On March 14, 2013, the Canadian Securities Administrators (“CSA”) published for comment proposed National Instrument 62-105 Security Holder Rights Plans (the “Proposed Instrument”) and its related Companion Policy. In a somewhat controversial move from the status quo, the CSA have proposed moving closer to Delaware’s more director centric position on target board control over shareholder rights plans (“Rights Plans”), more commonly known as “poison pills”. Current Canadian securities regulatory decisions pursuant to National Policy 62-202 Take-Over Bids – Defensive Tactics (“NP 62-202”) have generally meant that challenges to poison pills by bidders have been largely successful, except in some cases where shareholders have approved poison pills in the face of a specific unsolicited or hostile bid. In these situations, shareholder approval of the poison pill has been viewed as a de facto rejection of the take-over bid by shareholders. While falling short of U.S. tolerance for poison pills which permit a target board to “just say no” to unsolicited or hostile bids (which reached a high water mark in the controversial Airgas decision1), the CSA’s proposal could enable Canadian target boards to say “no for now” within shareholder approved limits. As with most matters dealing with enhanced defensive tactics, the devil is in the detail.
Purpose of the Proposed Instrument
According to the CSA, the purpose of the Proposed Instrument is to: (1) establish a comprehensive regulatory framework for Rights Plans in Canada that provides target boards and shareholders with greater discretion over the use of Rights Plans; (2) reduce the circumstances where regulatory intervention may be necessary; and (3) maintain an active market for corporate control. The following are some of the more significant provisions of the Proposed Instrument.
Under the Proposed Instrument, ultimate control over the adoption, renewal, termination and modification of a Rights Plan is given to shareholders and not to target boards or securities regulators.
Adoption of a Rights Plan
Although effective upon adoption by a board of directors, a Rights Plan will be permitted to remain in place only if approved by shareholders within 90 days of the date it was adopted (or if adopted after a take-over bid has been made, within 90 days from the date the take-over bid was commenced). Aside from applying to a Rights Plan adopted at an annual shareholders’ meeting, this also applies to the adoption of a second tactical Rights Plan with different or more restrictive terms than a Rights Plan previously approved at an annual shareholders’ meeting. Where the requirement to obtain shareholder approval is not met within the specified time frame, the Rights Plan will terminate.
Renewal of a Rights Plan
A majority vote of shareholders is required to maintain the Rights Plan under the Proposed Instrument. Despite having obtained initial shareholder approval, a Rights Plan will become ineffective if the Rights Plan does not receive majority shareholder approval at each annual meeting held following the financial year in which the initial shareholder approval was obtained.
According to the CSA, the annual approval requirement is beneficial not only to shareholders, who are afforded an annual opportunity to re-evaluate the Rights Plan, but also to bidders who will now have an awareness as to when the Rights Plan will be put to a shareholder vote and can thereby time the commencement of a take-over bid accordingly.
Termination of a Rights Plan
Under the Proposed Instrument, shareholders are permitted to terminate a Rights Plan at any time through a majority vote. Leaving the ultimate decision as to whether to terminate a Rights Plan with the shareholders is, according to the CSA, preferable to a scenario where shareholders must consider whether to replace a majority of the board in order to terminate a Rights Plan. The CSA has also indicated that the ability of shareholders to vote on the specific question of termination of a Rights Plan affords a hostile bidder the chance to requisition shareholder support for the termination.
Modification of a Rights Plan
According to the CSA, material amendments to an existing Rights Plan are to be dealt with in the same manner as the adoption of a new Rights Plan. Consequently, under the Proposed Instrument, material amendments to a Rights Plan will be effective upon adoption by a board of directors, but must thereafter be approved by shareholders within 90 days.
Non-Approval or Termination of a Rights Plan
Under the Proposed Instrument, if a Rights Plan has become ineffective or has been terminated, the board of directors will be prohibited from adopting a new Rights Plan for a period of one year, unless a new Rights Plan is being adopted in the face of a take-over bid commenced after the prior Rights Plan was not approved or was terminated. Shareholder approval within 90 days of the date of adoption is still required.
The concern that shareholders may be left susceptible to a hostile take-over bid commenced during the one-year period is, according to the CSA, one reason why a general prohibition against adopting a new Rights Plan after a prior Rights Plan has become ineffective or was terminated is not being proposed.
Exclusion of Bidders
When a take-over bid has been commenced, shares held by a bidder will be excluded from the shareholder vote to adopt, maintain, amend or terminate a Rights Plan. The policy rationale behind the exclusion, according to the CSA, is the conflict of interest that bidders face when shareholders are voting on a Rights Plan.
Application of a Rights Plan
Under the Proposed Instrument, the application of a Rights Plan is restricted to a take-over bid or the acquisition of securities of the issuer. Other than as a result of these two circumstances, securities must not be distributed pursuant to a right issued under a Rights Plan, according to the CSA.
The Proposed Instrument also prohibits issuers from using a Rights Plan to treat bidders differently. According to the CSA, any waiver or modification to the application of a Rights Plan by an issuer in favour of one take-over bid must be granted with respect to all other take-over bids.
If the Proposed Instrument is adopted, the CSA expect that they would only intervene in the operation of a Rights Plan that is approved by shareholders in limited circumstances where the substance or spirit of the Proposed Instrument is not being complied with or there is a public interest rationale for the intervention not contemplated by the Proposed Instrument.
Comments on the Proposed Instrument
Comments on the Proposed Instrument are due June 12, 2013. The Proposed Instrument relates only to Rights Plans. That being said, the Proposed Instrument is part of a broader and continuing CSA initiative looking at defensive tactics, including private placements during take-over bids. CSA staff are continuing to consider whether changes should be made to NP 62-202 and the overall take-over bid regime.
The Right Balance?
It remains to be seen whether the Proposed Instrument will be amended after the comment period, but the new direction has been extensively deliberated by the CSA and appears to have momentum. It might be viewed as a typical Canadian approach to a tough policy issue, informed by the American situation, and yet striking a workable balance between shareholder rights and directors’ defensive tactics.
The Related Consultation Paper from the Autorité des marchés financiers
In conjunction with the publication of the Proposed Instrument by the CSA, the Autorité des marchés financiers (the “AMF”) has published a consultation paper (the “Consultation Paper”) that presents an alternative approach to that offered by the Proposed Instrument.
The AMF believes that current market realities and the existing legal and economic environment necessitate a review of, and update to, the regulatory framework concerning all defensive tactics, not only Rights Plans. According to the AMF, its proposal seeks to restore the regulatory balance between bidders and target boards.
The AMF is proposing to replace NP 62-202 with a new policy that would recognize the directors’ fiduciary duty to the corporation in responding to an unsolicited take-over bid and would redefine regulatory intervention on the ground of public interest. According to the AMF, under its proposal, appropriate deference would be given to directors facing unsolicited take-over bids to implement defensive tactics and intervention by the regulators would only occur in limited circumstances where an abuse of shareholders’ rights is evident or a negative impact to the efficiency of capital markets exists.
To give directors appropriate deference, the AMF would examine the context in which the take-over bid takes place, the process followed by the directors and the basis for their recommendation to shareholders. The AMF has indicated that when appropriate safeguard measures are effectively implemented and monitored by boards and their independent advisors, this should provide reasonable assurance that directors’ decisions are not tainted by conflicts of interest.
The AMF is also proposing that all bids be subject to a minimum 50% tender condition, and that all bids be extended for 10 days after the announcement that this tender condition has been met.
According to the AMF, the intent of the Consultation Paper is to provide a forum for discussion of these issues and to seek comment on the AMF proposal.
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1 Air Products & Chemicals, Inc. v. Airgas, Inc., C.A. No. 5249-CC (Del. Ch. Feb. 15, 2011).