As each week passes and a new acquirer surfaces with a takeover bid for a Canadian company it is harder to ignore the troubling sense that our publicly traded companies are sitting ducks. Under our current securities rules a takeover bid can be launched and completed in less than 60 days. Given the complex nature of modern global markets this short window is not nearly enough time for a target company to react in a truly effective way. Realistically, it can easily take several months for the board of a target company to assemble a transaction that fully reflects the underlying value of the business.
In this environment perhaps it is time for the courts in Canada to wade back into the fray on poison pills, and it may be that we should take another look at the U.S. experience. Poison pills are a popular takeover defence mechanism that allows target companies to hold off hostile offers for a time with the threat of making them prohibitively expensive by issuing large quantities of new stock.
In Canada, the role of takeover referee has been assumed largely by our provincial securities regulators, often the Ontario Securities Commission. Typically, the commissions will allow companies to keep poison pills in effect for 45 to 60 days so that they can come up with a superior alternative for shareholders. When the time runs out, the pill will typically be "cease traded" and the hostile bid goes forward.
The principle focus of the securities commissions is of course on the effective functioning of the capital markets. They recognize that when a bid is made at a premium to the prevailing market price, investors will want to cash out. In fact, many shareholders will sell into the market quite quickly, and much of the stock can end up in the hands of arbitrageurs who will take the best offer that emerges in the time available. When this happens, we end up protecting the interests of shareholders who are seeking quick returns on their investments, rather than long term corporate growth.
When a company is faced with a hostile bid, there is an enormous amount of work to be done if it is going to respond with a superior alternative. Asset values have to be analyzed, alternative transactions developed, white knights solicited, and binding agreements negotiated. The increase in cross-border activity has added to the complicated financial, tax and legal considerations which need to be addressed.
Apart from poison pills, what else is available to target companies in Canada? Investment Canada is too blunt an instrument to wield in most cases. Unless a takeover poses significant national interest concerns, intervention on that front would be unwarranted and could deter future foreign investment in this country.
The Competition Act of course only addresses competition concerns. It is not going to be relevant where the buyers are private equity firms, or even industry players who don't yet have a major Canadian presence. Even with Inco and Falconbridge both in Canada, the main competition concerns have come from outside the country.
So the tools are limited for Canadian companies in responding to a bid. As a result, our securities regime may be putting our companies at a disadvantage when buyers in the United States, or Europe or Asia, cast their eyes in our direction.
Poison pills were imported north into Canada from the United States over 15 years ago. They are somewhat of an artificial contrivance, which may raise suspicions about their motives. Even their original inventors in the U.S. were probably at least a little surprised when the first pills survived early judicial scrutiny and went on to become a familiar feature of the corporate landscape.
From the outset, a major concern was management entrenchment. People worried that company executives were more interested in keeping their jobs than securing the best value for shareholders. Boards of directors were often perceived as willing accomplices to protect the corporate nest. But we're far past that now. Enron and WorldCom have caused a sea change in corporate governance.
No board in today's environment is going to let management's personal interests dictate what to do in a take-over battle. Lawsuits against directors are on the rise and shareholders are more vocal with their criticisms. As for their own board seats, most directors would be unlikely to view their fees as easy money in light of what has become a major time commitment with significant potential liability.
With more time, well governed companies could produce for their own shareholders a bigger share of the values being sought by bidders. There might also be beneficial results for other constituencies - employees, customers, suppliers - the Canadian business environment as a whole. U.S. companies get much more time to react to takeovers, and in some cases they are allowed to "just say no". We don't want to get in the way of market forces, but most people would view the U.S. as a reasonably competitive economy.
This does not mean we should just copy the U.S. model. Canadian stock exchange rules require shareholder approval for the adoption of poison pills, and it's unlikely that we would be prepared to do away with that requirement. Moreover, the question of whether to accept a "just say no" defence at all, or in what circumstances it might be justified, is probably something that would need a careful review.
The mandate of the securities commissions covers the take-over bid rules and securities law, and they have quite properly dealt with poison pills on that basis. But target company responses to hostile take-over bids do raise important issues of corporate law - how are directors supposed to discharge their fiduciary duties, and what is really in the best interests of the corporation as a whole? These are fundamental legal matters which deserve being revisited by our courts.
Eric Spindler is a corporate and securities lawyer with Blakes, Cassels & Graydon LL