A New "Just Say Slow" Takeover Bid Regime Takes Shape

The Canadian Securities Administrators (CSA) have announced a proposal that will reshape the current regime for takeover bids in Canada. In a united front, Canadian regulators have decided to abandon earlier competing proposals made by the CSA and the Québec regulator (AMF) on the regulation of shareholder rights plans (or "poison pills") and defensive tactics generally. The regulators’ focus has now shifted to introducing a harmonized takeover bid regime that will strike a new balance between the right of shareholders to decide the outcome of an unsolicited takeover offer and the ability of target boards to respond to a hostile bid.

The new CSA proposal: (i) extends the time for takeover bids to 120 days; (ii) mandates a 50% minimum tender condition; and (iii) requires bids to be extended for 10 days once the minimum tender condition is met. The proposal will give target boards more time to respond to an unsolicited approach by extending the minimum period during which a formal bid must remain open, subject to the board's ability to shorten the timeframe in certain cases. Target shareholders will maintain their right to respond to a bid, but on a collective basis; a majority of the target's independent shareholders will need to tender to the bid for it to succeed. Undecided shareholders will have additional time to accept the bid once the minimum tender condition has been met.

Background

Last year both the CSA and AMF released competing proposals aimed at reforming Canada’s policy relating to defensive tactics. Under the CSA proposal, target boards would be free to deploy a poison pill for 90 days, a longer period than is currently permitted in the face of an unsolicited bid, subject to obtaining shareholder approval. The AMF proposed an alternative new regime governing all defensive tactics which would give target boards even greater discretion to defend against, and "just say no," to hostile bids. Details of the earlier CSA and AMF proposals are set out in our bulletin "Canadian Companies Will Be Harder to Acquire Under New Poison Pill Proposals."

New Proposal

The CSA's new proposal seeks to address concerns and alternative approaches raised by market participants following the release of the regulators’ proposals last year. Many expressed concerns regarding the CSA’s proposed shareholders’ meeting requirement to approve poison pills within 90 days of their adoption by the target board, the proxy contests that would ensue to terminate them, and the relative inflexibility that the mechanism presented for bidders. The AMF proposal was separately criticized for giving target boards very broad discretion to decide on the outcome of a bid, with a reduced role for shareholders.

Rather than seek to reform the use of poison pills, the CSA is now proposing to amend the takeover bid regime itself in Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids, Part XX of the Ontario Securities Act, and Ontario Securities Commission Rule 62-504 Take-Over Bids and Issuer Bids. Under the proposed amendments, all non-exempt takeover bids would:

• have a mandatory tender condition that a minimum of over 50% of all outstanding target securities held by persons other than the bidder and its joint actors be tendered to the bid before the bidder can take up any securities;
• be extended by the bidder for an additional 10 days after the bidder fulfills the mandatory minimum tender condition and the bidder announces its intention to immediately take up and pay for the securities deposited under the bid; and
• remain open for a minimum of 120 days, subject to the ability of the target board to waive, in a non-discriminatory manner when there are multiple bids, the minimum period to a period of no less than 35 days.

The new proposal seeks to redress perceived shortcomings of the regulators’ prior proposals and correct coercive elements of the current bid regime. It also aims to rebalance bid dynamics between target boards and hostile bidders by giving target boards more time to "just say slow" and evaluate an unsolicited offer, and seek value-enhancing alternatives. The new proposal will equally give shareholders the opportunity to respond to changing bid dynamics, and allow their support for a hostile offer to be assessed without the need for a proxy contest, but rather in real time on expiry of the bid. The new minimum bid period is also likely to encourage a bidder’s engagement with the target, but to the extent that the target remains unreceptive to the approach, the bidder could still proceed with its hostile bid.

The new proposal effectively codifies existing "permitted bid" terms commonly found in most poison pills (but provides for a minimum bid period of 120 days rather than 60 days). Although details have yet to be released, the proposal continues to leave it open to target boards to implement poison pills in order to curtail, for example, creeping acquisitions, or to deal with other special circumstances. At this stage it is unclear whether or when poison pills will attract regulatory intervention or if the CSA will take steps in future to regulate their adoption. 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 rules.

At this stage the CSA does not intend to make changes to either the current takeover bid exemptions or National Policy 62-202 Take-Over Bids - Defensive Tactics.

The CSA is in the process of developing the proposed amendments to the bid regime. Subject to receipt of necessary approvals, it intends to publish draft rules for comment in the first quarter of 2015.