October 29, 2015 – Proposed takeover rules will produce winners and losers and need rethinking, according to a new report from the C.D. Howe Institute. In “The Future of Poison Pills in Canada: Are Takeover Bid Reforms Needed?,” author Anita Anand, a University of Toronto law professor, assesses the rules proposed by the Canadian Securities Administrators (CSA), and recommends a key change: do not implement the proposed 120-day bid period and retain the current 35 day period.
“The investor protection rules that apply in corporate takeover bids may soon undergo major changes in Canada,” says Anand. “Provincial and territorial securities regulators have proposed a new national framework for the regulation of takeover bids and this framework has significant ramifications for target shareholders, bidders and targets themselves.” she adds.
Under the new framework, takeover bids must receive tenders of more than 50 percent of the outstanding securities subject to the bid. Bids must remain open for a minimum of 120 days; a significant increase from the current requirement of 35 days.
Shareholder rights plans or “poison pills” are a form of defensive tactic that enable a corporation to shield itself against hostile or unwelcome bidders by making it prohibitively expensive for the bid to succeed. If triggered, the poison pill allows all existing shareholders, other than the original bidder, to purchase shares at a discount, which has the effect of diluting the bidder’s holdings in the target and making its bid more expensive.
“Poison pills adopted without shareholder approval isolate shareholders during a crucial decision about the firm in which they have invested,” states the author. “As long as the potential for conflict between the interests of boards and those of shareholders remains, shareholders should be able to decide the fate of their investment.”
In this regard, Anand supports the 50 percent condition proposed by the CSA as it minimizes the impact of potential conflicts of interest at the board and senior management level. However, she argues that a 120-day bid period is too long: it disadvantages both target shareholders and bidders by making bids more expensive while benefitting the board and management of the target. She points out that a 120-day bid period will ultimately serve to deter some takeover bids from occurring. Given the market discipline and capital allocation efficiency benefits derived from takeover bids, it is counterintuitive for securities commissions to craft takeover bid rules that have the effect of discouraging bids.
The report recommends that the CSA, and specifically the provinces and territories that comprise it, adopt the 50 percent condition but remove the 120-day bid period provision. “Instead of 120 days, the current time period of 35 days, on which existing case law is based, should remain in place,” concludes the author.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada’s trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. It is considered by many to be Canada’s most influential think tank.
For more information contact: Anita Anand, Professor, University of Toronto Faculty of Law, and Academic Director, Centre for the Legal Profession firstname.lastname@example.org; Daniel Schwanen, Vice President, Research, C.D. Howe Institute; Duncan Munn, Chief Operating Officer, C.D. Howe Institute; 416-865-1904, or email: email@example.com.