Many comments suggest that 120 days is too long to keep the bid period open

By James Langton | August 2015

The Canadian Securities Administrators (CSA) are proposing reforms to takeover bid rules in Canada. The aim is to shift the balance of power fundamentally among buyers, target companies and their shareholders.

Comments note the proposals represent the most significant changes to these rules in years. Many comments support the CSA's common approach after competing proposals were initially published by both the CSA and the Autorité des marchés financiers in 2013.

The single set of proposals announced by the CSA in March would, among other things, extend the minimum time that a takeover bid must remain open to 120 days from 35 days; require that 50% of independent shareholders vote in favour of a bid for it to go ahead; and require bidders to extend their offer for 10 days once the bid appears to be succeeding.

In general, these changes are designed to give target companies and their shareholders more power in the takeover process. For example, by dramatically increasing the minimum bid period, target companies will have more time to find a better deal (either from a "white knight" or through an auction).

Similarly, the new minimum tender condition is designed to ensure that a target company's independent shareholders have the power to determine whether a bid is accepted or not. The 10-day extension would mean that shareholders in a target company will get time to tender their shares to a successful deal if those shareholders haven't already, thereby removing the pressure for them to submit to a deal they may not support for fear of being left behind.

For the most part, the securities industry, issuers, the legal community and investor advocates support the proposals - or, at least, the regulators' objectives. The major concern is whether the extension period is too long.

A number of comments warn that by requiring that companies have at least 120 days to consider a bid, securities regulators may end up deterring prospective bidders from making takeover offers in the first place. The concern is that the protracted period may make the launch of speculative takeover bids too expensive: bidding companies would face much greater costs, such as legal, investment banking and financing expenses. In addition, a bid's chances of success may be reduced because a target company would have more time to drum up alternatives.

The comment from the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada), an investor advocacy group, says that while the group "strongly supports" the proposed minimum tender requirement and the proposed 10-day extension, it is not in favour of the 120-day rule due to concerns that it will deter potential bidders. FAIR Canada's comment also raises the possibility of draining power away from the target company's shareholders because the 120-day period to consider a bid may hand too much leverage to the board of a takeover target.

Similarly, the comment from the Canadian Coalition for Good Governance (CCGG) also supports the minimum tender requirement and the 10-day extension, but points out the potential for the balance of power to shift to the target company's board from that firm's shareholders.

The comment from the Investment Industry Association of Canada (IIAC), also raises concern about the 120-day period, warning that the negative impact of discouraging hostile bids outweighs the positives of giving targets more time. Instead, the IIAC comment recommends extending the minimum bid period to 90 days rather than 120 days.

A number of other comments (including those from both FAIR Canada and the CCGG) also suggest setting the minimum bid period at around 90 days, citing both regulatory practices in other countries and recent research from Bay Street law firm Fasken Martineau DuMoulin LLP, which found that most competing bids emerge after the existing 35-day period expires, but within 95 days of the initial offer.

That research, which analyzed all of the 143 hostile takeover bids that have been launched in Canada in the last 10 years, also found, among other things, that an extended bid period reduces the likelihood of a bid succeeding by about 50%, and leads to higher prices for target shareholders.

However, the comment from Hansell LLP suggests that these negative side effects may be mitigated by the fact that the proposed regime would give bidders more certainty about the takeover process. If target companies have more time to consider, they are less likely to adopt more extreme defensive tactics, such as "poison pills", to find alternatives. Hansell's bid also suggests that regulators consider offering guidance on the use of "poison pills."

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