It may still be too early to draw any definitive conclusions, “but we certainly haven’t seen an uptick” in hostile bids more than two years after changes were made to Canada’s takeover bid regime, says Jeremy Fraiberg of Osler, Hoskin & Harcourt in Toronto.
“In 2018 there were only five hostile bids, and three in all of 2017,” he says. “This is below the average over the past 10 years. The new 105-day minimum deposit period may be one factor that accounts for the decline. Other factors may include a decrease in the number of public companies and a slowdown in the resource sector.”
Indeed, research compiled by shareholder services and advisory firm Kingsdale Advisors indicates a steady decline of hostile bids over more than a decade, from a high of 24 in 2006. The decline does not entirely coincide with the new regime’s introduction, and the drop in the resource sector preceded any of these changes. Still, there was concern that this could chill takeovers in Canada, says Fraiberg, and “it’s still tough to say but the numbers certainly haven’t dispelled that.”
Changes to the regime came in May 2016, when the Canadian Securities Administrators published a Notice of Amendments to Take-Over Bid Regime in an effort to modernize the rules governing Canadian takeover bids. The amendments included a minimum bid period of 105 days (a big increase from the previous 35 days), a 50 per cent minimum tender condition and an extension of at least 10 days after the minimum tender condition is satisfied.
The amended takeover bid regime, set out in National Instrument 62-104 Take-Over Bids and Issuer Bids (NI 62-104), was adopted by all provinces. The minimum bid extension resulted from concerns that target boards did not have enough time to respond to a hostile bid. “The new regime is intended to give boards enough time to respond effectively to a bid,” says Fraiberg. “But by increasing the timeline for bidders, it increases financing costs and market risk.”
According to Borden Ladner Gervais’s M&A Trends to Watch for in 2019, hostile takeover bids have become less common, even though the trend had been downward for a decade. “Nevertheless, hostile bids have not gone away completely under the new rules. While the longer time periods have made hostile bids less interesting to watch, we have witnessed a number of them in 2018, including hostile bids in the oil patch, which have historically been quite rare.”
Neill May of Goodmans in Toronto doesn’t think the new regime has played a major role in the decline of takeovers since its implementation. “Other factors play a more significant part in determining the level of transaction activity. Those factors include the cost of funds, other regulatory considerations (foreign investment, anti-trust, industry-specific, other…), the increasing level of activity in the shareholder activism space, macroeconomic factors, and other influences.”
The new rules have resulted in significant change for businesses, says May. “What they have done, at a high level, is to substitute the historical pattern of either (a) unsolicited bids met by shareholder rights plans (which ultimately inevitably resulted, absent an intervening event, in the cease trading of the rights plans), or (b) unsolicited bids structured to be open for sufficient time to qualify as ‘permitted bids,’ with a framework that memorializes the longer deposit period.”
May adds, “At ground level it has changed some of the preparatory work done on both sides of public M&A (reducing the focus on shareholder rights plans, most obviously), but in more general terms there has not been significant impact, in our view.”
The first poison pill ruling to test the new takeover bid regime came in November 2017, after Aurora Cannabis Inc. made a bid for CanniMed Therapeutics Inc. CanniMed rejected the offer, proposing an alternative merger with recreational cannabis firm Newstrike Resources, and enacted a poison pill. CanniMed’s rights plan allowed its shareholders to vote on the Newstrike deal. Aurora then launched a hostile takeover bid.
The Ontario Securities Commission and the Financial and Consumer Affairs Authority of Saskatchewan cease traded CanniMed’s poison pill, declaring it an improper defensive tactic. The regulators said tactical rights plans “should not generally be utilized to deem a bidder to beneficially own locked-up shares in circumstances where they would not be deemed to be joint actors under the applicable rules.” They added that it “will be a rare case in which a tactical plan will be permitted to interfere with established features of the takeover bid regime such as the opportunity for bidders and shareholders to make decisions in their own interests regarding whether to tender to a bid by entering into lock-up agreements of the kind under consideration in this case.”
Newstrike shareholders approved the proposed merger in January 2018 and CanniMed’s shareholder vote on the Newstrike deal was postponed while it held talks with Aurora. CanniMed dropped plans to acquire Newstrike and Aurora ended up acquiring CanniMed for $1.1 billion.
There are lessons to be learned from the Aurora/CanniMed bid, says Michael Partridge at Goodmans in Toronto. The decision “demonstrated the regulators’ inclination to permit the new framework to function as drafted and corresponding disinclination to allow rights plans to vary the operation of that framework or to make orders that adapt the framework to particular circumstances. That might have been expected, because presumably a core objective of the new rules was to create certainty, and because the rules were the product of a long process involving different regulators so granting relief would be a complex and challenging process.”
Partridge does not anticipate that the new regulatory framework will affect the level of takeover bid activity in the future. “In our experience, TOB [takeover bid] activity has tended to be cyclical, and right now in M&A seems to be taking a back seat (at least in terms of air play) to proxy contests.
“Right now, corporate profits seem strong and the cost of capital has remained relatively stable, so the conditions for an increase may be there, but forecasting on things like this is beyond mere lawyers.”