This year, the Canadian securities regulator will propose significant changes to the takeover bid regime with the goal of providing target boards more time to respond, but will it serve to actually dampen merger and acquisition activity in the country?
In Canada, a takeover bid made directly to shareholders is the only way to acquire legal control of a public company without the consent of the target board.
The current regulatory regime has attracted criticism that it unduly favours bidders over targets and their shareholders.
It is anticipated the Canadian Securities Administrators will release in the late fall a revised proposal that will incorporate comments received during a spring consultation period. It could come into force in early 2016.
There will likely be three main rule changes:
• Meet a minimum tender requirement where bidders must receive tenders of more than 50 per cent of the outstanding securities that are subject to the bid (excluding securities owned by the bidder itself or its joint actors);
• Be extended for an additional 10 days after the minimum tender requirement is met and all other terms and conditions of the bid have been complied with or waived; and
• Remain open for a minimum deposit period of 120 days, unless the target board states in a news release an acceptable shorter deposit period of not less than 35 days, in which case the shorter period would apply to all concurrent takeover bids.
Under the current regime, non-exempt takeover bids must remain open for 35 days and are not subject to any minimum tender requirement or an extension requirement once the bidder has taken up deposited securities.
“The third change is causing more discussion and concern on our part,” says Aaron Atkinson, a partner with Fasken Martineau DuMoulin LLP and co-author of the “2015 Canadian Hostile Take-Over Bid Study.”
“The defence tactic a board used was to put in a rights plan and effectively that would extend the bid period from 35 days to 45 or 60 days. Now we’ve got a situation where that period is going to be extended substantially,” says Atkinson.
With more time built in, says Atikinson, it is possible bids may attract more competition, and as a bidder’s deal also has to be fully financed, they will have to get financing and pay standby fees for a potential 120-day period. He says it could translate into a decrease in M&A activity.
York University governance and law professor Richard Leblanc, who teaches takeovers at Harvard University, agrees, saying it gives the target company four months to “entrench and resist” and is more management friendly versus shareholder friendly.
“Generally, the market for corporate control is you want freedom, not artificial barriers like shareholder rights plans. You should not make an inefficient company artificially protected,” he says.
“Elongated periods, staggered boards, dual-class shares, advance notice — all are devices by law firms retained by management to frustrate the market for corporate control.”
He says the duty of a director should be to the interest of the company and its shareholders, not management.
“These entrenchment mechanisms are largely frowned upon by investors. If shares are trading at $20 and there is an offer for $25 or $30, I don’t want to wait 120 days. It deters people.”
In-house lawyer Renato Pontello has dealt with hostile takeovers in the semiconductor industry. He says 90 days should be sufficient and says a slightly longer period may actually prove to see better bids, as opposed to low-ball offers.
“I think given the amount of financing involved and the interloper risk of having a white knight appear, we’re less likely to see hostile bids being launched,” he says. “It may very well result in the hostile bid initial bear-hug letter being a little more sophisticated than in the past and likely see bids really represent the true value of the target company.”
Pontello says there should also be more time for the director’s circular to be filed. It’s currently 15 days.
“From an in-house counsel perspective, you probably want to have at least a good draft waiting in the wings in the event there is a takeover bid,” he says.
Atkinson says the proposed rules would give more power to boards.
“The question we’re struggling with is does it mean bidders may choose not to bid at all rather than going into this substantially increased uncertainty?” he says. “The regulators recognize that there is a disciplinary function that a hostile bid regime creates because it presumably keeps management and boards on their toes. If you weaken the threat in the eyes of the board, we don’t know how boards and management teams may react in light of that.”
Bradley Freelan, of Faskens and Atkinson’s co-author, says changing the rules won’t necessarily translate into more friendly deals — it might translate into 14 fewer hostile bids a year and an even smaller number of friendly M&A deals that happen now.
“I don’t think anybody thinks that’s a good idea either,” he says.
In the Faskens analysis of all 143 hostile takeover bids for control of Canadian-listed issuers during 2005-2014, the hostile bidder won 55 per cent of the time.
“So, a hostile bidder success rate of 55 per cent coupled with a target remained independent rate of 68 per cent suggests to us that, while the playing field may not be perfectly level, it is not as un-level as one may have thought. Therefore, you may not want to make drastic changes to the minimum-bid period as are being proposed,” he says.
Atkinson says 35 days is probably not enough time, but he questions whether extending it to 120 days is really what’s good for shareholders.
Key findings in the the Faskens report include: When initiating a public contest for control, a hostile bidder was successful more than half the time; however, in those circumstances, the sale of the company was by no means inevitable, with targets of these bids remaining independent almost 30 per cent of the time.
“I think the prevailing wisdom before the study came out was that, once a hostile bid was announced, a change of control was inevitable; there was going to be a sale of the target,” says Freelan. “This shows that’s not the case.”
The study also found competitive auction scenarios occurred 37 per cent of the time, but when they did, shareholders were the clear winners, on average getting higher a premium, while the hostile bidder was often left empty-handed, prevailing one-third of the time.
The study showed hostile bidder’s odds also improved when offering cash and a premium.
Shareholder rights plans also proved valuable by buying time and driving competition. A hostile bid for a target that had a rights plan in place was more than twice as likely to face competition.
The board’s support was also a prized asset: Hostile bidders had a near-perfect record when securing the board’s support and fared poorly without it (prevailing on only 22 per cent of contests), particularly when the board’s recommendation was more likely to influence the outcome.
Shareholder activism is also becoming more prevalent, says Leblanc, and it has proven to be effective in improving shareholder value. The cost of a takeover is often a loss of position for management, but, in an activist situation, that’s not necessarily the case.
“We’re moving from takeovers to activism where you don’t have to take over the company or engage in defences but you can just get one or two directors on the board and move an efficient management team and augment shareholder value,” he says.
