Last month, the Canadian Securities Administrators (CSA) published for comment proposed National Instrument 62-105 (NI 62-105), a discussion on which can be found here. The proposal suggests a new regulatory framework for the treatment of shareholder rights plans or “poison pills”. In essence, the proposal creates a more flexible framework of defensive tactics that can be used by target boards and shareholders. If adopted, NI 62-105 would significantly change the Canadian M&A landscape.
Under the proposal, a rights plan would be effective when adopted by a target board. Such plan would be allowed to continue so long as it is approved by a majority of security holders within 90 days from the date of adoption, or 90 days after a take-over bid has been commenced. To that end, regulators will not intervene unless it is in the public interest to do so. Currently, if a hostile bidder asks a Canadian securities regulatory authority to cease trade a rights plan to render it inoperative, that authority will generally do so after a specified time.
While the proposal, if enacted, will certainly discourage hostile take-over bids, it may act as a catalyst for an increase in shareholder activist activity.
Specifically, if the proposal has the intended effect of strengthening a target board’s defensive capability, acquirers who traditionally pursue control of a company through a hostile takeover may instead engage target boards in a proxy contest for director seats. This route, whereby a dissident shareholder puts dissident directors up for election who are favourable to their cause, may be the most obvious method to effect corporate change. It also saves the dissident shareholder from having to go head-to-head against a target board with recourse to an unimpeded shareholder rights plan.
We may also see an emergence of proxy contests centered on the rights plans themselves. This type of proxy contest involves dissident shareholders seeking support from other shareholders to terminate the rights plan by majority shareholder vote. If a dissident shareholder is successful in forcing the termination of a rights plan, its prospects of acquiring that company through a hostile takeover bid becomes a realistic proposition. While this may prove to be a costlier and more time consuming option, it is not entirely unrealistic given the obstacles that the proposal, as drafted, would place in front of dissident shareholders.