Proposals under review by the Canadian Securities Administrators (CSA) could expand boards’ tactics when facing hostile takeover bids. It coincides with directors’ growing willingness to engage with activists, which is already helping head off some possible fights.
A wave of activist activity and well publicised hostile M&A fights have put Canadian boards on guard. The country’s securities system offers fewer defensive options than the US, and early warning systems are more lax than elsewhere in the world.
In an effort to give boards more tools to cope with hostile bids, the CSA has proposed a new regime for right plans. This includes boards’ ability to establish rights plans and have them maintained indefinitely, pending shareholder approval.
While the changes are welcomed by most boards, many are already taking steps to pre-empt bids or activists involvement.
“Given some of the recent high profile successes of activists in Canada, in particular the CP [Canadian Pacific] Rail fight, boards and advisors are much more attuned to what activists can do and their tactics,” said David Woollcombe, partner at McCarthy Tetrault. “The result is that companies are now trying harder than ever to stay close to their shareholder base and make sure their strategy is well understood, all in an effort to head off potential angles of attack from activists.”
KEY TAKEAWAYS
Hostile and activist activity is growing in Canada spurring calls to create poison pill regulations;
The proposed rules still maintain shareholder primacy but give Canadian boards more defensive options;
Many boards have already adopted policies and strategies for defending against hostile bids and potential proxy fights.
In the past few years, a growing number of Canadian companies have found themselves the target of US activists. The proxy fight over CP Rail by Perishing Square is often cited as the wake-up call to boards’ vulnerability to activists and takeovers. Many US activists have been drawn by Canada’s friendlier regulatory environment, and the way its companies weathered the financial crisis.
The proposals
There are two proposed plans for poison pill regulation – one by the CSA, which is a collective of all the individual provincial securities regulators, and a second from Quebec’s regional regulator.
The CSA proposals would still maintain shareholder primacy in Canada, while giving boards the ability to develop poison pill plans. Boards would now be able to institute rights plans that will take effect immediately,
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Boards are being proactive in preparing for the possibility of an activist campaign |
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but must be approved by shareholders within 90 days. They can be kept in place pending annual reapproval. While the plans can be withdrawn at any point with a majority shareholder vote, bidders are excluded from any vote to change, amend or maintain the rights plan. The Quebec plan gives even more power to boards to deflect offers, but is less likely to be adopted. Canada’s constitution gives each province the right to draft their own securities laws, but to prevent divisions or complications, all of supervisors are expected to adopt the same regulation.
“The takeover bid legislation is mainly harmonised across the provinces with each province passing its own rules that are more or less the same,” said Brian Pukier, a partner at Stikeman Elliott. “But we sometimes find that a provincial securities regulator can interpret those rules differently than the regulators in other provinces.”
“While they endeavour to be as consistent as possible with each other, their differing philosophical preferences do get highlighted from time to time in their decisions,” he explained.
Whichever proposal is adopted the final version, is expected later this year.
Preemption
The proposal for the new right plans can only be triggered by a hostile bid and not by proxy contest. This could increase the amount and ferocity of Canadian proxy fights, but the preemptive strategies that boards are adopting are likely to keep these in check.
“Boards are being proactive in preparing for the possibility of an activist campaign,” said Jonathan Feldman, partner at Goodmans. “This preparation includes having the right team in place, engaging with shareholders on a regular basis and conducting ongoing vulnerability analyses.”
Engagement
Baring the ability to prevent proxy fights or hostile bids, Canadian boards have become far more comfortable negotiating with activists.
“Many activists and boards would rather work constructively with each other in order to avoid the cost and bloodshed associated with a proxy fight,” said Feldman. “If a shareholder comes to a board with a well-articulated business plan, a well advised board will in most cases be willing to listen and engage with that shareholder.”
These negotiated approaches will likely become even more prominent as activism and hostile strategies become common features of Canadian corporate practice.
“Many of the activists will engage in a pretty sophisticated analysis of a company’s strategy and financials before engaging with a target, and while boards will often seek publicly to paint a black hat on an activist they often have some good strategic ideas that a company ends up adopting,” said Woollcombe.
Further reading
Men’s Wearhouse – Jos A. Bank: the benefits of aggression
New governance rules challenge Indian listcos
Rural/Metro increases banks’ M&A liabilities, costs