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Canadian Securities Regulators Propose New Regimes for Shareholder Rights Plans

March-15-2013

Lawyer Jonathan Feldman, Neill May, Michael Partridge
Area Corporate Finance and Securities

Summary

On March 14, 2013, Canadian securities regulators published two separate proposals that would significantly change the rules concerning common defensive tactics in the face of hostile take-over bids and the manner in which contests for corporate control are regulated and conducted.

The Canadian Securities Administrators’ (CSA) proposals are outlined in its proposed National Instrument 62-105 Security Holder Rights Plans (“NI 62-105”).  The CSA’s proposals would provide the board of an issuer targeted by a hostile bid with greater flexibility to use a shareholder rights plan, or “poison pill”, as a defence tactic. In place of the current system, where poison pills can effectively only be used to facilitate the target board’s efforts to achieve a superior value transaction, the new rules would provide target boards with the flexibility, with shareholder support, to “just say no” to a hostile bid.

Québec’s securities regulatory authority, the Autorité des marchés financers (AMF), also published a consultation paper regarding defensive tactics, which would provide even greater flexibility to target boards.

The comment period for both the CSA and AMF proposals ends on June 12, 2013.

Highlights of NI 62-105

NI 62-105 proposes a framework where a rights plan can provide enduring protection from a hostile bid provided that it receives shareholder approval (unlike the current system where rights plans are not permitted to endure, and are typically cease traded by securities regulators after a relatively short period of time).

Establishment and Approval of a Rights Plan

Under NI 62-105 a rights plan would continue to be effective from the date it is adopted by the company’s board of directors. However, in order for the plan to remain effective it must be approved by shareholders within 90 days of its adoption by the board (or, if implemented after a take-over bid has been launched, within 90 days of the date of the bid). A bidder and its joint actors are excluded from the shareholder vote required to adopt, maintain, amend or terminate a rights plan.

Renewal and Amendments to a Rights Plan

A rights plan will remain effective if it is approved no later than at each annual meeting following the initial shareholder approval. Material amendments to a rights plan are treated as if they were a new plan: they are effective as of the date they are adopted by the board, but must be approved by shareholders within 90 days of their adoption.

Termination of a Rights Plan

A rights plan will terminate automatically if the board fails to receive the requisite majority approval of the shareholders within the requisite 90 day time-frame. In addition, shareholders may terminate a rights plan by a majority vote at any time. This allows a bidder to challenge the rights plan by requisitioning a meeting of the shareholders to approve the termination of the plan and allows shareholders to remove a rights plan if they wish to accept a take-over bid that the plan is blocking.

If a rights plan was not approved or is terminated, the company may not adopt a new rights plan for a period of 12 months except with prior shareholder approval. However, a rights plan can be adopted within that 12 month period if a formal take-over bid is made and shareholder approval is obtained within 90 days.

Application of a Rights Plan

If a target board waives or modifies a rights plan in favour of a bidder, the rights plan must be waived or modified with respect to all take-over bids. This ensures that the rights plan is applied consistently and the target board is not able to discriminate between bidders. The rights plan is also only effective in respect of acquisitions of securities of the company and does not apply to proxy contests.

Highlights of Alternative Approach Proposed by the AMF

The consultation paper published by the AMF provides boards of target companies even more latitude than that provided by NI 62-105.  The AMF proposes replacing the current National Policy 62-202 Take-Over Bids - Defensive Tactics with a new policy that would recognize the fiduciary duties of directors in responding to a hostile take-over bid and only allow regulator intervention on the grounds of public interest. This would essentially allow target boards to implement a poison pill without shareholder approval for an unlimited period of time. Louis Morisset, the superintendent of securities markets in Québec, has stressed that, as a matter of policy, the AMF recognizes that boards of directors have fiduciary duties and intervention should be limited to clear cases of abuse.

The AMF proposal was published for market participants’ consideration as an alternative to NI 62-105. If it does not receive broad support, the AMF will support the changes proposed in NI 62-105.

Conclusion

The proposed regimes contemplated by NI 62-105 and the AMF proposal represent a fundamental shift in the treatment of shareholder rights plans in Canada by giving target boards significant discretion to maintain a poison pill in the face of a hostile bid that the board determines is not in the best interests of the corporation if shareholders have approved the implementation of the poison pill. The fight over the continuation of poison pills in Canada will shift from hearings in front of the securities regulators to proxy battles over their implementation or termination.

If these changes are implemented, Canadian companies may be less vulnerable to hostile take-over bids and give target boards more leverage when negotiating with hostile bidders while leaving shareholders with the final say on whether a rights plan should be adopted or maintained. On the other hand, giving target directors greater discretion to resist unsolicited bids could decrease the number of offers for Canadian companies or dampen a target’s enthusiasm for seeking out superior alternatives when faced with a hostile bid, thereby ultimately reducing the opportunities to maximize shareholder value.

For further information on these proposals, please contact any member of our Corporate Securities Group.