“Poison pills” are a well-known defense strategy for boards trying to retain control of their companies. In the face of a hostile bid, their purpose is to give boards enough time to find someone who is better aligned with their goals for the company.
In Canada, hostile bids and defense strategies against them are much different than those in the US. In the US, boards have a much easier time holding their own against activists during aggressive bids.
We spoke with Jonathan Feldman, a partner at Goodmans LLP (named Canada’s Law Firm of the Year by the International Financial Law Review) who focuses on corporate and securities law, with an emphasis on mergers and acquisitions. Feldman has extensive experience acting for buyers and sellers in a wide range of industries for private and public companies.
He has been involved in a number of contested shareholder matters, including proxy contests representing both dissident shareholders and boards of directors. He is also often asked to participate in litigation matters where strategic advice is sought and knowledge of corporate and securities law is required.
Christopher P. Skroupa: How are shareholder activists’ strategies evolving to combat “poison pills?”
Jonathan Feldman: Canada has always been different than the US when it comes to the role of poison pills. The “just say no defense” used in the US in the face of a hostile takeover has never been available in Canada. In Canada, poison pills could be adopted by boards in the face of a hostile bid, however, their purpose traditionally was to give the board more time to react to the bid – which only had to be open for 35 days – and find a “better bidder.” It was never intended to permanently thwart a bid. The general mantra was, “there is a time that a pill must go.”
Traditionally, boards would adopt tactical pills in the face of a hostile bid recognizing that eventually the bidder would run to the applicable securities regulator for an order to cease trade – or kill – the pill. Once the pill was gone, shareholders would be free to tender if they so wished.
The other option – rarely used, if ever – for the bidder was to structure the bid as a “permitted bid” under the terms of the pill. That is, they would have to keep the bid open for at least 60 days – instead of the statutory minimum of 35 days, include a “minimum tender condition” that would require at least 50% of the shareholders unaffiliated with the bidder to tender into the bid. Once this minimum condition was satisfied, the bidder had to extend the bid for another ten days to allow other shareholders one more chances to tender, in an effort to minimize coercion inherent in takeover bids to minority shareholders.
After years of debating the role of poison pills and whether they should be allowed to be used as a takeover defense, whether boards should be allowed to just say no and whether the Canadian securities regulators should consider other forms of defensive tactics, the Canadian regulators instead decided to change the take-over bid rules. As of May 2016, any shareholder wishing to launch a hostile takeover bid must:
- Keep the bid open for 105 days;
- Include the minimum tender condition;
- Extend the bid for ten days after the minimum tender condition is satisfied.
In other words, they adopted the concept of a permitted bid into law.
So now regulators have made it very clear that poison pills are no longer necessary, since the law gives boards more time to consider a bid and find alternatives. However, they are helpful to boards as a means to avoid a “creeping” takeover bid.
What this means is that normally if a shareholder wishes to increase its ownership above 20% it must make a formal take-over bid to all shareholders, unless it can fit into an exemption to this general rule. The two main exemptions are the ability to buy up to 5% in the market, and to enter into private agreements with a limited number of shareholders under certain prescribed conditions.
So a shareholder could go over 20% without having to launch a bid if it used these exemptions. A pill that gets triggered at 20% is still a viable defense against a shareholder wishing to quietly accumulate a position in excess of 20% – like a creeping bid – and that’s about all pills can be used for now under the new rules…
Skroupa: What are some of the biggest mistakes that activists make when trying to affect board change?
Feldman: Lack of preparedness and lack of understanding the shareholder base. It is of critical importance for activists to speak with their fellow shareholders before spending the time and incurring the expense of engaging in an activist campaign.
One of the major advantages for activists in Canada is the ability for them to speak to up to 15 shareholders without having to mail and file a proxy circular. The use of this “quiet solicitation” exemption is of extreme benefit to activist shareholders and serves them very well in determining the best means of achieving their objectives.
There are also other legal ways that shareholders can communicate with each other both privately and publicly before launching an all-out campaign that can be very helpful. We do need to make sure that these shareholders avoid being joint actors, which is our version of becoming a “group,” but this is something that can be navigated just as is done in the US.
Skroupa: Vice versa, what are some of the biggest mistakes boards make when trying to prevent activism engagement?
Feldman: An ounce of prevention…
Boards in Canada are aware of the proliferation of activist investors and have become much more sophisticated in recognizing – as many of their counterparts have done for years in the US – that they need to be proactive in preparing for the eventuality that is activist engagement.
Many boards now run screens – they try to think like activists – to determine their potential vulnerabilities, work with advisors to pre-empt an activist knocking on their door and establish a response team in advance to ensure they are ready if need be.
The most important decision a board can make in this context is to develop a process for proactively engaging with their shareholders so that they – like the activists – know what the shareholder base is thinking.
There is no excuse for NOT doing this – however, there are still many boards out there that view this type of preparation to be a waste of both money and time. It is no coincidence that they are the ones that are typically the most vulnerable.
In addition, once the activist does take action boards need to conduct themselves like adults. It’s surprising that this has to be said but there are some cases out there where boards use tactics that are somewhat questionable whether it involves putting stock in friendly hands, not properly disclosing information to regulators or “scorched earth” tactics.
Directors need to think of their reputations, plus the securities regulators are watching closely. Much more closely than in the past.
Skroupa: How have recent developments in the Canadian M&A market affected the rise of shareholder activism in Canada?
Feldman: “Bumpitrage” is becoming much more commonplace in Canada than ever before. In large part, this phenomenon is a function of US activist investors looking at Canadian M&A deals more closely, and seeking opportunities to make money.
This year we have seen a number of cases where some traditional and non-traditional activist investors have inserted themselves into the deal process once announced, by buying significant blocks of stock – or teaming up with others – and forcing the parties to increase the price. This tactic won’t work on every deal, but it is interesting that it is happening with increasing frequency.
The other area that is attracting some interest is appraisal arbitrage. While Canada does not have some of the built-in advantages that exist in Delaware, there are some provincial corporate statutes that do make appraisal arbitrage attractive.
For example, for companies incorporated under the Alberta corporate statute, dissenters can expect to be paid a reasonable rate of interest, don’t have to pay legal costs if they lose and can buy into an appraisal claim long after the record date for the meeting.
While the experience in Canada is limited relative to that in the US, there is certainly increased interest and opportunity.
Skroupa: What new challenges are boards facing with the increase in US activists looking to take advantage of the Canadian M&A?
Feldman: As I mentioned previously, boards in Canada are getting more accustomed to the existence of activist investors and many of them are preparing accordingly. With this in mind, boards are being much more careful in ensuring that as part of their analysis they “think like an activist.”
They spend time thinking of the vulnerabilities that their deals might reveal and work to get ahead of them. At the same time, there is a lot more work to be done by Canadian boards in this area given the increasingly prominent role that US activists are playing in these deals and given the experience advantage that US activists have in this area.
Feldman has been a frequent author and lecturer on topics including recent developments in the Canadian M&A market, the evolving role of shareholder rights plans and the rise of shareholder activism in Canada.
In 2017, Feldman was elected President of The University of Toronto Law School Alumni Association.
Feldman will be giving a presentation titled Activist Strategies for Effecting Board Change at the Global Shareholder Engagement & Activism Summit in Toronto, Canada on Sept. 28-29.