The future of poison pills in Canada: are takeover bid reforms needed?

• Author: Anand, Anita

The rules regarding shareholder rights plans, also known as "poison pills", ensure that boards of directors facing a hostile takeover bid can retain a poison pill for a period of time in order to search for other potential offers. Over the years, the period of time has grown in length from twenty to thirty-five days and the Canadian Securities Administrators (CSA) have recently proposed a 120-day period during which takeover bids would remain open. In light of the historical rationale of takeover bid law to protect the interests of target shareholders, this article argues that the legal regime should not allow an extensive bid period of 120 days. While other aspects of the CSA proposal are sound, a lengthy bid period disadvantages both target shareholders and bidders and will ultimately deter bids from occurring.

Les regimes de protection des droits des actionnaires, autrement connus sous le nom de >, visent a proteger les actionnaires d'offres d'achat hostiles en permettant au conseil d'administration de se prevaloir d'une periode de temps extraordinaire afin de considerer de nouvelles soumissions. Au fil des annees, cette periode est passee de vingt a trente-cinq jours. Recemment, les Autorites canadiennes en valeurs immobilieres (ACVM) ont propose d'etablir une periode fixe de 120 jours durant laquelle les actionnaires pourraient considerer toute offre d'achat soumise. Compte tenu des raisons historiques ayant pousse a reglementer les offres publiques d'achat, a savoir proteger certaines classes particulieres d'actionnaires, cet article soutiendra que notre regime juridique devrait se garder de decreter une periode de soumission aussi longue. Bien que d'autres elements de la proposition de l'ACVM s'averent prometteurs, une periode prolongee de soumission aura pour effet de desavantager a la fois les actionnaires cibles et les soumissionnaires, et finira par dissuader ces derniers de se preter au processus d'offres.

1. Takeover Bid Law A. Corporate Law B. Securities Regulation II. Poison Pills A. Underlying Rationale B. Applicable [jaw III. Reform of Takeover Bid Regime? A. Mandate of Securities Regulators B. CSA Proposal Conclusion Introduction

   When faced with an unwanted acquisition proposal, a target board of directors may seek shareholder approval for a shareholder rights plan or "poison pill" to prevent acquisitions of its securities above the twenty per cent legislative takeover bid threshold. (1) The pill provides time for the target board to negotiate with the bidder for an enhanced bid, to solicit competing bids, or to propose some other alternative to its shareholders. (2) In the absence of a higher offer from the bidder and no alternatives coming forward, case law says that "the pill has got to go" (3) and the original bidder can proceed with its proposed acquisition transaction. (4) But poison pills, even those ratified by shareholders ex ante, can remove the decision about whether a bid proceeds from the hands of shareholders, leaving it to rest with incumbent target management and the board, who may not necessarily act in the shareholders' best interests.

   The Canadian Securities Administrators (CSA) recently proposed a new framework for the regulation of takeover bids. (5) The framework contains the most significant reforms to the takeover bid regime in Canada in decades. (6) Under the proposal, takeover bids would have an irrevocable fifty per cent minimum tender condition and could remain open for a minimum of 120 days. (7) The fifty per cent condition means that a bid would succeed only if a majority of independent shareholders tendered their securities in response to the bidder's offer (securities of the bidder and its joint actors would not be counted in the fifty per cent). Once the condition is met, the proposed rules would require an additional ten-day right to tender for undecided shareholders.

   In addition to containing substantive amendments to the legislative regime, the CSA Proposal represents a united front for the provincial and territorial jurisdictions that comprise the CSA. Indeed, some may legitimately view the CSA Proposal as a watershed moment in Canadian securities regulation. This observation is especially true given that on many issues--enforcement, the exempt market, and, until now, takeover bids--securities regulators across Canada have been unable to develop comprehensive rules with which all regulators agree. The CSA Proposal was released for comment but the CSA will likely be hard-pressed to amend the proposal in a material way given the difficulty in reaching the current compromise. (8) Thus, the CSA Proposal may well represent the takeover bid law that will ultimately apply across the country.

   This article argues in favour of the majority approval requirement because it effectively implements collective decision making akin to a shareholder vote. The 120-day bid period, however, would cause uncertainty in the market to the detriment of both target shareholders and bidders. While the 120-day period is target friendly--giving acquisition target boards more time to evaluate a bid, search for other options, or ultimately recommend the bid's rejection--hostile bidders would be unreasonably exposed. Their bid for the target would remain open for a much longer period than the current 35-day bid period and would allow considerable time for a white knight bidder to emerge with an alternative bid. Further, financial resources that the bidder has allocated to purchase the target's shares remain in limbo while the 120-day period transpires. In short, there appears to be little reason, at least within the confines of the objectives of securities regulation to protect investors and maintain market efficiency, to lengthen the bid period.

   Part I examines relevant Canadian corporate and securities law that governs boards of directors in the takeover bid context. It also compares Canadian law with US law, which adopts a conspicuously different approach to the duties of the target board. Part II sets forth the rationale for poison pills, arguing that they may run contrary to the interests of target shareholders. Part III analyzes the CSA Proposal, contending that target shareholders should be able to decide for themselves (i.e., by tendering) whether a bid will succeed. To be clear, this article analyzes poison pills in relation to takeover bids that occur pursuant to securities legislation and that do not fall within an existing legislative exemption (9) or another aspect of business law (such as arrangements under the corporate statute (10)).

   Before proceeding, an argument grounded in macroeconomic issues bears mentioning. Some argue that takeover bid law contributes to a "hollowing out" of the greater Canadian economy because directors of target boards have limited tools to defend against a takeover bid. (11) This argument may have merit, but even if it does, securities regulation is arguably an inappropriate legislative regime in which to address it. Statutorily, securities regulation seeks to protect investors and is a matter of provincial jurisdiction. (12) By contrast, issues relating to the health and welfare of the Canadian economy fall squarely under the federally enacted and administered Investment Canada Act. (13) In other words, a separate legislative regime exists to deal with foreign takeovers of Canadian firms. Admittedly, the federal regime has its weaknesses, including that it only applies to certain transactions that are above the review threshold and it also contains an ambiguous "net benefit" test. These weaknesses in the ICA require attention federally as securities regulators have no jurisdiction here, constitutionally speaking. Moreover, as will be evident from the discussion below, it is likely inconsistent with the board's fiduciary duty for it to prioritize concern for the Canadian economy above its duty to act in the best interests of the corporation.

   Even if one believes that the securities regulatory regime is the proper venue in which to prevent a hollowing out, it is not clear that takeover bids, generally speaking, are a net negative for the domestic economy. On the contrary, many argue that corporate takeovers generate positive gains, including benefits for target shareholders in the form of premia over the pre-announcement price paid for securities. (14) In other words, the economic advantages of takeover bids to shareholders of the target, and to the economy generally, must be weighed against the alleged negative effects of foreign takeovers. (16) Once again, as it is primarily concerned with investor protection, the securities regulatory regime is not the proper forum in which the debate about hollowing out should occur.

1. Takeover Bid Law

   This section analyzes the complex law relevant to takeover bids in Canada, elucidating the importance of two areas: corporate law and securities regulation. It further examines the relationship between the two in terms of takeover bids and poison pills.

   1. Corporate Law

      The duties of directors in the context of a takeover bid can be understood first by referring to corporate law, under which directors' basic statutory obligation is to discharge their fiduciary duties honestly and in good faith with a view to the best interests of the corporation. Directors must also exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. (16) This duty, which applies to boards of public and private corporations, is consistent across provincial corporate statutes in Canada. It must be read in light of the recent decision BCE Inc. v. 1976 Debentureholders, (17) in which the Supreme Court of Canada explained that the duty is owed to the corporation rather than to a particular stakeholder group within the corporation. (18) The Court explained that in any given instance, which would include a takeover bid, the board must have regard to "all relevant...