To read "M&A: Tory's Top Trends for 2011" in full, please click here.
Two well-known Canadian companies dominated the M&A headlines last summer and fall, one as the hunter and one as the hunted. Although the outcomes in both situations were similar – hostile bidders turned away – the cases highlight an important question: whether directors of Canadian companies facing a hostile bid find themselves with a relatively empty toolbox compared with directors in other jurisdictions.
As the battle for Potash Corporation of Saskatchewan was waged, only three possible outcomes appeared evident:
- BHP Billiton would be successful in its bid;
- Potash Corporation would find some alternative transaction led by a "white knight"; or
- The Canadian industry minister would refuse to grant Investment Canada Act approval for the BHP transaction.
We all know now that it was a failure to win Investment Canada approval that ended BHP's deal (See Trend 1). However, at no time during the Potash saga did observers really expect that, unless the federal government intervened, Potash Corporation would never manage to simply turn away BHP without an alternative transaction in hand. In other words, without unusual government intervention, Potash Corporation was "in play" and therefore a transformational outcome was imminent one way or another.
Meanwhile, Quebec-based convenience store operator Alimentation Couche-Tard Inc. embarked on a hostile bid for Iowa-based Casey's General Stores Inc. The range of possible outcomes in that case was far from certain, and both sides employed many different tactics during the fight. Those tactics included
- the issuance by Casey's of a substantial amount of debt on a private placement basis, with terms that included a "poison put" in the event of a change of control;
- a buy-back of approximately 26% of Casey's outstanding shares using the proceeds of the debt issuance; and
- a proxy battle launched by Couche-Tard for control of Casey's board.
At the end of the day, after losing its proxy battle by a wide margin and with Casey's board dangling the prospect of a higher offer from 7-Eleven, Couche-Tard refused to raise its bid and walked away. Ultimately Casey's board received a higher offer from 7-Eleven, but still declined to take the offer to shareholders – deeming it inadequate.
The Casey's board was able to use the protection of a shareholder rights plan, but also benefited from a corporate statute in Iowa that prevented Couche-Tard from acquiring 100% of Casey's unless Couche-Tard received the support of Casey's board or was able to obtain 85% of the outstanding shares under its tender offer.
The Canadian Approach: "There Comes a Time When the Pill Must Go"
Securities regulators in Canada have long held the view that the best approach in a hostile bid is to have an unrestricted auction for control. They regard this approach as consistent with their mandate to protect the interests of investors – shareholders should not be deprived of the ability to sell their shares as they see fit. The securities regulators make clear in their national policy on defensive tactics that these tactics may be used only "in a genuine attempt to obtain a better bid." Historically, there has been no room in the regulators' minds for any tactics that would "deny or limit severely" the ability of shareholders to respond to a bid.
In the takeover bid context, the securities regulators have wielded enormous power to implement this philosophy. Through their authority to issue cease trade orders, the regulators have the power to pull the plug on rights plans, the most commonly used Canadian defensive tactic. The regulators' approach, however, is hard to reconcile with the Supreme Court of Canada's interpretation of the duties of directors in a change-of-control situation. In the BCE decision in 2009, the Supreme Court expressly rejected the notion that the directors' only role in a change- of-control transaction is to maximize value for shareholders; the Court instead reiterated the principle that directors' duties are owed to the corporation and that directors must consider the impact of a transaction on all stakeholders. Although the BCE decision certainly suggests that there may be appropriate circumstances for a board to "just say no" and employ defensive tactics to turn away a hostile bidder, rather than simply to buy time to find a white knight, the securities regulators are likely to reject that board decision and turn the decision regarding the company's future over to the shareholders.
Recent rights plan decisions of the Ontario and Alberta securities regulators (in Neo Material Technologies and Pulse Data, respectively) suggested that perhaps the old way of thinking about defensive tactics may be changing in light of BCE. In both those cases, securities regulators refused to cease trade a rights plan in the face of a hostile bid. However, in both cases, shareholders, with full knowledge of the hostile bid proposed to them, voted to ratify the rights plan. The OSC's most recent decision in the Baffinland Iron Mines case, however, makes clear that its previous Neo decision turned on shareholder approval of the plan in the face of the bid and should not be viewed as recognizing any right of the board to use a poison pill to deny shareholders access to a bid. The decision of the British Columbia Securities Commission in Lionsgate is also unequivocal in its conclusion that the position of securities regulators in Canada should not change as a result of Neo and Pulse Data and that there will always come "a time when the pill must go."
The "Just Say No" Defence in the United States and a Shifting International Mood
Foreign takeovers of domestic companies are a rising concern in all jurisdictions, particularly as the global financial crisis has made targets vulnerable to opportunistic buyers. Part of the concern in Canada has related to a track record of broken promises by foreign acquirors, but Canadian companies have also not fared that well recently in attempting hostile transactions in other jurisdictions (in addition to Couche-Tard's abandoned bid for Casey's, Agrium Inc. was forced after a year to abandon its bid for CF Industries in early 2010). The concern expressed during the Potash debate about Canada being a "boy scout" when it comes to foreign takeovers may be driven less by the federal government's position on foreign investment and more by Canadian directors' inability to do much more than initiate an auction for control of the company once a company is in play.
In the United States, directors have the well-known "Revlon duty" to maximize shareholder value, but that duty arises only after a board has made a decision to sell control of the company. Until that decision is made, the board is free to implement defences against a takeover bid, including adopting a rights plan or a panoply of other "shark repellents." However, in Delaware and most states, the Unocal "enhanced scrutiny" standard applies to a board's action to implement or amend a rights plan after the company is put in play by a third-party bidder or by a board decision to sell a controlling interest in the company. Under this enhanced scrutiny standard, in order to receive the protection afforded by the business judgment rule, the directors must show that they had reasonable grounds to believe that a danger to corporate policy and effectiveness existed and that the defensive response was reasonable and proportionate to the perceived threat.
Unlike the Canadian securities regulators, the U.S. Securities and Exchange Commission has stayed out of the regulation of defensive tactics, leaving them to the courts to police as a matter of fiduciary duties under applicable state laws governing the fiduciary obligations of directors. The SEC has instead focused on ensuring that shareholders have adequate information with which to make a decision. For example, while Casey's was able to maintain its rights plan in place throughout its contest with Couche-Tard without regulatory interference, in Canada the rights plan would almost certainly have been nullified by the regulators after 45 to 60 days.
Even the United Kingdom is rethinking its approach to takeover bids after Kraft's acquisition of the iconic British candy maker Cadbury. That deal and the surrounding publicity have prompted the U.K. regulator to propose new rules intended to reduce the tactical advantage of bidders in takeover situations.
Continued Debate in Canada
Despite the debate over the sufficiency of the tools available to directors of Canadian companies facing a hostile takeover, it is doubtful that we will see any significant movement on the issue from securities regulators in the near future, particularly given the lack of a national securities regulator.
In light of Lionsgate and Baffinland, it now seems clear that Neo and Pulse Data do not herald a real shift in policy by securities regulators and do not open the door to a "just say no" defence. However, we expect that directors facing a hostile bid will continue to try to test the "old" thinking of securities regulators by attempting to keep rights plans in place longer or by obtaining shareholder approval of plans in the face of a hostile bid.
We also anticipate that boards and their advisers will look to develop innovative defensive tactics that, unlike rights plans, are not susceptible to the cease trade powers of securities regulators and that would require intervention by the courts. The courts are a preferable venue for targets to defend defensive tactics since courts are more likely than securities regulators to be deferential in their review of target board actions, particularly in light of the new fiduciary duty framework established in the BCE decision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
