The Canadian Securities Administrators (CSA) have released today draft rules on Canada’s new "just say slow" takeover bid regime. Under this new regime, the minimum period during which a takeover bid must remain open is extended to 120 days (subject to a target board’s ability to shorten the timeframe to as little as 35 days in certain cases). The rules preserve the right of shareholders to respond to a bid, but on a collective basis, by mandating a new 50% minimum tender condition. Once the minimum tender condition has been met, undecided shareholders will benefit from an additional 10-day extension to accept the outstanding bid.
The new rules will reshape the current takeover bid regime by redefining bid dynamics between target boards and hostile bidders. The new 120-day period will provide boards with more time to "just say slow" and evaluate a hostile bid, seek value-enhancing alternatives or convince shareholders to stay the course and reject the bid. As a result, boards will wield more negotiating leverage which will likely encourage a bidder's engagement with the target.
The CSA’s draft rules mark the end of a two-year regulatory process, which commenced with parallel proposals by the CSA and Québec securities regulator (AMF) on reform of the regulation of defensive measures. While the AMF had broad ambitions to revamp Canada’s defensive tactics policy entirely to give target boards discretion to defend against and reject hostile bids, the CSA’s proposal focused on their right to maintain a poison pill for 90 days, subject to shareholder approval. 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."
Subsequently setting aside their competing initiatives, regulators endorsed a compromise solution aimed at the takeover bid rules themselves, rebalancing bid dynamics between target boards and hostile bidders. The new proposal, for which they have now released draft rules, effectively codifies existing "permitted bid" terms commonly found in most poison pills (although the minimum bid period will be 120 days rather than the customary 60 days).
New CSA Draft Rules
Key aspects of the CSA’s new rules are set out below:
- New takeover bid framework. All non-exempt takeover bids will need to meet the following three requirements: (i) a mandatory minimum tender condition of over 50% of outstanding shares, other than shares held by the bidder and its joint actors; (ii) a 10-day extension once the 50% minimum tender threshold has been met and the bidder announces its intention to immediately take up and pay for deposited securities; and (iii) a 120-day minimum bid period, which can be shortened in certain cases. The existing takeover bid exemptions will remain unchanged under the new regime.
- 120-day period waivable to 35 days. The rules provide that target boards may shorten the 120-day minimum bid period to as little as 35 days by issuing a news release to that effect. The 120-day minimum bid period will also be shortened to 35 days (calculated from the date of the bid) if the target company issues a press release announcing that it has agreed to enter into, or determined to effect, a specified alternative transaction, such as a plan of arrangement. In circumstances where the minimum bid period has been shortened from 120 days, the shorter period will apply to any other competing bids.
- Partial bids allowed. The rules do not prohibit partial bids from being made so long as the 50% minimum tender condition is met and there is an automatic 10-day extension (further extensions of a partial bid beyond the first 10-day extension will not be permitted). Mechanics addressing pro-ration issues and withdrawal rights are also incorporated in the rules.
- Extension of bid period for notices of change or variation.If a bidder needs to send a notice of change prior to the expiry of the initial deposit period, the draft rules provide that the deposit period must not expire before 10 days after the date of the notice of change, which means the deposit period may need to be extended by the bidder. Similarly, where the 120-day minimum tender period is reduced in any of the circumstances described above after a bidder has launched its bid, the bidder will need to send a notice of variation to take advantage of the shortened period, but will need to ensure that the bid does not expire before 10 days from the notice of variation.
- Timing of directors' circular. At the moment, the rules do not propose any change to the existing requirement that the directors' circular evaluating the bid and advising target shareholders must be sent within 15 days of the bid. However, the CSA are seeking feedback as to whether this current time limit is sufficient.
120 Days: New Focus for Hostile Bidders
Directors of a Canadian target company facing a hostile bid currently must decide how to respond to the bid within a tight statutory timeframe: the directors' circular evaluating the bid and advising target shareholders must be sent within 15 days of the bid; and the bid may expire in as few as 35 days. Boards often take defensive measures, such as the implementation of a poison pill, with a view to buying more time to seek an alternative offer or creating leverage to negotiate an improved offer. In light of the regulatory treatment of poison pills, a hostile bidder is typically able to obtain an order from the regulator to cease trade the pill within approximately 45 to 60 days. Given this current framework, hostile bidders have found it relatively easy to bypass a target board and launch a bid directly to shareholders.
The new 120-day period will increase deal uncertainty for hostile bidders, exposing them, for example, to interloper risk for a much longer period of time. As a result, the extended timeframe will strengthen target boards’ negotiating leverage. We anticipate that hostile bidders will perceive the benefit of engaging more with target boards who will have the ability to waive the minimum tender period for friendly transactions. While the new bid framework will also provide more breathing room for boards and certainty around the time that boards have to respond to a hostile bid, it will continue to leave shareholders with the final say on whether a bid should be accepted.
Poison Pills Will Still Have Use
CSA National Policy 62-202 governing defensive tactics remains unchanged by the new rules. Target boards will 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 rules.
The draft rules are open for comment until June 29, 2015.
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