SECURITIES REGULATION AND IR

On March 14, 2013, the Canadian Securities Administrators (“CSA”) published for comment a proposal relating to the regulation of security holder rights plans in all CSA jurisdictions as part of a broader review of defensive tactics issues (the “CSA Proposal”). On the same day, the Autorité des marchés financiers (“AMF”) published An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics, a consultation paper proposing an alternative regime that regulates all defensive tactics (the “AMF Proposal”). However, the AMF has indicated that while it has initiated its consultation to provide a forum for discussion and seek comments on the AMF Proposal, it intends to maintain a cohesive and harmonious approach across the CSA regarding take-over bids and the regulation of defensive tactics. 

Rights plans, commonly known as ‘poison pills’, are a defensive tactic frequently adopted by Boards of target companies in anticipation of or in response to take-over bids that are unsolicited and not supported by the target Board. Under the current regime, which has been in place for almost 27 years but is often criticized for being too ‘bidder-friendly’, securities regulatory authorities will generally cease trade a rights plan after a specific time if so requested by a hostile bidder. The CSA Proposal, if implemented, would allow a rights plan to remain in place if majority security holder approval of the plan is obtained within specified times.

The basic elements of the CSA Proposal are:

• rights plans would become effective upon adoption by the Board, but must be approved by security holders within 90 days of such adoption or, if adopted after a take-over bid is made, within 90 days from the date such bid was commenced;
• rights plans must be approved annually by a majority vote of shareholders to remain effective;
• shareholders would be able to terminate a rights plan at any time by majority vote;
• shares held by the bidder and its joint actors would be excluded from a security holder vote to adopt, maintain or amend a rights plan;
• any material amendments to a rights plan must be approved by security holders within 90 days of the date of adoption;
• a rights plan would only be effective against take-over bids or an acquisition by a person of securities of the issuer, and could not be triggered by a shareholder vote; and
• if a rights plan is waived or modified with respect to one take-over bid, it must be waived or modified with respect to any other take-over bid.

While the CSA Proposal indicates that the CSA is of the view that the decision to adopt a rights plan should ultimately rest on shareholders, the AMF Proposal provides greater deference to Boards of target companies in the context of unsolicited take-over bids. The AMF believes that unless security holders are deprived from considering a bona fide offer due to the Board’s inadequate management of its or management’s conflicts of interest, and absent any unusual circumstances that demonstrate an abuse of security holders’ rights or that negatively impact the efficiency of capital markets, securities regulators should consider that defensive tactics are not prejudicial to the public interest and limit their intervention accordingly.

The AMF is of the view that, in assessing the reasonableness of the target board’s actions with respect to the proposal or implementation of a defensive tactic, it would be appropriate to consider, among other things:

• the establishment of a special committee comprised of independent directors with the mandate to consider and review the bid and make a recommendation to the Board;
• the appointment of independent financial and legal advisors to assist the special committee;
• the conclusion of the special committee and the Board that, based on their review of the bid and on the advice of legal and financial advisors, it is in the best interests of the company to implement a defensive tactic; and
• the completeness of the disclosure provided to security holders in the directors’ circular, and in any other form of communication used by target directors, on the process followed to provide their recommendation and their reasons in support of the defensive tactic.

The AMF Proposal also proposes to amend the current take-over bid regime to require an irrevocable minimum tender condition for bids on all securities of a class, and for any partial bids, of more than 50% of the outstanding securities owned by persons other than the bidder and those acting in concert with the bidder. Furthermore, the AMF’s proposed take-over bid regime would require that the bid be extended for an additional 10 days following the public announcement that such minimum tender condition has been met. The AMF believes that these two proposed changes would allow security holders to essentially ‘vote’ on an offer and would be an effective substitute to the security holders’ approval of a rights plan, or an amendment thereto, under the CSA Proposal. These changes would also have the benefit of applying to all bids and not only those that trigger a rights plan.

Comments on both the CSA Proposal and the AMF Proposal are due by June 12, 2013. Given the nature and scope of the proposals and the varying viewpoints of commentators, a further consultation period before the new rules are finalized is very much a possibility.

Hellen Siwanowicz is a Partner at McMillan LLP and gratefully acknowledges the assistance of Sandra Zhao, an Associate at McMillan LLP, in preparing this article.