Thursday, October 29, 2015
Prof. Anita Anand

Proposed takeover rules will produce winners and losers and need rethinking, according to a new report by Prof. Anita Anand for the C.D. Howe Institute. In “The Future of Poison Pills in Canada: Are Takeover Bid Reforms Needed?,” Prof. Anand assesses the rules proposed by the Canadian Securities Administrators (CSA), and recommends a key change: do not implement the proposed 120-day bid period and retain the current 35 day period.

“The investor protection rules that apply in corporate takeover bids may soon undergo major changes in Canada,” says Anand. “Provincial and territorial securities regulators have proposed a new national framework for the regulation of takeover bids and this framework has significant ramifications for target shareholders, bidders and targets themselves.”

Find out more and read the report on the C.D. Howe Institute website.

In conjunction with the report, Prof. Anand also wrote a commentary in the Financial Post about this issue ("Dump the 120-day takeover rule," October 29, 2015).

Read the commentary on the Financial Post website, or below.

Dump the 120-day takeover rule

By Anita Anand

October 29, 2015

This month, Suncor Energy Inc. made a hostile bid to acquire Canadian Oil Sands and in particular its 37 per cent in Syncrude Canada Ltd. The Suncor bid raises questions about the appropriate legal regime governing takeover bids in Canada. Securities regulators have not historically operated on the basis of harmonized rules governing defensive tactics that a target board, like Canadian Oil Sands, can adopt prior to or in the face of a bid. This disunity may fade away as the Canadian Securities Administrators (CSA) stand poised to adopt a new takeover bid regime.

Under the CSA draft rules, a takeover bid would have an irrevocable 50 per cent minimum tender condition. Once met, the rules would require an additional 10-day right to tender for undecided shareholders. The 50 per cent condition is commendable because it places the decision about the success of the bid in the hands of outside shareholders. The bidder must obtain a “majority of minority” approval before it can take up the target’s shares. The advantage is that a minority of shareholders cannot force the sale.

Another, less appealing, aspect of the CSA proposal is the requirement that the bid remain open for a minimum of 120 days. The 120-day period is target friendly, giving target boards more leeway to evaluate a bid, search for other options or recommend the bid’s rejection. But hostile bidders will feel exposed under the 120-day regime because their bid remains open and any white knight can come forward and thwart the bid. Furthermore, financial resources that they have secured to purchase the target’s shares remain in limbo.

The 120-day bid period will likely deter bids, or at least deter hostile bids, from occurring, which is optimal from neither an economic efficiency nor an investor protection standpoint. The 120-day requirement will cause uncertainty in the market to the detriment of both target shareholders and bidders.

On the positive side, the CSA proposal will create more certainty, especially with regards to shareholder rights plans or “poison pills.” For example, the proposal will sound the death knell for the “just say no” pill, whereby the bidder can remove the pill only via a proxy contest. The proposal will also prevent bidders from being able to corner target shareholders into the undesirable choice of selling into an underpriced offer or being stuck with illiquid shares.

Despite the lengthy bid period contemplated, more certainty regarding poison pills is commendable especially after conflicting case law from commissions across the country. The problem with pills, even those ratified by shareholders, is that they take the decision about whether a bid proceeds out of the hands of shareholders. They leave the decision with management and the target board, who may not act in shareholders’ best interests in the face of a change of control.

Some will argue that directors will be hard pressed not to act in the best interests of the corporation: after all, that is their legal duty under corporate law. However, the question is not whether managers and the board will in fact put their own interests ahead of those of the corporation and its stakeholders, but whether they have the ability to do so. As long as management and the board have the opportunity to prioritize their own interests above the corporation’s, management entrenchment remains a relevant concern.

One could ask: why not then strip senior management and the board of their powers outside of the takeover context and let shareholders make all major decisions? The answer is that takeover contests are not the ordinary course of business. Given that there is a change of control on the immediate horizon, takeovers intensify the threat of management entrenchment as directors and senior managers contemplate a potential loss of board seats and/or employment. Thus, the applicable legal regime should minimize the impact of potential conflicts of interest at the board and senior management levels.

In sum, a 120-day bid period is too long: it disadvantages both target shareholders and bidders by making bids more expensive while benefitting the board and management of the target. Such a lengthy period will ultimately deter some takeover bids from occurring. Now why would anyone wish to implement a rule that has such a negative effect on the market, making bids like Suncor’s a rarity if not a relic of the past?