Shareholder coalition critical of CSA’s new corporate takeover rules

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Canada's largest shareholder coalition is disappointed with new corporate takeover rules unveiled Thursday that will require hostile bidders to keep their offers open for 105 days, giving companies far more time to respond to unwanted bids than the current 35-day waiting period.

Regulators originally proposed a new 120-day minimum bid period in Canada, which faced criticism from some groups as too lengthy a waiting period for bidders trying to conclude a takeover.

The Canadian Securities Administrators (CSA), an umbrella group for all provincial securities commissions, said Thursday that its members have decided to choose 105 days instead. The CSA said it made the change from 120 days for largely technical reasons, and not in response to requests for a shorter takeover regime.

The new rules, which are scheduled to take effect May 9, were developed in response to complaints from companies that they have been forced into accepting takeover bids because they did not have enough time to find a better offer or convince shareholders to reject a bid.

Stephen Erlichman, executive director of the Canadian Coalition for Good Governance, which represents most of Canada's largest institutional shareholders, said his members wanted a 90-day waiting period on takeover bids, arguing that research shows the vast majority of better offers emerge within 95 days, and a longer time period creates pointless delays and adds risks that could deter bidders.

Mr. Erlichman said the decision to keep bids open for 105 days is "a classic Canadian compromise" but there is no cost-benefit analysis to show it is a better time frame than 90 days. Even more concerning, he said, the new rules are silent on whether companies could adopt a poison-pill defence to delay an unwanted bid further at the end of 105 days.

Because it is not explicitly forbidden, some companies will inevitably try to adopt a pill, Mr. Erlichman said, and bidders will have to go before provincial securities commissions to argue for it to be removed.

"You could potentially get different answers depending on where that poison pill hearing takes place," Mr. Erlichman said. "You've put uncertainty and costs into the process again. I thought one of the reasons behind this was to give boards more time and to get certainty into the process, and this detracts from that."

The CSA said it chose the 105-day period because a 120-day waiting period could conflict with federal and provincial securities laws governing "squeeze out" rules that allow buyers who have acquired 90 per cent of a company's shares to force out remaining shareholders to take a company private.

Under the so-called compulsory acquisition provisions, buyers can only squeeze out remaining shareholders within 120 days of launching a takeover, but could run out of time if the takeover bid must also be open for 120 days.

The new takeover rules will also require bidders to offer a 10-day extension at the end of every bidding period to give shareholders a chance to take up an offer once they see how others have responded. Current rules do not require any extension after the 35-day waiting period.

The mandatory 10-day extension was adopted in response to complaints that shareholders felt pressured to tender their shares to an offer they didn't like rather than risk being left as minority shareholders with no chance to sell later.

Securities lawyer Jeremy Fraiberg of Osler, Hoskin & Harcourt LLP said the decision to cut the waiting period to 105 days from 120 is "a technical point" that will not make a substantial difference for most companies or bidders.

But he said the new system broadly is a major shift for Canada. Mr. Fraiberg said one of the most significant new provisions is a rule requiring bidders to be offered 50 per cent of all shares they don't already own before they buy any shares tendered in an offer.

The change means hostile bidders cannot buy a smaller amount of shares if that is all that is tendered, and shareholders cannot sell their shares unless a majority of others also opt to sell.

"Now an individual's right to sell their shares in a bid is subject to the wishes of the majority," Mr. Fraiberg said.

Mr. Fraiberg said it is striking that the new rule is silent on poison pills – also known as rights plans – and said companies may succeed in winning more time with a rights plan if they can make a compelling argument to a regulator.

"As a practical matter you're going to have to have exceptional circumstances – maybe a shareholder vote to approve a pill or some late-breaking development in an auction – and in those exceptional circumstances maybe you'll get more time," Mr. Fraiberg said. "We haven't seen the last of rights-plan hearings in Canada."