In connection with tabling its February 20, 2014 budget, the Government of Québec stated its intention to implement recommendations made in the report of its Task Force on the Protection of Québec Businesses (Task Force). The Task Force recommends providing Québec corporations with significant tools to resist hostile takeover bids. If the measures proposed by the Task Force are implemented, together with the Québec securities regulator’s proposal on defensive measures currently under review, the result may be that Québec-incorporated corporations will be harder to acquire under a pro-target takeover bid regime that would be unprecedented in Canada. While the intended effect of Québec’s new measures would be to build a takeover bid "firewall" surrounding Québec corporations, the reality is that before these tools are available to Québec directors, several hurdles must be overcome. And at least in the short term, Québec’s measures are likely to have limited impact in practice.
The Task Force was established in the wake of high-profile transactions involving Québec corporations—the unsuccessful 2012 bid of Lowe’s for RONA, and the acquisition of Fibrek by Resolute Forest Products earlier that year. During the same period, securities regulators across Canada were considering reforms to their rules governing defensive measures, including Québec’s securities regulator, the Autorité des marchés financiers (AMF). The AMF has proposed a regime in which a target board will have enhanced power to adopt defensive measures, including shareholder rights plans (or "poison pills") with limited regulatory intervention. It has also proposed that takeover bids be structured to include an irrevocable 50% minimum tender condition (for details, see our bulletin Canadian Companies Will be Harder to Acquire under New Poison Pill Proposals).
The Task Force has recommended that the Québec government consider implementing the AMF’s proposal through amendments to securities legislation. It has also recommended a number of measures inspired by U.S. state corporate statutes that the Government of Québec intends to advance: variable voting rights and restrictions on certain transactions associated with hostile takeover bid activity.
- Voting rights. A corporation incorporated in Québec would be able to include in its articles provisions that a holder of its shares for more than two years will have enhanced voting rights, with the intention of limiting the power of short-term shareholders. In addition, a corporation’s articles could require that a hostile bidder is precluded from exercising voting rights with respect to its shares after launching a bid until the disinterested shareholders agree to restore those voting rights.
- Transaction restrictions. Unless the transaction was approved by the target’s board, a corporation acquired by way of a takeover bid would not be able to sell substantial assets for a period of five years following the change of control. In addition, a bidder could be precluded from keeping profits made associated with trading the shares of the target before and after launching the bid, and be required instead to pay those profits to the target.
- Board entrenchment. With staggered boards already permitted under the Québec corporate statute, the Task Force has recommended that a bidder whose offer has not been approved by the target board should be prohibited from revoking the term of office of incumbent directors before the end of their term (for a maximum duration of three years).
The above protective measures are drawn from standard U.S. anti-takeover statutes, such as control share acquisition and business combination statutes, that were implemented in the majority of states in the United States mostly in the period of 1985-1991, in an effort to protect state-incorporated corporations1 .
The Task Force is also suggesting that the Québec government replace Québec’s existing securities tribunal (the Bureau de décision et de révision) by a specialized securities tribunal made up of judges that would enhance the perception of quality of the decisions handed down by that regulatory body.
Québec's recommended anti-takeover measures are intended to safeguard the head offices of Québec corporations against unwanted takeovers, and foster their long-term development in the province. However, in the short term, the recommendations are unlikely to have any immediate impact. For a start, to give effect to the Task Force's recommendation that boards should be allowed to fully exercise their fiduciary duties in the face of a hostile bid and be in a position to deploy broader defensive powers, some relaxing of the current securities regulatory approach to defensive tactics would be required, either through the AMF's proposal or otherwise. The AMF's proposal, together with the competing proposal by the other Canadian securities regulators on shareholder rights plans, are still under review. A decision to implement the AMF proposal in Québec alone would be significant—signaling a departure from any plan to introduce a reformed harmonized takeover bid regime across Canada.
Separately, assuming the remaining recommendations of the Task Force are enacted in Québec law, directors would need the approval of shareholders by a two-thirds majority in order to implement these changes to the corporations' governing documents. With the rise in institutional share ownership of public companies2 , it remains to be seen whether sufficient support would be garnered to introduce these anti-takeover protections. The current wave of shareholder activism and the willingness of institutional shareholders to lean openly on boards to advocate strategic changes suggest that protective measures such as those recommended by the Task Force, including variable voting rights favouring long-term shareholders and anti-takeover measures supporting board entrenchment, might be met with some shareholder resistance. Board entrenchment has been a major focus for activist investors, as shareholders are increasingly using their votes to influence directors and assert themselves on strategy (for details, see our bulletin Shareholder Activism Will Increasingly Influence M&A Governance Practices).
The Task Force's specific recommendation targeting staggered boards, and the inability of an unsupported bidder to remove incumbent directors without cause before the expiry of their term of office, would also have the practical consequence of rendering the corporation ineligible for listing on the Toronto Stock Exchange. All TSX-listed issuers are now required to have their directors elected both individually and annually, rather than by slate or through a staggered board (see our bulletin TSX Developments on Corporate Governance and Transactions Requiring Securityholder Approval).
Finally, even if shareholders support the adoption of all of the Task Force's recommendations, the reality is that only corporations incorporated under the Québec Business Corporations Act would benefit from them. And as recognized by the Task Force, in the short term, the pool of existing Québec corporations that would be particularly vulnerable to an unwanted takeover bid, and might benefit from anti-takeover protection, is limited to eight Québec-incorporated public corporations in total, out of the 50 largest listed corporations with headquarters in Québec. The remaining corporations are otherwise already protected through dual-class structures favouring controlling shareholders or by sector-specific legislation with built-in safeguards against foreign ownership control.
It therefore remains to be seen whether in the long run, the Task Force's recommendations on paper will lead to Québec corporations becoming increasingly invulnerable to hostile takeover bids in practice—as well as how these recommendations may shift the balance of power among target boards, target shareholders and bidders for Québec corporations.
1 L. Bebchuk and A. Ferrell, On Takeover Law and Regulatory Competition, Discussion Paper No. 363, 05/2002, Harvard Law School.
2 See CSA Consultation Paper 54-401 Review of the Proxy Voting Infrastructure, August 15, 2013, at section 1.2.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2020 by Torys LLP.
All rights reserved.