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Who decides the fate of a public company that receives a hostile takeover bid? You would think it ought to be the owners. The answer, however, is about to become more complicated. A pair of competing proposals by securities regulators in Canada – as well as a newly struck task force in Quebec – will make it harder than before for shareholders to freely act on bids deemed hostile by their boards.
At issue is how much shareholders should be trusted with the fate of public companies. Should they be allowed to vote on a hostile bid – or should the boards they elect make the decision on their behalf?
Canadian nationalists, including some securities experts, have complained that Canadian companies are relatively defenceless against hostile takeovers. The targets for blame are the country's 13 provincial and territorial securities regulators, who limit the takeover defences that boards of target companies can throw up, including "poison pill" shareholder rights plans. Regulators typically quash such plans after 70 days or less – not enough time for boards to come up with alternatives, or so the argument goes. By contrast, in the U.S., where the success rate of hostile bids is lower, boards are answerable to courts, not regulators, and have greater leeway to decide what is best.
Mindful of the criticism, the Canadian Securities Administrators, which represents all 13 regulators, has published a proposal that would give boards more opportunity to defend against unwanted advances. Rights plans adopted by boards would remain in effect as long as shareholders vote to extend them, or until hostile bidders muster a majority of votes to quash them.
Of course, this being Canada, Quebec's Autorité des marchés financiers has published its own distinct proposal. It would give boards of targeted companies U.S.-style powers in opposing hostile bids: Boards could adopt poison pill plans without ever securing shareholder approval; the AMF would only step in if the boards acted abusively, while any challenges would be for the courts to decide.
The comment period for both proposals has been extended once, to next month, but it seems likely to be extended further. Last Friday, the Quebec government further muddied the waters by appointing a task force drawn from the who's-who of Quebec Inc. to write up recommendations by this fall to block hostile takeovers of Quebec companies. It's clear the move is all about protecting Quebec jobs and head offices, not shareholder interests. But the proposed defensive tactics may not be in the best long-term interests of the companies either, if they prevent better-managed and deeper-pocketed suitors from gaining control of poorly performing Quebec companies. (Yes, Rona, we're thinking of you.)
If shareholders suspect their interests are not the number one concern for a company's directors, they're right. It's not paranoia, it's case law: While directors have a fiduciary duty to perform, a 2008 Supreme Court decision related to the attempted buyout of BCE Inc., states that the board's duty extends to the corporation itself and establishes no priority among the stakeholder groups. Those groups could theoretically include employees, bond holders and customers.
Shareholders have good reason to worry that their voice will be lost if the new proposals go through. Those who wear their Canadian pride on their sleeves should be heartened: takeovers of Canadian, and especially Quebecois, firms are about to become harder to pull off. Less patriotic investors won't be so pleased.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow Sean on Twitter at @seansilcoff .
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Sean Silcoff