Quebec Premier Jean Charest’s proposal that boards of companies in his province should be able to just say “no” to foreign takeover bids they do not like is cynical, ill-thought-out – and worth considering all the same.
Mr. Charest’s latest proposal in the economic nationalism derby currently gripping Quebec’s election race – the unlikely result of a potential takeover of Quebec-based hardware chain Rona Inc. – is to give directors of companies more power to fend off hostile bids by foreign companies, even if shareholders want to sell.
Critics decried the idea immediately. How dare Mr. Charest wrest power from shareholders, the owners of companies? Quebec companies will trade at a discount, because they will be protected from acquisition, don’t you know.
Let’s be clear: What Mr. Charest is proposing is the worst of policy on the fly – he and his finance minister offered different versions of how it would work. His ideal is not about good corporate governance. It is about pandering to an electorate’s fears of a foreign corporate invasion.
But the idea contains a kernel that deserves discussion. In Canada, many respected voices, including the Supreme Court, have argued that shareholders should not always get the last word on a takeover bid. There are many people who believe that boards should be able to “just say no,” as Mr. Charest is suggesting. If nothing else, Mr. Charest’s flight of fancy is moving what should be a bigger issue to the front page, when it has long been relegated to business columns. (I should know: I’ve been writing about this for years.)
There are certainly precedents for what Mr. Charest is suggesting. The Supreme Court, ruling on a case involving BCE Inc., declared that the duty of a board is to think long term, not just of “short-term profit or share value.”
Lawyer Ed Waitzer, leader of of the corporate governance group at Stikeman Elliott LLP, and Stikeman partner Sean Vanderpol argued in a paper last year that Canadian securities regulators should dispense with their shareholder-first stance on takeovers.
The federal government’s Competition Policy Review Panel found in 2008 that the current rules in Canada make a target board facing a takeover little more than “an auctioneer” and should be abandoned in favour of a more U.S.-style model that allows directors more latitude to decide what to do.
The U.S. long ago dispensed with the idea that shareholders should get to make a quick, and final, decision on a takeover bid. Boards have the power to block a takeover in the name of long-term strategy. And yet the world’s largest capital market soldiers on, and an incredible number of deals still get done.
Currently, Canadian boards are stuck when a hostile bid comes in – foreign or otherwise. They are given usually six to eight weeks to find an alternative. After that, securities regulators force the bid to be put in front of shareholders. Investors almost always take the money and run.
Even if the board of the target finds an alternative, that just means a higher offer. One way or another, when a Canadian company is put in play, it is very likely to be sold a few weeks later, with only the rarest of exceptions. Mr. Charest’s idea of giving boards the power to say “no” would enable a company to decide if a takeover is in its long-term best interest.
Mr. Waitzer and Mr. Vanderpol cite the example of Airgas Inc. and Air Products and Chemicals Inc., two makers of industrial gases. Air Products, in early 2010, offered $60 (U.S.) a share for Airgas. The board of Airgas called the bid hopelessly low, and said no thanks. Air Products boosted its bid to $65.50, then $70. Airgas passed, saying the price had to be at least $78, and because Airgas had a poison pill takeover defence, Air Products was stuck.
The battle ended up in front of a judge, in the leading business court in the U.S. Delaware Chancery Court. The court ruled that Airgas’s board had acted in good faith and allowed the poison pill to stand. Air Products was stymied and abandoned its takeover attempt.
To make this really work in Canada, Mr. Charest’s idea would need to be expanded nationally and applied to all hostile takeovers – regardless of whether the bidder was foreign.
There must be appropriate limits to the power to say no. The goal of Canada’s current system is to ensure that boards and managers don’t entrench themselves, protecting their jobs instead of selling when a takeover is indeed in the best interests of shareholders. The U.S. system relies on two checks. Shareholders can vote out the board if they are unhappy with its decisions, or can seek relief from a judge. Supporters of rolling back Canada’s shareholder-first regime suggest Canada’s courts are more than up to the task of ensuring boards act properly.
In the Airgas situation, the shareholders hardly suffered. Under Canada’s rules, the company would have surely been sold for $70 a share in cash. Today, shares of still-independent Airgas trade at $83.