Uncertainty over use of poison pill

Off the Record value-enhancing transactions (would be made) more difficult or inappropriately discouraged,” by arrangements in which “tactical shareholder rights plans could, as a general matter, operate to prevent lock-ups and permitted market purchases.”

The second part was the regulators’ view that some tactical plans “can be confusing to investors and market participants,” and besides would serve “no useful purpose.”

The final part focuses on the regulators’ conclusion that the rights plan constitutes an “impermissible defensive tactic.” They said it will be a “rare case” in which a tactical plan will be permitted to interfere with established features of the takeover bid regime. Those features include the opportunity for bidders and shareholders to make decisions in their own interests regarding whether to tender to a bid by entering into lock-up agreements.

How did we get here? One starting point is the May 2016 decision to implement a new takeover bid regime with little reference to poison pills. (Three years earlier Quebec’s Autorité des marchés financiers issued a consultation paper calling for an expanded role for defensive tactics and a greater emphasis on the board’s business judgment.)

The “implicit” understanding at the time was that regulators would get out of the business of adjudicating rights plans given the new takeover rules that required a deal to be completed in 105 days, with a 10-day extension, and a 50-per-cent minimum tender were more generous than what was allowed under a so-called permitted bid. (But issuers still kept seeking shareholder approval for rights plans.)

But gaps remain between what was allowed under old rights plans and the workings of the new takeover rules. Previously, bidders weren’t allowed to purchase another five per cent (if it took them above 20 per cent) until the pill expired; now the regulators are saying the five per cent is available immediately.

“Under the old regime, participants had confidence that rights plans would prevent a five-per-cent creep and hard lock-ups; now there is some uncertainty,” said Fraiberg. “If this interpretation is correct, the irony is that the new regime potentially provides less board protection,” than previously.