Lexpert US Guides

Corporate 2013

The Lexpert Guides to the Leading US/Canada Cross-Border Corporate and Litigation Lawyers in Canada profiles leading business lawyers and features articles for attorneys and in-house counsel in the US about business law issues in Canada.

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M&A REGULATION The Current Framework Proposals for New Frameworks The current Canadian regulatory approach to rights plans is based on the principles outlined in National Policy 62-202, Take-Over Bids—Defensive Tactics ("NP 62-202"), adopted (in its original form) in 1986. The policy reflects a concern that the interests of the board and management of an issuer subject to a take-over bid may not be aligned with the interests of securityholders, and that defensive measures adopted by the issuer may deny securityholders the opportunity to respond to a bid. The policy endorses the paramountcy of securityholder choice, supported by oft-cited passages expressing the regulators' view that "unrestricted auctions produce the most desirable results in take-over bids" and "regulators will intervene if defensive tactics are adopted that will likely deprive shareholders of their ability to tender to a bid or a competing bid." Hostile bidders in Canada faced by a rights plan commonly apply to the securities regulators for an order to "cease trade" (effectively, to invalidate) the plan. The typical approach of securities regulators in those cases, consistent with the principle of securityholder choice, is that the only legitimate purpose of a rights plan is to give the target issuer more time to develop superior alternative transactions to the proposed hostile bid. The over-arching principle is that "there comes a time when the pill has got to go." Specifically, securities regulators generally apply NP 62-202 to intervene and cease trade rights plans if no competing bid or transaction is likely to arise. The focus at regulatory hearings is typically on how much additional time a target issuer should have to develop such alternatives. A number of concerns have been expressed about the existing framework. One frequently mentioned issue is that the current Canadian approach generally is too bidder-friendly. In particular, the practice of intervention by securities regulators is said to limit the leverage available to a target issuer to negotiate with, or defend itself against, a hostile bidder, and more generally to restrict board and securityholder discretion, potentially frustrating efforts to maximize value for the issuer's stakeholders. The Canadian framework is often contrasted to the American approach, where rights plans are not generally nullified if no alternative transaction is promptly developed. For this reason, the current regulatory approach to rights plans is often cited as contributing to the "hollowing out" of corporate Canada by making Canadian issuers easier to acquire. Another common criticism of the current Canadian approach is that hearings before securities regulators are not the proper forum for regulation of rights plans; proponents of this view argue that courts are best positioned to regulate defensive tactics and assess whether the members of a target issuer's board have discharged their fiduciary duties, and whether other corporate remedies, such as the "oppression remedy," are available in the context of a proposed control transaction. The approach described has generally been applied by regulators in Canada for more than two decades, and a relatively settled set of factors considered in determining whether rights plans should be nullified has been developed. Nevertheless there have been exceptions, and because of the discretion embedded in those factors and in the core test of whether a rights plan has outlived its usefulness, there has been some inconsistency in the regulatory approaches and consequently some uncertainty. Whatever one's perspective on the regulation of rights plans, what is clear is that the Canadian regulatory approach evolved through a series of securities commission decisions rather than any coordinated policy reform process, and that reconsideration of the approach should take into account contemporary phenomena such as the common incidence of multi-jurisdictional take-over bids and the increasing trend of shareholder activism and proxy contests. On March 14, 2013, Canadian securities regulatory authorities published two proposals for reform of the system for review and oversight of rights plans. The proposals of the Canadian Securities Administrators (the "CSA") are outlined in National Instrument 62-105 Security Holder Rights Plans ("NI 62-105"). The Autorité des marchés financiers (the "AMF") (the Québec securities regulatory authority) published its own proposals in a separate consultation paper. The CSA's proposals would provide the board of an issuer targeted by a hostile bid with greater flexibility to use a rights plan as a defense tactic. The new rules would give target boards the flexibility, with securityholder support, to "just say no" to a hostile bid. The key element of the CSA's proposals is the concept of collective securityholder determination; proposed NI 62-105 reflects the CSA's view that the ultimate decision about the adoption or maintenance of a rights plan should remain with the securityholders as a group, and not with the board of directors, regulators or courts. This approach is different from the paradigm of securityholder choice under the current framework, with the focus on each securityholder ultimately having the opportunity to choose whether or not to accept a proposed offer. Securityholder support under NI 62-105 refers to the collective will of the securityholders (in recognition of the collective action problem that exists with unwelcome take-over bids). Additionally, though the proposals would eliminate securities commissions' active role of evaluating when and whether to nullify each rights plan brought before them, there would still be a limited continuing role for securities regulators where a rights plan is being used in a manner contrary to the public interest. HIGHLIGHTS OF PROPOSED NI 62-105 NI 62-105 proposes a framework where a rights plan can provide enduring protection from a hostile bid provided that it receives securityholder approval (unlike the current system where, as described, rights plans are generally not permitted to endure, and are typically cease traded by securities regulators after a relatively short time). Approval, Renewal and Termination of a Rights Plan As is the case under the current regulatory framework, under NI 62-105 a rights plan would be effective from the date it is adopted by the issuer's board. However, in order for the plan to remain effective it must be approved by securityholders within 90 days of its adoption by the board (or, if implemented after a take-over bid has been launched, within 90 days of the date of the bid). A rights plan previously approved by securityholders would not need to be re-approved in the event of a take-over bid. Securityholder approval would be by simple majority, with the bidder and its joint actors excluded from voting. Once approved, a rights plan would remain effective if re-approved no later than at each annual meeting following the initial securityholder approval. Predictably, a rights plan would terminate automatically if the requisite majority securityholder approval were not obtained within the prescribed 90 day time-frame. In addition, securityholders could terminate a rights plan by a majority vote at any time. This could allow a bidder to challenge the rights plan by requisitioning a securityholders' meeting to approve the termination of the plan, and allow securityholders to remove a rights plan if they desired to accept a takeover bid blocked by the plan. The clear implication of the proposed rule is that a target issuer could maintain a rights plan indefinitely, and in the face of a hostile 44 | LEXPERT • June 2013 | www.lexpert.ca C-00-Firm.indd 44 13-05-17 10:06 AM

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