"Defensive tactics other than shareholder rights plans will become more common and will attract a high level of regulatory scrutiny."
This was the prediction of securities regulators in Hecla, their first defensive tactics decision under Canada’s new takeover bid regime.1 The Hecla decision is an important one: it articulates the regulators’ approach to reviewing defensive measures under the new regime, highlighting the securities law perspective on the relative roles of target boards and shareholders in change-of-control transactions.
Securities law in Canada prioritizes protecting a target’s shareholder interests; in contrast, corporate law demands that target boards consider non-shareholder interests and gives directors significant discretion under the business judgment rule to respond to a bid. While these regimes may seem to conflict, an alternative view is that they overlap: in the face of a bid, a target board may use defensive tactics in the exercise of their duties, up to the limit permitted by securities laws.
If, as Hecla predicts, a wider range of defensive tactics is indeed expected in the coming years, the question is: how will these measures be handled by securities regulators? We anticipate the development of a principle-based framework that, over time, will supplement Canada’s defensive tactics policy and require regulators to balance the corporate and securities laws.
Poison Pills and the Old Regime
Under the old takeover bid regime, bids could expire in just 35 days, and target boards would typically implement “tactical” poison pills to buy more time to seek an alternative offer or create negotiating leverage. In response to the widespread use of poison pills, regulators developed a body of principles consistent with the mandate of protecting investor interests which allowed target boards to maintain a poison pill for a set time in the face of a hostile bid. In the view of securities regulators, reflected in Canada’s defensive tactics policy (NP 62-202), a defensive tactic cannot be used to deny shareholder choice or access to a bid, and if it does, it will be set aside as contrary to the public interest.
Rise of Non-Pill Defensive Measures
The new takeover bid regime includes a new minimum bid period of 105 days, which changes how tactical poison pills will be treated by regulators.2 Absent exceptional circumstances, regulators are unlikely to allow a tactical poison pill to delay an unsolicited bid beyond the new 105-day minimum bid period. With more time to consider a hostile bid and seek value-enhancing alternatives, target boards may take steps that they believe are in the best interests of the corporation, including fending off an unwanted bid. This may cause target boards to consider taking other measures which may be appropriate as a matter of corporate law, but which may test the limits of Canadian securities law.
Regulators’ Principled Framework
As their first defensive tactics decision under the new bid regime has demonstrated, the regulators’ approach to reviewing non-pill tactics seeks to strike a balance that recognizes the principles of both corporate and securities law. Hecla involved a target undertaking a private placement concurrently with an unsolicited takeover bid. The Ontario and British Columbia regulators, in their joint decision, set out a two-step approach to determine whether to cease trade the private placement. First: does the target board’s action have a corporate law purpose (such as raising capital)? And second: even if the action is intended to achieve a corporate law purpose, does it nevertheless have the effect of a defensive measure? To answer these questions, the regulators considered a list of factors, weighing both the corporate needs met by the target board’s action and its relative impact on the outstanding bid.3
Even if a private placement may be considered a defensive tactic, the regulators will not necessarily intervene, acknowledging the need to balance corporate law’s principle of deferring to a board’s business judgment with the securities law principle of facilitating shareholder choice in the context of a change-of-control transaction. This new principled framework is likely to inform the approach regulators apply to other non-pill measures adopted by a target board in the face of a hostile bid.
Target Boards in a New Era of Defensive Tactics
If a target board’s action is used as a tool to attract an M&A transaction to the benefit of shareholders, securities regulators are unlikely to intervene unless the effect of that action is considered abusive to shareholder rights and/or the capital markets. If, on the other hand, the target board acts to prevent a bid or protect a deal rather than encourage an unrestricted auction, the outcome is less certain. While such actions may be permissible under corporate law, securities regulators may intervene, effectively imposing a limit on the proper exercise of a target board’s powers.
As Hecla suggests, targets may consider the appropriateness of effecting a private placement to a friendly shareholder, making it more difficult for a unsolicited bidder to achieve the new takeover bid 50% minimum tender requirement. However, without a proper business purpose, target boards of large-cap issuers will struggle to defend the legitimacy of a private placement undertaken at the same time as a bid.
Target boards will also continue to see the benefit of adopting a poison pill in order to regulate exempt purchases of target securities through creeping acquisitions and private agreement purchases, and prevent irrevocable lock-up agreements.
However, we would expect that the regulators would not generally permit a target board to maintain a poison pill if a bid has been accepted by a majority of disinterested shareholders and if the bid otherwise complies with the new takeover bid regime.
For securities regulators, target shareholders must ultimately decide the outcome of a bid, though they have acknowledged that they need to “tread warily” in this new era of defensive tactics. As they navigate how Canada’s defensive tactics policy will operate relative to Canadian corporate law in the future, the regulators, who left the poison pill hearing business behind when the new bid regime took effect, are now planting firm first steps into the arena of defensive actions.
1 See Re Hecla Mining Company (2016), 39 OSCB 8927 (Hecla).
2 For background details on Canada's new takeover bid regime, click here to read our bulletin of February 26, 2016.
3 For details on the Dolly Varden and Hecla Mining dispute, and the commissions' decisions, click here to read our bulletin of October 25, 2016.