills. If shareholders terminated or did not approve the poison pill within the required time frame, the target would be prevented from adopting a new poison pill for a period of 12 months, unless a new takeover bid was made during that time.
The CSA’s draft rules can be accessed here.
The Current Regime
Canadian securities regulators currently view a poison pill (which dilutes a bidder’s position when triggered) to be acceptable as a temporary measure intended to allow a target board time beyond the minimum 35-day takeover bid period to seek value-maximizing alternatives to a hostile bid. A poison pill will be set aside by regulators if it is not facilitating the target board’s effort to find an alternative to the hostile bid. Under the current regime, the question for regulators is not whether but when a poison pill should be set aside to allow shareholders to consider a hostile bid.
The CSA Proposal
The CSA proposal would allow a poison pill to remain effective after it is adopted by the board, provided that the pill is approved by a majority vote of the target’s disinterested shareholders within 90 days of the board’s decision to adopt the pill or of the commencement of the bid, whichever is earlier. If the target board does not seek shareholder approval, the poison pill will automatically lapse after the 90-day period. The proposal does not require a previously approved pill to be re-approved by shareholders if a bid is made. Poison pills that had previously been approved by shareholders, or that are subject to approval within the 90-day period, would be left undisturbed by securities regulators. The proposal would also allow target boards to adopt a second tactical pill with more restrictive terms than a previously approved pill, so long as shareholders approved the second pill within the 90-day time frame.
The CSA’s proposed regime provides directors with an effective mechanism to slow a hostile bidder and to take greater control over the response to a bid. Currently, a board can be expected to have the use of the pill for 45 to 60 days before the regulator will set it aside. Under the proposed new regime, target boards will be able to adopt a tactical pill and schedule the shareholders’ vote on the pill for the 90th day (or not schedule any vote) to take full advantage of the 90-day period granted under the proposed new rules. If approved by shareholders, a poison pill could potentially remain in effect indefinitely.
The AMF Proposal
As an alternative to the CSA proposal, the AMF is proposing to replace the existing CSA National Policy 62-202, which governs all defensive tactics, with a new policy that would give target boards much greater discretion to respond to an unsolicited offer, subject to limited regulatory review for abuses. In addition, the AMF is proposing changes to protect shareholders against the "coercion effect" of the existing takeover bid regime (where shareholders may feel pressured to tender to a bid in order not to have payment for their shares delayed or be left behind with a minority position in less liquid stock if the bidder does not acquire all of the target’s shares).
The AMF favours a review of NP 62-202 given the significant legal and market developments since its adoption in 1986. These include the Supreme Court of Canada’s decision on directors’ duties in the BCE case, more rigorous corporate governance standards, increased shareholder activism and the growing influence of hedge funds and other arbitrageurs on the outcome of takeover bids.
The AMF proposal has two key aspects. First, the AMF considers that regulators should view defensive tactics as not being prejudicial to the public interest and therefore they should limit their intervention accordingly, unless there is abuse of shareholders’ rights, a negative impact on the efficiency of capital markets or mismanagement of the board’s or management’s conflicts of interest in a change-of-control context.
In assessing the reasonableness of a target board’s defensive tactic, the AMF would consider the following facts, among others:
- the establishment of a special committee of independent directors to consider and review the bid and make a recommendation to the board;
- the appointment of independent financial and legal advisors to assist the special committee;
- the conclusion of the special committee and the board that it is in the best interests of the corporation to implement a defensive measure, based on their review of the bid and their independent advisors’ advice; and
- the completeness of the disclosure provided to shareholders in the directors’ circular, and in other communications, on the process followed to provide their recommendation and their reasons in support of the defensive measure.
Second, to minimize any inherent structural coercion that results when a bid is made to shareholders directly, bids would have to include two key features that are typical of "permitted bids" under a poison pill. A bid would have to include an irrevocable minimum tender condition requiring that more than 50% of the target’s shares held by independent shareholders be tendered to the bid. Partial bids would be permitted but would be subject to the same 50% minimum tender condition. If the 50% condition was satisfied, the bidder would be required to extend its offer for an additional 10 days to give shareholders that have not deposited their shares time to deposit them during the extension. The AMF views these changes as an effective substitute to the CSA proposal requiring shareholder approval of a poison pill. But absent an intervention by the regulators, this ‘voting’ mechanism would not address the removal of a pill which the target board had determined should remain in place despite the 50% minimum condition being satisfied.
Since under the AMF proposal the regulators would not intervene except in limited circumstances, target boards would have greatly enhanced flexibility to defend against a hostile bid. Shareholders’ ability to respond to a hostile bid would, in most cases, depend on the board. The AMF’s proposal can be accessed here.
Impact on Bid Strategy
Under the CSA and AMF proposals, securities regulators would still have the power to set aside a target’s poison pill using the public interest jurisdiction. However, it is clear from the proposals that regulators intend to exercise that jurisdiction only in limited cases. As a result, a hostile bidder that wishes to overcome the poison pill obstacle would have to resort to a different strategy.
A bidder could try to attack a target board’s defensive measures in court, but the "bitter bidder" rule on standing in oppression cases, together with the protections of directors under Canadian corporate law, make this strategy unlikely to succeed absent unique circumstances. The lack of a direct avenue to securities regulators to attack a poison pill would add to the difficulty that bidders would have in acquiring Canadian targets.
Without the pill hearing before a securities regulator or the intervention of the courts, bidders would need to resort to costly proxy contests to either terminate the pill (which is specifically contemplated by the CSA proposal) or replace the target board with nominee directors believed to be more sympathetic to a change of control. Of course, if the battle in a hostile bid becomes the proxy fight, that could have the effect of bringing the poison pill regime full circle: with shareholders having the ability under the CSA proposal to vote to eliminate a poison pill or under the Canadian corporate statutes to replace the entire board at any time, shareholders will ultimately continue to have the final say on a bid.
For more discussion on the changing landscape of bid defensive tactics in Canada, see Hostile Bids Will Become More Difficult as Target Boards “Just Say Slow.”
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