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Canada's securities regulators are bang-on in wanting to overhaul Canada's weak hodge-podge of rules for corporate-takeover poison pills. But they should be careful about whose rights they are protecting in the process.
Sources told The Globe and Mail's Jeff Gray this week that the Canadian Securities Administrators (CSA), the umbrella group for the country's provincial and territorial securities regulatory bodies, is on the verge of unveiling proposed rules that would toughen corporate poison pills, known more formally as shareholder rights plans. A poison pill essentially authorizes a company's board to flood the market with cheap shares in the event of an unsolicited (or "hostile") takeover bid – effectively making the takeover prohibitively expensive and difficult for a predatory buyer.
There's little doubt the rules need fixing. As they stand now, they offer companies only a relatively short-term reprieve from a takeover threat, and different provincial jurisdictions disagree on the extent to which they can be enforced and the circumstances under which they can be applied.
In practice, Canadian companies have largely given up on poison pills as next to useless. In 2011 – a year that saw more than 1,000 mergers and acquisitions in Canada – regulators ruled on a grand total of two poison-pill cases, according to a report from law firm Osler Hoskin & Harcourt LLP.
Canadian company boards don't have the right to outright reject a hostile bid, as they do in the United States, and can really only use a poison pill to delay a hostile bid for a month or two, at which point the bidder can petition regulators to halt the poison pill. In practice, that means Canadian companies use the time only to find a "white knight" – another more palatable bidder to take them over. Avoiding being acquired entirely is pretty much out of the question.
"Generally speaking, once a Canadian target company is put in play, a change of control transaction is likely to occur," the Osler report said.
The U.S. envy is evident in the key elements of the what the CSA is considering: It would reportedly allow companies to keep poison pills in place indefinitely, as long as shareholders had approved the plan, at least as recently as the company's latest annual meeting.
It all reflects a continuing Canadian fear that our publicly traded corporations are sitting ducks to be snapped up by any big-shot foreigner who feels the urge. We have already put in place a new regime for the federal government to block certain foreign takeovers; now, in search of a belt to go with our suspenders, we want boards of individual companies to have the power to do the same thing.
But is that necessarily in the best interest of shareholders?
The current system certainly needs fine-tuning, but the way it typically functions – buying time for a competitive bidding process that often results in a white knight emerging with a better, more lucrative offer – sounds like a process that routinely unlocks significant shareholder value. A process where a board can block a hostile bid, perhaps in its own misplaced quest for self-preservation more than in shareholders' best interests – can hardly be said to do the same.
In a paper last year, Goodmans LLP lawyer Grant McGlaughlin proposed that shareholders should have the power to call a vote on revoking a poison pill if they feel it is no longer in their best interest. If the CSA wants to give poison pills more potency, it needs to offset it with this type of safeguard; otherwise, it risks tilting the poison pill too far away from the interest of shareholders.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.
David Parkinson