New rules would discourage takeovers

This week, the Canadian Securities Administrators (CSA) published draft rules under which a takeover bid would have an irrevocable 50% minimum tender condition. Once met, the rules would require an additional 10day right to tender for undecided shareholders.

The bid, however, would also remain open for a minimum of 120 days. The 50% condition is laudable, because it offers effective decision-making capacity on the part of shareholders. The 120-day requirement, however, would cause uncertainty in the market, to the detriment of target shareholders, and of bidders.

The CSA proposal seeks to strike a balance that might lessen the prominence of litigation relating to shareholder rights plans or “poison pills.” The bidder must obtain a “majority of minority” approval before it can take up shares; securities of the bidder and its joint actors would not be counted in the 50%. The advantage is that a minority of shareholders cannot force the majority to sell control.

The proposal would therefore likely sound the death knell for some pills such as the “just say no” pill, whereby the bidder can remove the pill only via a proxy contest. But it would prevent bidders from being able to corner target shareholders into the undesirable choice of selling into an underpriced offer or being stuck with illiquid shares.

The 50% minimum tender condition weighs in favour of shareholder decision-making. The rationale is that in a hostile bid shareholders ought have the opportunity to tender. This approach allows shareholders the ability to decide the fate of their investment in a corporation: Why should a board of directors have the ability to make this decision for shareholders?

In an era where shareholders are increasingly sophisticated, it makes sense to allow bidders to speak to target shareholders directly — especially in the case of poison pills that have not been approved by shareholders.

While the CSA proposal is consistent with the interests of target shareholders in recommending a 50% condition, the timeframe proposed by the CSA proposal seems ill-conceived. Unlike current law, which allows bids to be open for 35 days, under the CSA proposal the bid could be open for a minimum of 120 days and could be extended for ten days.

The target board could reduce the 120-day period, as it might in a friendly transaction, but if it does, the bid must remain open for a minimum of 35 days. Once a target board reduces the period, all bids would be subject to the same period.

The 120-day period is target friendly, giving acquisition target boards more, much more, time to evaluate a bid, search for other options or ultimately recommend the bid’s rejection. But hostile bidders will likely feel exposed under the 120-day rule, because their bid for the target remains open and any white knight could come forward during that time. Further, financial resources that they have allocated to purchase the target’s shares remain in limbo while the 120-day clock ticks.

The 120-day bid period will, in short, deter bids, or at least deter hostile bids, from occurring, which is optimal from neither an economic efficiency nor an investor protection standpoint.

It is counterintuitive for takeover bid rules to have the effect of discouraging non-negotiated bids. The justification for a four-month bid period, including the negative implications for target shareholders, bidders and takeover bids generally, has not been made. There is little reason, at least within the confines of the objectives of securities regulation, to lengthen the current bid period.

While the CSA is to be congratulated for reaching a compromise in its draft rules, it bears mentioning that, because Canada has no national securities regulator, each provincial and territorial jurisdiction must coordinate under the aegis of the CSA in order to ensure simultaneous implementation of the new rules.

A seamless process this is not.

Hostile bidders will likely feel exposed under the 120-day rule