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M&A REGULATION take-over bid, if the plan is approved by the target issuer's securityholders. Additionally, the proposed rule would take the battle from the arena of a regulatory hearing to the forum of a securityholders' meeting. The rule would facilitate the ability of hostile bidders to directly challenge a rights plan through the securityholder approval process (and without the need to initiate a proxy contest to seek to replace the board itself). Conversely, if a rights plan were not approved, or if the securityholders voted to terminate a plan, the issuer would be prohibited from approving a new rights plan for a period of 12 months except with prior securityholder approval. If a formal take-over bid were made, however, a rights plan could be adopted. Any such plan would be subject to the normal requirement for securityholder approval within 90 days. "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." Application of Rights Plans Proposed NI 62-105 also contains certain provisions concerning the operation of rights plans. Consistent with the regulators' concerns about a possible misalignment of interest between an issuer's board and its securityholders, the proposals require that, if a board waives or modifies a rights plan in favor of a particular take-over bid, it must do so with respect to all take-over bids. This would ensure that the rights plan is applied consistently, and the target board cannot discriminate between bidders. Further, and notably in an era of increasingly common proxy contests, the proposals stipulate that rights plans could only be effective for acquisitions of securities, and not in the context of proxy contests. HIGHLIGHTS OF AMF'S PROPOSED ALTERNATIVE APPROACH As noted, on the same date on which the CSA published proposed NI 62-105, the AMF published a consultation paper contemplating a different approach to the regulation of rights plans. The AMF stated that if its proposal does not receive broad support then it will support the changes proposed in NI 62-105. The AMF's proposed approach would provide target issuers with even more latitude than NI 62-105. The AMF proposes replacing NP 62-202 with a new policy that would recognize the fiduciary duties of directors in responding to a hostile take-over bid and only allow regulator intervention on the grounds of public interest. This alternative approach would allow target boards to implement a poison pill without securityholder approval for an unlimited period of time. The AMF's consultation paper emphasizes reasons for reform similar to those cited in support of proposed NI 62-105, including the perception that the current approach is too bidder-friendly and that target issuers lack the necessary flexibility to respond to hostile bids. The AMF cites the example of the contest for control of Fibrek Inc., where the AMF (based on the principles set out currently in NI 62-202), overruled a defensive tactic that would have facilitated a higher valued alternative to a hostile bid. Under the AMF proposal, challenges to rights plans would be reviewed under the lens of the exercise by board members of their fiduciary duties, with regulatory intervention limited to clear cases of abuse. One unique and related element of the AMF proposal concerns the nature of bids themselves. The AMF is proposing that all bids be required to have an irrevocable minimum tender condition of 50 percent of "independent" securityholders, and a mandatory 10-day tendering period extension after the minimum tender condition has been satisfied. The proposal to require "permitted bid" conditions (other than a specified minimum bid period) in all bids is intended to address the structural coercion that securityholders may face in the context of a take-over bid. RIGHTS PLANS — LOOKING FORWARD Both NI 62-105 and the AMF proposal are subject to public comment, with the comment periods scheduled to end in June 2013. The implementation of either proposal in the form published would represent a fundamental shift in the treatment of rights plans in Canada. Both proposals would give target boards significant discretion to adopt and, with securityholder approval, maintain a poison pill in the face of a hostile bid that the board determines is not in the issuer's best interests. Canadian issuers could become less vulnerable to hostile take-over bids and have more leverage when negotiating with hostile bidders. Canadian issuers would also have more time to negotiate with hostile bidders, since it is expected that bids would, as a result of the new framework, generally be open (or if not, then extended) for 90 days rather than the statutorily required minimum 35-day deposit period. In the context of hostile bids, the fight over the continuation of rights plans would shift from hearings in front of the securities regulators to proxy battles over their implementation or termination, although regulatory intervention could still occur where the regulators consider intervention to be "in the public interest." PROPOSED AMENDMENTS TO THE EARLY WARNING DISCLOSURE REQUIREMENTS One day before the release of the rights plan proposals, the CSA proposed a broad set of amendments to the early warning regime, the system for disclosure of significant ownership positions and of the acquirors' investment intentions. There are parallels between the proposals beyond the timing of publication. Though there have been periodic reforms, and proposals for reform, of the early warning rules, the key elements of the regime had not been amended since their introduction in the 1980s. As with rights plans, an impetus for reform may have been triggered by the increase in shareholder activism (in addition to other phenomena, such as the use of increasingly complex derivatives by sophisticated investors to avoid disclosure requirements, and so-called "empty voting" tactics, which enable the accumulation of significant voting stakes through derivatives and securities lending arrangements without holding a corresponding economic interest). www.lexpert.ca | LEXPERT • June 2013 | 45 C-00-Firm.indd 45 13-05-17 10:06 AM