Canadian regulators don’t tinker frequently with the technical nuts and bolts from the country’s takeover regime. But new rules to limit using poison pills will disrupt the strategies and tactics we’ve become used to in Canadian takeover battles.
Big change is really a afoot, lawyers say.
“The takeover amendments are expected to profoundly alter the manner in which takeover bids are conducted, and the securities regulators’ role in those transactions,” write lawyers from Goodmans LLP in a note about the rules.
That’s one of many, many law firm bulletins which have flooded into my inbox because the rule changes were announced.
To make sure, while the new rules will probably allow it to be harder to mount unsolicited bids in Canada, they will not make hostile bids impossible. The boards of target companies still aren’t permitted to “just say no” to a hostile bid. Instead the new rules impose a much longer mandatory tender period. Which will give target boards more time to line up alternatives. It will also expose hostile suitors towards the risk competing bidders will go into the mix.
Wanna-be suitors and could-be targets will get creative, lawyers expect.
Some lawyers predict suitors will avoid the new tougher rules by launching proxy battles to consider charge of a target company’s board. Other lawyers suggest target companies might protect themselves in proxy battles by using “voting pills” that expand voting rights.
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And lawyers say poison pills aren’t dead simply because they might still be used to protect target companies from “creeping bids” made through transactions which are exempt from the usual takeover rules, for example normal course purchases or private agreements.
The amendments created by Canadian Securities Administrators, an umbrella group that co-ordinates policy across Canada’s network of 13 provincial and territorial securities commissions, will lengthen to 105 days from 35 days the period an offer must remain open for acceptance with a target company’s shareholders. The bid should also seek at least Half of the target companies shares, and also the bid should be extended by a minimum of 10 days when the bidder’s the weather is satisfied.
In mention of new requirements, Lawyers at Davies Ward Phillips & Vineberg LLP are calling the system “50-10-105.”
The Davies Ward lawyers explain that the new rules don’t ban the use of poison pills, but issuers will need to be careful about once they use them. “The CSA warns that it is ready to examine those things of target boards considering the amended bid regime to find out whether they are abusive of securityholder rights,” they write. “We expect that the utilization of shareholder rights plans to further postpone take-up with a hostile bidder will be met by swift intervention from securities regulators.”
Lawyers from Osler, Hoskin & Harcourt LLP say there may be rare circumstances in which a regulator allows a poison pill to delay an offer beyond 105 days, “such as where a clear most of shareholders have approved the rights plan in the face of the bid, or where there have been late-breaking developments in an auction that justify supplying the target issuer with additional time.”
Lawyers at Torys LLP suggest the brand new rules might actually encourage greater co-operation between bidders and target boards. The longer 105-day period generates uncertainty for hostile bidders because it makes it easier for an interloper to thwart the bid, and that gives target boards negotiating leverage, the Torys lawyers write. “We anticipate that hostile bidders will perceive the benefit of engaging more with target boards who will be capable of lessen the minimum tender period for friendly transactions.”
Lawyers at Norton Rose Fulbright LLP argue the new rules will spark proxy battles instead of takeover contests, particularly for resource companies. The soon-to-be-extinct 35-day period gives bidders an “off-ramp” to pull a bid if commodity prices tank. The new 105-day period, which takes effect in many jurisdictions on May 9, means bidders need to invest in a fully-financed bid that would remain open in excess of three months – a long time within the commodities world.
An obvious way to avoid the risk is to seek board control instead of majority ownership of the target company’s shares, the Norton Rose Fulbright lawyers say. “We feel the amendments may lead to an increased utilization of proxy fights and bully M&A tactics by acquirers to effect acquisitions of commodity issuers in circumstances where they’d have otherwise done this by hostile bid under the current (and shortly to be amended) take-over bid regime.”
Financial Post
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