Reduction in hostilities? Jury’s out on new takeover bid regime

By Ann Macaulay Web Only

Reduction in hostilities? Jury’s out on new takeover bid regime

Photo licensed under Creative Commons by Nick J Webb

 

Canada’s takeover bid regime is now harmonized across the country with the Canadian Securities Administrators’ implementation of National Instrument 62-104 Take-Over Bids and Issuer Bids. As of May 9, all non-exempt takeover bids are subject to a 105-day bid period, a 50 per cent minimum tender requirement and a 10-day extension requirement in order to permit other shareholders to tender to the bid.

Extending the minimum deposit period for takeover bids from 35 days to 105 days provides a more certain time frame for a hostile bid, equalizing “the negotiation leverage that a target board has with a hostile bidder,” says Frederic Duguay of Hansell LLP in Toronto. “It gives the board of the target more time in order for it to properly evaluate the bid, seek competitive offers from other parties and make a recommendation to its shareholders whether they should tender or not to that particular bid or tender to a strategic alternative that has been proposed by the board.”

The increased bid period is subject to two exceptions: The target’s board may issue a news release that there is a shorter deposit bid period of at least 35 days that is acceptable to the board or it issues a release stating that it has agreed to enter into an alternative transaction.

Boards will no longer need to implement a shareholder rights plan, or “poison pill,” to buy more time. Previously, hostile bidders typically went to the regulators in an effort to have the pill cease trading or terminated and could obtain an order within 45 to 60 days. The new rules “effectively codify the permitted bid provisions that are commonly found in poison pills,” says John Emanoilidis, who co-heads the M&A practice at Torys LLP in Toronto.

Lengthening the statutory 35-day period often created uncertainty but parties should now expect a maximum 105-day bid period. “In addition to providing more time, it also provides a target board with more leverage in negotiating with the hostile bidder because another feature of the rule change is that the board will have the ability to abridge that 105-day period back down to 35 days,” says Emanoilidis.

He predicts that a bidder will see the benefit of more engagement with a target board and will try to negotiate a friendly deal because that will give the bidder a shorter time period. “Obviously with a longer time period, there is increased deal uncertainty because that will expose a hostile bidder to an interloper for an extended period of time,” he said. It used to be “relatively easy for a bidder to bypass the board and simply ask the regulators to terminate the pill.” There are also increased financing costs that may arise as a result of an extended time period.

The 50 per cent condition addresses the concern that shareholders may have felt pressure to tender, says Emanoilidis. “And there may be circumstances where, depending on the shareholder profile of the target, it will be very difficult if not impossible to execute a hostile bid if you have, for example, a significant shareholder that opposes a hostile bid.”

Duguay anticipates a decrease in hostile bids due to the increase of time and the minimum tender condition for bids that are not supported by the board or management of the target. There’s more deal uncertainty for the bidder because boards have much more time to communicate this to their shareholders. “You always want to reduce as much as possible if you can that deal uncertainty so if you’re able to engage with the target beforehand and come to a negotiated merger that is supported by the board, then that largely eliminates that deal uncertainty. As a hostile bidder, that would be your ultimate outcome.”

Many believed the prior regime favoured bidders. “A board was in a tough position to quickly try to produce an auction or find an alternative transaction for shareholders because there was already a transaction available that provided value to shareholders,” says Duguay. He added that a company’s shareholders often felt obliged to tender to a particular bid since they might not have gotten premium value from another transaction.

Duguay will present on Corporate Governance: The Role of Directors with Genevieve Pinto of McCarthy Tétrault LLP in Vancouver as part of the CBA’s 2016 Skilled Lawyer Series. This year’s program, titled Anatomy of a Deal, has a total of 16 modules that examine all aspects of an M&A deal from start to finish through the lens of a scenario developed by Cassels Brock & Blackwell partner Jake Bullen.

The new regime’s significant changes “strike the right balance,” says Emanoilidis, providing boards “with more effective leverage to deal with a hostile bidder but ultimately preserves the right for shareholders to collectively decide the outcome of a bid within a set time frame.”

Although he doubts the changes will have an impact on overall deal activity, he believes that deals “that might have otherwise been hostile may commence as a friendly transaction earlier than they would have otherwise because the rules are set up to encourage a hostile bidder to negotiate.”

But other M&A lawyers argue that the new regime could in fact encourage more aggressive actions. The changes “may result in an increased use of proxy fights and bully M&A tactics by acquirers to effect acquisitions of commodity issuers in circumstances where they would have otherwise done so by hostile bid,” according to Walied Soliman, Orestes Pasparakis and Trevor Zeyl in a Norton Rose Fulbright LLP website article.

Describing it as a “more onerous takeover bid regime,” they write that a prospective acquirer may “employ more traditional activist tactics to effect an acquisition, such as running agitation campaigns, starting proxy fights, or using bully M&A tactics, such as the use of shareholder supported bear hug letters (which is an offer of a price higher than the trading price made to restrict the target’s options).”

Whether the lengthier timeframe will have a chilling effect on hostile bids remains to be seen. And as Emanoilidis says, “The rules continue to provide shareholders with the final say on whether a bid will succeed. So boards will have more time, they will have more leverage but ultimately at the end of the 105-day period, if a majority of shareholders accept the deal, the deal will proceed.”

Ann MacAulay is a contributor based in Toronto.

Photo licensed under Creative Commons by Nick J Webb

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