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Going hostile: The rules on unsolicited deals may be changing

Going hostile: the rules on unsolicited deals may be changing

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Changes could be on the way Canada's long-established rules on "poison pills," criticized for leaving domestic companies almost defenceless against hostile takeovers. But don't hold your breath.

The Ontario Securities Commission has been discussing proposed reforms that would add more-potent poison to those pills and drastically alter the Canadian landscape for corporate deals. Officials from the regulator have been meeting with leading Bay Street lawyers after floating the proposal publicly late last year.

OSC officials have also been making their case to the Canadian Securities Administrators, the umbrella group for the country's fragmented provincial and territorial securities regulators, which must approve any rule change.

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Despite these hurdles, some observers expect an announcement this year. But Naizam Kanji, the OSC's deputy director of finance, whose comments about the proposed reforms at a fall event had Bay Street securities lawyers buzzing, is vague about the timing.

"We are working with the CSA in reviewing the current approach to rights plans and determining the appropriate framework going forward," Mr. Kanji said in an e-mailed statement.

"I am not able to say with any certainty when any proposals would be presented to the public for comment."

The changes, if they ever come to pass, would make it much easier for Canadian boards of directors to fend off hostile takeovers, something many feel is needed. But some say the proposed changes are misguided, because shareholders – not boards – should have the final say. Others say the proposals would not go far enough.

Poison pills are typically triggered when a hostile bidder obtains a pre-determined certain number, or percentage, of shares in a target company. Poison pills usually consist of rights issued to existing shareholders that allow them to buy new shares at bargain prices. If exercised, they would dilute the hostile bidder's holdings, making a takeover much more expensive or even impossible.

Unlike in the United States, the rules enforced by the OSC and other Canadian regulators usually toss out poison pills after a short period, about 40 to 70 days. They are typically allowed to stand only long enough to allow a "white knight" suitor to buy the company instead of the hostile bidder. In the United States, courts have allowed boards of directors to use poison pills to "just say no" to hostile bidders.

Concerns that the current approach leaves Canadian companies too vulnerable to predatory foreigners have prompted calls for reforms. Some critics cite what they call a "hollowing out" of corporate Canada, pointing to foreign takeovers of key companies such as mining giants Inco and Falconbridge.

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A handful of high-profile contradictory rulings from securities commissions in recent years has also caused uncertainty: In 2007, the Alberta Securities Commission allowed a poison pill to block the takeover of Pulse Data Inc.; and in 2009, the Ontario Securities Commission upheld a poison pill in the case of Neo Material Technologies Ltd.

But other decisions held to the traditional view, including the B.C. Securities Commission's 2010 ruling in Lions Gate Entertainment Corp. in which a poison pill was killed off before a shareholder vote.

Mr. Kanji's proposals, as outlined last fall, would allow companies facing hostile takeovers to maintain poison pills indefinitely, so long as shareholders have approved the pill at the company's most recent annual general meeting or at the time of a hostile bid.

Edward Waitzer, a former OSC chairman who is a partner at Stikeman Elliott LLP in Toronto, said the idea is a good step forward but doesn't quite go far enough. He points out that under Mr. Kanji's proposal, the OSC would still retain its catch-all "public interest" power to intervene in poison-pill cases.

Mr. Waitzer argues that the OSC should get out of the business of regulating poison pills altogether, and leave it to the courts, as is the case in the United States. Still, he welcomes the discussion.

"From my perspective, this is all good. The mere fact that [Mr. Kanji]is putting something out there, and is prepared to engage in discussion about it, kind of puts the policy in play," Mr. Waitzer said. "If we have a robust, open discussion, hopefully we'll come up with a better result than we have now."

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Lawyer Mark Adkins, of Blake Cassels & Graydon LLP's New York office, said the new rules, if they come to pass, would clear up questions that hang over poison pills in Canada, allowing target companies a "just say no" defence provided they have the support of their shareholders.

"It used to be a black-and-white issue," said Mr. Adkins, who advises foreign bidders for Canadian companies. "It has been a bit less certain in the last couple of years."

David Woollcombe, the leader of McCarthy Tétrault LLP's business law group in Toronto, sees the proposed changes as the middle point between the U.S. model, which clearly gives the upper hand to the boards of targeted companies; and the current Canadian one, where shareholders are king.

"I think there's a recognition that the old model, the hard-and-fast 'the pill must go, after some period of time,' is not particularly efficient, helpful or transparent," Mr. Woollcombe said. "So I think they're trying to move the dial a bit."

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About the Author
Toronto City Hall Reporter

Jeff Gray is The Globe and Mail’s Toronto City Hall reporter. He has worked at The Globe since 1998. From 2010 to 2016, he was the law reporter in Report on Business, covering Bay Street law firms and white-collar crime. He won an honourable mention at the National Magazine Awards for investigative journalism in 2010. More

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