Shareholder Rights Plans Canadian Regulators Propose Modified US Style Of Regulation

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1 Shareholder Rights Plans Canadian Regulators Propose Modified US Style Of Regulation Kevin Thomson Lisa Damiani \\mtlapps02\marketing\systems\kv - Research, Interaction & Tikit\Article cover-

2 g u i d e t o t h e l e a d i n l a w y e r s i n c a n a d a g500 Shareholder Rights Plans Canadian Regulators Propose Modified US Style Of Regulation By Kevin Thomson and Lisa Damiani Davies Ward Phillips & Vineberg LLP For many years, Canada has been considered one of the most bidder-friendly jurisdictions in the world because of the limited number of defenses available to Canadian companies in the face of an unsolicited take-over bid. A shareholder rights plan (also called a poison pill ) is an effective defensive tactic because if triggered it results in massive dilution of the prospective bidder, making a take-over bid uneconomic. A rights plan can be shareholder-approved and in place at all times, or can be a tactical plan, implemented in the face of a threatened or actual take-over bid. A target board in the United States can, in certain circumstances, maintain a shareholder rights plan in place indefinitely. In contrast, Canadian securities regulators typically have been willing to cease trade rights plans of Canadian issuers within approximately 45 to 70 days following commencement of a hostile bid, on the theory that shareholders, not boards, should determine the success or failure of the bid. Recently, staff of the Ontario Securities Commission (OSC) outlined a new proposed regulatory regime for rights plans that, if adopted, would give Canadian companies more time to respond to an unsolicited take-over bid. While it will not put Canadian companies on equal footing with their counterparts in the United States in terms of the types and strength of available defensive measures, from a target company perspective, the proposed regime is in some ways a significant improvement from the traditional approach applied by the Canadian securities regulators. Current Approach In Canada, a board of directors can adopt a shareholder rights plan at any time. A rights plan adopted in the absence of an imminent take-over bid is often referred to as a shareholderapproved rights plan, because the Toronto Stock Exchange requires that such a plan be approved by shareholders within six months of adoption. A rights plan adopted in the face of an actual or threatened take-over bid is generally referred to as a tactical rights plan. Tactical plans typically have a duration that is substantially less than the six month shareholder-approval period mandated by the TSX and, accordingly, generally are not put forward for approval by the target s shareholders. Recently, two different hybrid approaches have emerged. The first is a shareholder-approved tactical plan this is a plan adopted in the face of a take-over bid and promptly put to shareholders for approval. The other new approach is to layer a tactical plan (adopted in the face of a take-over bid) on top of the company s existing shareholder-approved rights plan. A bidder making an unsolicited take-over bid for a Canadian public company can apply to the applicable provincial securities commission for an order cease trading the target s rights plan. A cease trade order effectively terminates the operation of the plan, allowing the bidder to safely proceed with its bid. For many years, the general approach of the Canadian securities commissions has been that a target company cannot rely indefinitely on a rights plan to prevent shares from being purchased by a hostile bidder. While a rights plan can be used to delay completion of a hostile bid in order to give the target time to conduct an auction and identify a white knight or formulate and articulate a stand-alone or other alternative long-term vision for the company, at some point the pill must go. With a few exceptions, the regulators have cease traded rights plans on the basis of the fundamental principle that ultimately shareholders must be given the opportunity to choose between the offer made by the unsolicited bidder and any alternatives proposed by management. As a result, the question for the Canadian securities regulators is often phrased as Has the time come for the pill to go? The securities regulators have articulated a series of factors to be considered in formulating the answer to that question, but generally will cease trade a rights plan somewhere in the range of 45 to 70 days after the start of an unsolicited bid. A 1

3 l e x p e r t / a m e r i c a n l a w y e r Over the last five years, there have been decisions by the Alberta and Ontario securities commissions that have deviated from the traditional approach and allowed a rights plan approved by shareholders in the face of an unsolicited bid to remain in place indefinitely. On the other hand, the British Columbia Securities Commission recently reached an opposite conclusion when faced with a similar situation. There are concerns among practitioners about the different approaches taken by the provincial securities commissions, creating an unequal and uncertain hostile bid regulatory regime across Canada. New Proposal In December 2011 at the annual Dialogue with the OSC seminar, staff of the OSC indicated that they planned to bring forward to the Canadian Securities Administrators a new proposal for the regulation of shareholder rights plans in Canada. The goal is for the Canadian securities regulators to get out of the business of deciding when the pill must go, shifting this decision to the company s shareholders. This initiative is still in the preliminary stages; draft rules have not yet been formally tabled for comment. However, staff of the OSC have begun to describe to practitioners the proposals currently under consideration. As is currently the case, a shareholder rights plan would become effective immediately upon approval by the company s board of directors. Under the new proposal, the rights plan would have to be put to shareholders for their approval by majority vote by the earlier of (i) 90 days following adoption of the rights plan, and (ii) 90 days after commencement of a formal take-over bid for the target company (if applicable). If the rights plan receives shareholder approval, it would need to be re-approved by shareholders every year thereafter to remain in place. Shareholders would also have the ability to terminate the rights plan at any time by majority vote. If shareholders refuse to approve a rights plan, the company would be prohibited from adopting a new rights plan for 12 months unless a take-over bid is made for the company during that 12- month period. Companies with an existing rights plan could layer a second rights plan (that would become effective upon adoption by the board of directors) on top of the pre-existing plan. The second rights plan would again require shareholder approval within the time periods described above. The approach to material amendments to a rights plan would be similar to the initial adoption of the plan. The amendments would be effective upon adoption by the board of directors, but would have to be submitted to shareholders for approval within 90 days. Shares held by the bidder under a formal take-over bid and its joint actors would be excluded in determining whether the rights plan, or its termination, or any material amendment, received the required majority approval of the shareholders. If there is a large blockholder who would be grandfathered under the rights plan, shareholder approval of the plan would require two votes one that includes the shares held by the blockholder and one that excludes such shares. Shareholder rights plans would be required to include a waive for one, waive for all provision, such that if the target board waives the application of the rights plan for a particular take-over bid, the target board must waive the rights plan for all take-over bids. The waive for one, waive for all requirement applies only to take-over bids. If a friendly acquisition transaction is structured as a one-step transaction, such as a plan of arrangement, the rights plan could stay in place to delay or forestall a competing hostile take-over bid. Although the objective of the proposal is to avoid the securities commissions becoming arbiters of when the pill must go, staff of the OSC have made it clear that rights plans will still be subject to the Commission s public interest discretion, meaning that the OSC will step in and impose a remedy in the unusual situation in which a company s actions in relation to a shareholder rights plan are abusive or not in the public interest. Shareholders as Gatekeepers The new proposal relies heavily on shareholders and shareholder approval as the new gatekeeper to determine when a rights plan can remain in place. One of the most serious concerns that has been raised regarding this proposal is the heavy reliance it places on what is well understood to be a deeply flawed shareholder voting system in Canada. The Canadian shareholder voting system lacks transparency and cannot always be relied upon to generate an accurate reflection of the view of shareholders. The votes of some shareholders may not be counted for a variety of reasons, including late delivery of meeting materials or incorrectly completed proxy or voting instruction forms. On the other hand, the voting rights for some shares may be voted more than once (called multiple voting or, when the number of votes for an intermediary s position exceeds the size of the position, over voting ), generally as a result of securities lending transactions or inefficiencies in the back office operations of the various intermediaries whose clients own shares of the relevant company. The system also suffers from empty voting, which occurs where an investor that has the right to vote does not have a meaningful economic interest in the outcome. This can occur as a result of derivatives or hedging transactions, where an investor has used a synthetic instrument or engaged in shorting in order to reduce its economic exposure to the shares of the issuer. But it also can occur where a shareholder sells its shares between the record date for a meeting of shareholders and the A 2

4 g u i d e t o t h e l e a d i n l a w y e r s i n c a n a d a g500 date of the meeting. In that case, the investor has the right to vote the shares it held on the record date, but at the date of the meeting the investor has no economic interest in the outcome of any resolution put to shareholders. This issue may be particularly acute in the context of a proposed M&A transaction, where trading volumes, and therefore shareholder turnover, are generally much higher than normal. In a situation in which a shareholders meeting is called following the announcement of a hostile bid, shareholder turnover often results in a dramatic shift between those who held shares on the record date compared to those who hold shares on the meeting date, with the result that the vote may not reflect the wishes of those who acquire very substantial share positions prior to the meeting. Role for Proxy Advisory Firms The shift of responsibility for rights plans from securities regulators to shareholders will also be impacted by the increasing influence of proxy advisory firms. Proxy advisory firms have had an important role in the development of rights plans in Canada. Firms such as ISS and Glass Lewis have specific guidelines for Canadian rights plans, which must be satisfied in order to avoid a negative voting recommendation. Most rights plans of Canadian public companies have been drafted specifically to comply with these guidelines. For example, the 20 per cent triggering threshold, 60-day permitted bid period and exemption for permitted lock-up agreements (all of which are very common in Canadian shareholder-approved rights plans) are all rights plan characteristics derived from the guidelines of these proxy advisory firms. As a result of these guidelines, and the influence of the proxy advisory firms, shareholder rights plans in place for Canadian companies are almost always a dramatically watered-down version of a typical rights plan for a US company. The OSC s new proposal will increase shareholders focus on the specific terms of shareholder rights plans. Under the current regime, even when shareholders have approved a rights plan (outside of the context of a specific bid), there is a wellfounded expectation that the rights plan will be cease traded by the securities regulators within approximately 45 to 70 days after an unsolicited take-over bid is commenced. If the new proposal is adopted, the securities regulators will no longer play that role, and shareholders will have to be satisfied that the rights plan will not present too formidable an obstacle for a possible future change of control transaction. It is uncertain how the proxy advisory firms will respond to the proposed changes to the regulatory regime. Will they review and revise their guidelines for Canadian shareholder rights plans? For United States companies (where the SEC will not interfere with a rights plan and there is no requirement for shareholder approval), the proxy advisory firms guidelines for an acceptable shareholder rights plan are much more liberal. For example, a rights plan can stay in place for up to one year without shareholder approval and there is no requirement to include a permitted bid provision. It remains to be seen whether the proxy advisory firms will use this opportunity to adopt a more liberal set of guidelines, similar to those that apply to United States companies, and give Canadian target companies more flexibility to tailor their rights plans to the company s particular situation. It is equally possible that the proxy advisory firms will move in the opposite direction and either maintain their historical rights plan policies, or seek to further constrain the ability of Canadian companies to utilize a rights plan to materially delay or possibly block an unsolicited bid. Although it is possible to obtain the required shareholder approval in the face of a negative recommendation from the proxy advisory firms, it generally involves an extraordinary effort, including management time spent explaining the rights plan and its benefits to key investors and the expense and ongoing efforts of a proxy solicitor. In addition, because the shareholder approval would last only one year under the new proposal, the issuer would have to repeat the exercise every year. If the proxy advisory firms insist on watered-down plans that have limited usefulness, companies may well respond by not adopting ordinary course rights plans and instead waiting to adopt a tactical plan in the face of a hostile bid, if one arises. Strategic Considerations The new proposal would change the playing field for target companies and change the approach to both making and defending against unsolicited take-over bids in Canada. Companies would need to assess whether to maintain a shareholder-approved rights plan, or adopt a tactical plan if and when a bid is made, or possibly follow both courses of action through a layered approach. Under the new proposal, an advantage to a shareholder-approved rights plan is that it can stay in place to forestall a bid until the earlier of the date that the rights plan has to be re-approved by shareholders, being 12 months after shareholder approval was obtained, and the date that shareholders determine by majority vote to terminate the plan. Where the target company has a shareholder-approved rights plan in place, two strategies likely to be pursued by hostile bidders are (i) to time the bidder s unsolicited bid to coincide with the target s annual meeting at which the existing shareholder-approved rights plan will be considered, or (ii) to accompany an unsolicited bid with a requisition for a meeting of target shareholders to consider the termination of the existing rights plan. By announcing an unsolicited bid shortly before the target company s annual meeting, the bidder would try to thwart A 3

5 l e x p e r t / a m e r i c a n l a w y e r the shareholders approval of the continued operation of the rights plan. The outstanding or proposed bid will put pressure on shareholders to vote against the resolution in order to have the opportunity to tender their shares to the bidder s premium offer. As discussed above, the significant amount of shareholder turnover that generally occurs following announcement of a proposed bid may impact the success of this strategy, if a large number of shareholders who hold target shares on the record date sell those shares before the meeting date. In Canada, one or more holders of at least 5 per cent of a company s outstanding voting shares can requisition a shareholders meeting, which requires the company s directors to call a shareholders meeting to consider the matters outlined in the requisition. If a hostile bidder has a 5 per cent toehold interest (which is below the ownership threshold that requires public disclosure in Canada), the bidder can requisition a shareholders meeting to consider a resolution terminating the rights plan. Even if the bidder does not own any target shares, the bidder may be able to persuade other shareholders holding 5 per cent or more of the target (in aggregate) to requisition the meeting, or may build such a commitment into lock-up agreements signed with key shareholders prior to the announcement of the bid. Although there are limitations on the business that can be tabled by the requisitioning shareholder, absent unusual circumstances, a resolution to terminate the rights plan would be acceptable business for a requisitioned meeting. The bidder would pursue all available avenues to persuade shareholders to vote for the termination of the existing rights plan at the meeting. Under Canadian corporate legislation, the target s board generally is required to call the meeting within a relatively short period following receipt of the requisition, and requisitioned meetings generally are held within approximately 60 days after the meeting is called, with the effect that a requisitioned meeting generally will be held within approximately 90 days from the date of the requisition. As an alternative to, or potentially in addition to, a shareholder-approved rights plan, a target company could adopt a tactical plan if a hostile bid is commenced. Under the proposed regulatory regime, such a plan could remain in place for 90 days without being put to shareholders for approval. In light of the typical time periods associated with conducting a requisitioned meeting and the time afforded by adopting a tactical plan, if target board support cannot be obtained, it is virtually certain that under the proposed regime, a hostile bid could not succeed until at least 90 days following its commencement. In the unusual circumstance in which a target board determines that the completion of a change of control transaction is unlikely to be supported by shareholders, such as a very low premium or negative premium offer made at a time when white knights are unlikely to surface, the board may well adopt a tactical plan and then immediately put the plan to shareholders for approval. Under the proposed regime, if such approval is obtained, the plan could be effective to block the hostile bid without the threat of securities commission intervention to cease trade the plan. Conclusions If the new proposal is adopted, we predict that many Canadian target companies will adopt a tactical rights plan when faced with an unsolicited bid. Target companies will use the minimum 90-day period afforded by the tactical plan to identify an alternative transaction or give the board leverage to obtain a better price from the original bidder. In cases where the unsolicited bid presents an unusual harm to shareholders, we anticipate that target companies may well choose to put their tactical plan to shareholders for approval in order to extend its effectiveness. Given the timing advantages offered by tactical rights plans under the new proposal, it remains to be seen whether many Canadian public companies will decide to abandon the typical shareholder-approved form of rights plan and the accompanying requirement for annual shareholder approval to maintain that plan, in favor of the adoption of a highly tailored tactical plan if a hostile bid for the company is announced at some future date. A 4

6 g u i d e t o t h e l e a d i n l a w y e r s i n c a n a d a g500 Kevin Thomson, Davies Ward Phillips & Vineberg LLP Tel: (416) Fax: (416) kthomson@dwpv.com K evin is a senior partner in the firm s Toronto office. Member of the firm s Management Committee (since 1997). Widely recognized as one of Canada s leading mergers & acquisition lawyers, with extensive experience in the natural resources sector. Recognized as a leading M&A lawyer by numerous ranking organizations, including Chambers Global: The World s Leading Lawyers for Business ( respected throughout the market very smart, strong and thorough great judgment ), Expert Guides Guide to the World s Leading Mergers & Acquisition Lawyers, Who s Who Legal s International Who s Who of Business Lawyers, Best Lawyers The Best Lawyers in Canada, the IFRL1000, PLC s Which Lawyer? Yearbook, The Lexpert /American Lawyer Guide to the Leading 500 Lawyers in Canada and the Lexpert Guide to the Leading US/Canada Cross-border Corporate Lawyers. Has acted as lead counsel in numerous hostile and friendly public company change of control transactions. Representative transactions include including Barrick Gold s unsolicited bids for Placer Dome (at the time the largest hostile bid in Canadian history) and NovaGold Resources, Minmetals Resources hostile bid for Equinox Resources and friendly bid for Anvil Mining, Newmont Mining s acquisition of Fronteer Gold, Toromont Industries unsolicited bid for Enerflex Systems, Fresnillo s unsolicited bid for MAG Silver and Fronteer Gold s unsolicited bid for Aurora Energy. Lisa C. Damiani, Davies Ward Phillips & Vineberg LLP Tel: (416) Fax: (416) ldamiani@dwpv.com Lisa is a partner in the Mergers & Acquisitions, Capital Markets and Corporate/Commercial practices and a member of the Mining practice group. Represents clients in both friendly and unsolicited public acquisition transactions as well as private acquisitions and dispositions of businesses and individual assets. Extensive experience in the mining sector, as well as in transactions in the oil and gas, gas compression, aerospace, logistics, manufacturing and entertainment industries. Recognized as a repeatedly recommended lawyer in the areas of Mergers & Acquisitions and Mining in The Canadian Legal Lexpert Directory; an up-and-coming lawyer in the area of energy & natural resources: mining by Chambers Global: The World s Leading Lawyers for Business; and a leading practitioner of corporate law by The Best Lawyers in Canada. Selected as a top 40 lawyer in the Lexpert Rising Stars: Leading Lawyers Under 40. A 5