Differing frameworks for shareholder rights plans

The CSA has published a proposal that would see it establish a new regulatory framework for the treatment of shareholder rights plans (aka poison pills) in Canada. The proposal would allow the board of a target company, and its shareholders, greater discretion to use these sorts of plans (which grant existing shareholders the right to purchase shares at a discount, in order to make a buyout more expensive) as a takeover defense.

Regulators are concerned that the current regime is too friendly to prospective buyers, as they will typically cease trade these sorts of plans after giving the target company some time to find another buyer. The result is usually that the company is sold one way or another, either to the initial bidder, or via auction. Now, they are aiming to correct that balance by giving companies more freedom to defend themselves from hostile bidders.

The CSA’s proposed approach would allow boards to adopt a shareholder rights plan, and would permit that plan to remain in place as long as it receives majority shareholder approval within specified time frames. Shareholders would also be able to terminate a rights plan at any time by majority vote.

This new approach would allow companies to defend themselves by permitting their poison pills to remain in place, reducing regulators’ involvement in these sorts of takeover battles, and creating a more consistent regulatory regime.

“The CSA believe that the proposed rule will modernize, harmonize and codify an appropriate regulatory approach to rights plans in Canada,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC). “Barring exceptional circumstances, the decision to adopt and maintain a rights plan would be a matter for company boards and shareholders, not securities regulators.”

While the AMF also sees the need for reform in this area, it suggests that the reform should be broader. In its consultation, the AMF argues that the time has come to review the regulatory treatment of all defensive tactics, not just rights plans, and so, it aims to “initiate broader reflection” on the Canadian take-over bid regime and defensive tactics.

The AMF notes that while the CSA proposal will potentially reduce the need for regulatory intervention, it only deals with rights plan, and so, “it does not provide a complete answer to certain fundamental issues regarding our take-over bid regime which, in our view, should all be addressed at this time.”

“These issues include the structural imbalance between bidders and target boards, the lack of deference to the decisions and actions of boards, the inability of directors to contemplate measures other than the sale of the target corporation, and the prevalence of security holders’ decision to tender in all circumstances,” the AMF says. “We are of the view that a broader approach to defensive tactics could provide an answer to some of these fundamental issues.”

So, it’s proposing to adopt a new policy that would require that regulators only intervene in situations where boards’ actions or decisions are clearly abusive of shareholders’ rights or negatively impact the efficiency of capital markets. It says its proposal, “would clearly recognize the fiduciary duty of directors to the corporation in responding to an unsolicited take-over bid and would redefine regulators’ intervention on the ground of public interest.” It is also proposing to change the take-over bid regime to require bidders to comply with certain conditions.

“The primary objective of our proposal is to restore the regulatory balance between bidders and the boards of target corporations and update the current regime to reflect the current legal and economic environment as well as market practices respecting unsolicited take-over bids. The context has changed significantly over the past 25 years, and we believe that the time has come to take action,” stated Louis Morisset, the AMF’s superintendent, securities markets.

The comment period for both proposals is open until June 12.