Canada's securities regulators plan a more potent poison pill

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Canadian securities regulators are aiming to make it harder for hostile bidders to take over domestic companies by toughening rules on so-called poison pills.

They are expected to unveil proposed new rules next month that would loosen the restrictions on the ability of corporate boards to use poison pills to fend off takeovers, sources say. If adopted, the proposal would mean a major overhaul for a regime that has long been criticized for leaving Canadian companies too vulnerable.

Quebec's securities regulator plans to announce its own competing and more radical proposal, amid public and government concern raised by last year's proposal by U.S.-based Lowe's Cos. Inc. to acquire retailer Rona Inc.

Many companies try to use poison pills, also known as shareholder rights plans, to fend off unsolicited takeover bids. The typical pill allows existing shareholders to buy a large amount of new shares at cut-rate prices. This dilutes the hostile bidder's holdings, making a takeover too expensive.

Under the current policy, regulators usually disallow a poison pill after 40 to 70 days, leaving it in place long enough only for a target company to find a "white knight" bidder to buy it instead. The new proposal by the Canadian Securities Administrators, an umbrella group for provincial regulators, would allow boards to keep it in place much longer.

Quebec's securities regulator, the Autorité des marchés financiers (AMF), plans to releases its proposal at the same time.

The CSA plan, as currently proposed, and circulated among senior securities lawyers on Bay Street, would change the landscape by allowing corporate boards to use a poison pill indefinitely, provided it was approved at the company's most recent annual meeting or is approved by a shareholder vote in the face of a hostile bid. The reforms were first floated by the Ontario Securities Commission more than a year ago.

Phil Evershed, head of global investment banking with Canaccord Genuity, said Canada's current regime has attracted U.S. hostile bidders: "You have U.S. acquirers coming here because we have better takeover rules." Even if an initial hostile bidder fails, the current rules often result in the sale of the target company.

The CSA's proposal, which will be subject to public consultations before any final decision is made, is meant to reconcile recent contradictory securities commission tribunal decisions in Ontario and Alberta that allowed poison pills to stand indefinitely if a majority of shareholders had voted in favour of the pill.

Quebec's plan is more radical. The AMF proposal would essentially allow boards of directors to initially say "no" to a hostile bid. But the AMF would step in if the target company's directors appeared to be blocking a takeover bid out of their own self-interest, instead of the company's best interest. Hostile bidders would also likely challenge the actions of target companies' boards in court, which is what happens in the United States.

"In our view, we should still use our public interest jurisdiction when there are clear cases of abuse of shareholders' rights or of capital markets," said Louis Morisset, superintendent of securities markets in Quebec, in an interview. "This does not mean in my mind that a board would be in a situation to just say no and just say no forever."

The previous Liberal provincial government and the current Parti Québécois government have said boards of directors need greater power to fend off hostile bidders. Mr. Morisset said the AMF's approach is not "dictated by the government," and that the securities regulator has been considering changes for several years.

Mr. Morisset calls the CSA's plan a "very partial solution." He has been talking up his alternative, which also includes changes to other takeover bid rules, with securities lawyers in Montreal and on Bay Street. While he says the AMF hopes to provoke a public debate, he adds that Quebec would go along with the CSA's proposal if its own fails to attract support.

With files from Boyd Erman