In March of this year, the Canadian Securities Administrators (CSA), the umbrella securities regulatory organization representing all of the provinces and territories of Canada, introduced a package of very significant changes (Proposed Bid Amendments) to the legal regime applicable to takeover bids for Canadian issuers. Although subject to a 90 day public comment period, it is widely expected that the substance of the amendments will be adopted in the very near term. The changes are likely to have a major impact upon the structure and frequency of unsolicited and competitive takeover bid activity in Canada.
The Proposed Bid Amendments are the result of a lengthy and far-reaching consultation process by the CSA which was initially focussed upon the regulation of takeover bid defences in Canada, following a decades-long policy debate between advocates of robust takeover defences in furtherance of directors' fiduciary duty to act in the best interests of target issuers, and those who believe in the right of target shareholders to consider and make a tender decision on every unsolicited offer for control. For various reasons of law, regulatory policy and market dynamics, the "shareholder choice" approach has overwhelmingly predominated in Canada. The result has been the evolution of a market for corporate control in Canada that has substantially favoured the interests of hostile bidders over target boards and other stakeholders, including – in the view of many – target shareholders.
Proposed Bid Amendments
The Proposed Bid Amendments are intended, in the words of the published proposal, "to enhance the quality and integrity of the takeover bid regime and rebalance the current dynamics among offerors, offeree issuer boards of directors and offeree issuer securityholders by (i) facilitating the ability of offeree issuer securityholders to make voluntary, informed and coordinated tender decisions and (ii) providing the offeree board with additional time and discretion when responding to a takeover bid."
The CSA has identified, and proposed substantive amendments in respect of, three principal elements of the current regime to achieve these objectives:
Minimum Tender Period
Under current requirements, a takeover bid must be open for acceptance by target shareholders for a minimum of 35 days1. There is a clear market consensus that the minimum period, almost invariably the period set by hostile bidders, is frequently insufficient for target boards to canvass, develop and announce value maximizing alternatives to the initial bid. In practice, targets will frequently adopt (or rely on previously adopted) shareholder rights plans (SRPs) to extend the initial bid period unilaterally, but securities regulators (which have primary jurisdiction under Canadian law and unchallenged practice) have typically set these plans aside within 60 days of the initial bid date, thereby enhancing – but often only marginally – the time available to targets to respond to hostile bids. This regulatory treatment has rendered "poison pill" defences, commonly and successfully used in the US, of limited utility in Canada.
The Proposed Bid Amendments would require takeover bids to be open for an initial period of 120 days, unless the target board agrees with the bidder, and publicly discloses its agreement, to reduce the tender period to a shorter period of not less than 35 days. In the Canadian context, this is a major development. Axiomatically, the only bids that will have shorter tender periods than the 120 day mandated minimum will be target supported, "friendly" transactions. The risk and uncertainty, from the bidder's perspective, of a much longer tender period is expected to result in greater incentive for bidders to reach friendly, board supported deals, which should translate to more generous initial, or negotiated, price proposals, and fewer classically hostile bids.
Minimum Tender Requirement
Under the existing Canadian regime, takeover bids may be for a specified number or percentage, but less than all, of the outstanding target shares (a "partial bid"), for all shares tendered with neither a minimum nor a maximum number of target shares to be acquired (an "any-and-all" bid) or a minimum percentage of the outstanding shares, but with the minimum condition being waivable by the bidder in its discretion. Many market participants and commentators have identified, and criticized, the structural coercion inherent in all of these situations, which often result in pressure on shareholders to tender to undesirable bids and other perverse tender decisions.
The Proposed Bid Amendments attempt to address this concern, by requiring that all bids be subject to a mandatory, unwaivable minimum tender requirement of more than 50% of the outstanding target shares held by shareholders unrelated to the bidder. In substance, this requirement imposes a shareholder referendum on every bid proposal2. By giving shareholders a collective veto and the comfort of knowing that no shares will be taken up under a bid unless a majority of those held by independent shareholders have been tendered, the Proposed Bid Amendments remove a substantial coercive element and pressure to tender from the shareholders decision making. The minimum tender requirement will make "any and all" bids illegal, and render partial bids much more difficult to effect and much less frequent in practice. The minimum tender requirement will also make it impossible for a bidder to waive a minimum tender condition, although conditions that require tenders of more than 50% will be capable of amendment to reduce them to not less than 50% plus one share.
Minimum Extension Requirement
Under the existing regime, bidders may take up shares at the expiry of bids where all conditions have been satisfied or waived, with no obligation to extend the period of time for tenders by "undecided" shareholders. This creates an obvious further element of coercion for shareholders, who must weigh the risk of not accepting an otherwise undesirable offer (or selling in the market) and being "trapped" in a less liquid investment with a controlling shareholder, having forgone both the liquidity and the implied takeover premium in the bid. The Proposed Bid Amendments attempt to limit, if not eliminate, this coercion by mandating a requirement that all bids be extended for at least 10 days following the satisfaction or waiver of all bid conditions. By eliminating the leverage available to hostile bidders as a result of the coercive elements of no minimum tender thresholds and no extension requirements, the Proposed Bid Amendments can be expected to lead to a lessening of successful hostile bid activity and an increase in negotiated transactions. Whether or not that proves to be the case, these two new requirements will clearly reduce tender pressure on public minority shareholders, and provide target boards with the additional comfort of knowing that no bid can succeed unless it is accepted by holders of an independent majority of the target shares.
The Future of Defensive Tactics
The Proposed Bid Amendments, and the CSA publication accompanying them, are silent on the likely regulatory response to takeover bid defences, notably SRPs, under the new regime. Given that the proposed minimum tender period is substantially longer than the time period historically permitted by regulators to implement alternative transactions, it is likely that conventional Canadian SRPs will fall into disuse for their primary historical purpose. They should still retain their utility, to limit and curtail "creeping" control activity through private acquisitions and open market accumulations that are exempt from full blown takeover bid compliance (including the Proposed Bid Amendments). SRPs could also be useful in extreme cases where a target board can make a compelling case that it needs more than 120 days to complete an alternative value maximization exercise.
1. There are other proposed rules that could result in a reduction in tender periods for the initial hostile bid where the board approves and announces a competing "white knight" transaction, whether another takeover bid or an alternative transaction requiring target shareholder approval. In addition, subsequent competing bids would benefit from the same reduction in the tender period as that agreed to for prior bids.
2. Notably, this requirement and the Minimum Extension Requirement discussed below are applicable equally to hostile and friendly bids, and cannot be waived by targets.