New takeover rules limiting poison pills will make it harder to bring hostile bids

Canadian regulators don’t tinker frequently with the technical basics of 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 a afoot, lawyers say.

“The takeover amendments are expected to profoundly change the way takeover bids are conducted, and also the securities regulators’ role in those transactions,” write lawyers from Goodmans LLP inside a note about the rules.

That’s just one of many, many law firm bulletins that have flooded into my inbox since the rule changes were announced.

To make sure, as the new rules will probably make it harder to mount unsolicited bids in Canada, they’re not going to make hostile bids impossible. It’s of target companies still aren’t permitted to “just say no” to some hostile bid. Instead the brand new rules impose a much longer mandatory tender period. Which will give target boards additional time to line up alternatives. It will also expose hostile suitors to the risk competing bidders will enter 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 control of a target company’s board. Other lawyers suggest target companies might protect themselves in proxy battles by utilizing “voting pills” that expand voting rights. 

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And lawyers say poison pills aren’t dead simply because they may still be used to protect target companies from “creeping bids” made through transactions which are exempt from the usual takeover rules, such as 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 time a bid must remain open for acceptance by a target company’s shareholders. The bid should also seek a minimum of 50 per cent of the target companies shares, and also the bid should be extended by at least 10 days if the bidder’s conditions are satisfied.

In reference to the new requirements, Lawyers at Davies Ward Phillips & Vineberg LLP are calling the system “50-10-105.”

The Davies Ward lawyers point out that the new rules do not ban the use of poison pills, but issuers will need to be careful about when they use them. “The CSA warns that it’s ready to examine those things of target boards in light of the amended bid regime to determine whether or not they are abusive of securityholder rights,” they write. “We expect the utilization of shareholder rights plans to further postpone take-up by 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 obstruct an offer beyond 105 days, “such as where a clear majority of shareholders have approved the rights plan in the face of the bid, or high happen to be late-breaking developments within an auction that justify providing the target issuer with a lot more time.”

Lawyers at Torys LLP suggest the brand new rules might actually encourage greater co-operation between bidders and target boards. The more 105-day period generates uncertainty for hostile bidders since it makes it easier to have 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 reduce the minimum tender period for friendly transactions.”

Lawyers at Norton Rose Fulbright LLP argue the brand new rules will spark proxy battles rather than takeover contests, designed for resource companies. The soon-to-be-extinct 35-day period gives bidders an “off-ramp” to drag a bid if commodity prices tank. The new 105-day period, that takes effect in most jurisdictions on May 9, means bidders need to commit to a fully-financed bid that would remain open in excess of three months – a long time within the commodities world.

An obvious way of preventing the risk would be to seek board control rather than majority ownership of the target company’s shares, the Norton Rose Fulbright lawyers say. “We feel that the amendments may result in a heightened use of proxy fights and bully M&A tactics by acquirers to effect acquisitions of commodity issuers in circumstances where they would 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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