Taming hostile takeovers

What’s wrong with the current system of regulations of hostile takeovers put in place in 1986 by the Canadian securities commissions? Well, it is quaint, distorting … and illegal. For instance, empirical results provide clear evidence that the changes in u.S. state laws to increase the power of boards to “just say no” to takeovers have indeed led to far fewer hostile takeovers; but the rate of successful takeovers actually increased and shareholders received a substantially better offer for their shares. In the u.S., boards of directors with enhanced powers have extracted much better deals for their shareholders.

Take the recent case of Inmet Mining Corp. and First Quantum Minerals. Inmet’s board was dead set against a takeover by First Quantum. The latter made a bid; no other bidder has shown up. despite the board’s opposition, Quantum simply put its offer to the shareholders. As enough of them handed in their shares the deal has been done; the takeover was successful. under Canadian regulations, the board of Inmet had no other recourse; it believed that it was not in the long-term interest of Inmet to be acquired by Quantum at the offered price but were powerless to act. That does not make any sense.

Strangely, almost at the same time u.S. states were acting to place legal hurdles in the path of hostile takeovers, Canadian securities commissions were adopting (in 1986) rules to make hostile takeover operations easier to carry out successfully. Foremost among the reasons given for this Canadian initiative was the “protection of the bona-fide interests of the shareholders of the target company.… The takeover bid provisions … should leave the shareholders of the target company free to make a fully informed decision.”

It was a strongly held belief of regulators and a premise of the 1986 regulation adopted by the Canadian securities commissions that management was always in conflict of interest when faced with a bid for its company. Another argument invoked in 1986 assumed the appropriate regulatory approach to takeover bids is to encourage unrestricted auctions.

Whatever dubious merit there might have been to this back in 1986 (and empirical evidence does raise doubts), it now smacks of a time and circumstance that have passed on.

The time has come to modernize the obsolete regulations of take-

Time has come to modernize obsolete regulations of takeovers in Canada

overs in Canada. The provincial securities commissions, co-ordinated through the Canadian Securities Administrators, must bring forth a framework for takeover regulation that is sensitive to the realities of contemporary financial markets and complies with Canadian laws and jurisprudence as well.

Canadian corporate governance already incorporates what activist investors are fighting for in the united States; elimination of staggered boards and separation of power between the chair of the board and the CeO, both governance principles which make it easier to carry out a hostile takeover. Combined with the widespread practice of majority voting for board members, these features of Canadian corporate governance provide shareholders with the means and tools to punish an errant board.

The changes in shareholding since 1987 have been remarkable; as soon as a takeover offer is made public, the financial calculus of present shareholders coupled with the actions of specialized funds transform radically and swiftly the shareholder base of the target company. To consider these new shareholders as the “owners” of the corporation, the sole “deciders” of its fate, needing the benevolent protection of securities commissions against malevolent, conflicted management, seems like an imaginative scenario of times past.

The regulations adopted by securities commissions in 1986 are remarkably disrespectful of the Canada Business Corporations Act and Supreme court jurisprudence. It is time that the CSA aligns its regulations with Canadian law; securities commissions cannot thwart the authority and responsibility of directors to act in the longterm interest of the corporation. Takeovers represent the quintessential decision about the long-term interest of the corporation and of all its stakeholders.

The notion that unrestricted auctions for companies are the best system flies in the face of the Canadian business context. There is rarely an abundance of credible bidders for a particular company. The board needs to be able to bargain for a higher price.

The quaint notion that management is, ipso facto, against the takeover of their company because of inherent conflicts of interest must be updated. Because of the changes in compensation system for executives and board members, the concern has become that management and boards may be too receptive to a takeover offer that may not be in the interest of the corporation and its stakeholders. The potential conflict of interest has switched sides. Securities commissions should be alert to the appearance of that phenomenon and assess measures to limit this sort of conflict of interest.

It is urgent that the Canadian Securities Administrators adopt proposals that bring takeover regulations in line with 21st century financial markets.