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New rules increasing Canadian targets’ ability to use poison pills are up for comment |
The first half of 2014 has seen bigger global M&A volumes than any other since 2007. The cash stockpiles that many companies have been building, along with the increasingly positive outlook for many businesses, has made the prospect of deals more attractive. But the increasing desire of corporates and funds to make acquisitions has been matched by targets' willingness to fight back.
The development of new target tactics has been highly prominent in Canada, where for years securities regulations and Toronto Stock Exchange rules have prevented many poison pill defences. A flow of hostile bidders and activist investors has been making its way north of the US since the financial crisis. Canada suffered far less economic damage than its southern neighbour, but the US recovery has not lessened cross-border activism. In fact, it has spurred hostile bids in the mining sector, as the value of many minerals has dropped as the US dollar has climbed.
New regulation that would increase businesses' ability to insert poison pills is up for comment. There are two proposals. The first is from the Canadian Securities Administrators (CSA), a national body that jointly represents the provincial regulators, and would allow boards to create shareholder rights plans that could be kept in place indefinitely with continued shareholder approval every 90 days. The second comes from Quebec's provincial regulator and includes changing the authorities' view of defensive strategies so that they are not considered against the public interest. Regulators' ability to intervene in deals to prevent or dismantle these tactics would, therefore, be limited.
The CSA proposal is more likely to be adopted, but boards aren't waiting for that to be proven correct. Recent deals such as Hudbay's takeover of Augusta and Goldcorp's attempt to buy Osisko – all of which are Canadian companies – demonstrate the lengths board and shareholders are going to in trying to prevent these takeovers.
In Augusta's case, the board put in place a unique rights plan that included a lower trigger threshold and allowed the board to amend or withdraw the plan at any time.
Canadian provincial regulators have tended to side with the bidder, agreeing that poison pills are detrimental to shareholders and the market. While the goal of shareholder primacy is valuable, permitting hostile bidders to have the upper hand may not always be in the best interest of the market. When shareholders have voted in favour of extending these plans, regulators have allowed them to stay in place temporarily. But more consideration should be given to these votes. Boards should not be able to entrench themselves, but at the same time, other companies looking for opportune takeovers don't necessarily generate the best value for shareholders. New rules need to come into effect so that boards have the time and freedom to run value maximising activities to best inform investors of their options.