Clay Horner, Bastien Gauthier, Robert M. Yalden
Mar 5, 2014
On February 20, 2014, the government of Québec tabled its 2014-2015 budget in which it stated that it may enact amendments to Québec’s Business Corporations Act (Québec Act) intended to protect Québec incorporated businesses from unsolicited take-over bids, as well as tax incentives intended to encourage businesses to establish and maintain head offices in the province of Québec. The amendments would be based on recommendations made by a task force that the government of Québec established in 2013 to consider measures that might be adopted to protect Québec businesses.
As a result of a number of unsolicited take-over bids targeting Québec based businesses, notably Lowe’s unsolicited bid for Rona Inc. in 2012, Québec’s Minister of Finance and the Economy established a task force on June 7, 2013 headed by Claude Séguin, Senior Vice President at CGI Group Inc., in order to make recommendations to protect Québec businesses from unsolicited take-over bids and to encourage the development of head offices in the province.
In its report issued concurrently with the budget, the task force identifies 25 corporations that have head offices in the province and that are considered to be vulnerable to unsolicited take-over bids, including SNC Lavalin, Metro, CAE and Cominar REIT (a trust established under the Civil Code of Québec). The report also highlights the economic importance of head offices in Québec, and notes that 18 of the 50 largest Québec public corporations are effectively controlled by one or more related shareholders, and seven have statutory or similar protections against take-over bids. The report also notes that of the 25 remaining corporations, 17 are federally incorporated, seven are governed by the Québec Act and one is a trust.
Potential Amendments to the Québec Act
The task force, which reviewed legislation in place in Europe and the United States, recommended a number of amendments to the Québec Act which would allow Québec incorporated corporations, subject to any required shareholder approval, to:
- provide for additional voting rights for shares of a class held for over two years, unless such rights are withdrawn by a 66⅔ percent vote of shareholders;
- limit what an unsolicited acquirer could do with the assets it just acquired, as well as the acquirer’s ability to immediately change the composition of the target’s board. In particular:
- for a period of five years, an unsolicited acquirer would not be able to sell assets representing 15% or more of the target corporation or to complete a merger or other combination of the assets of the target corporation;
- any profits an unsolicited bidder makes on the resale of the target corporation’s shares within 24 months following the completion of an unsolicited take-over bid must go to the corporation. This resale rule will only apply to those shares that an unsolicited bidder purchased as a toehold position in the 12 months preceding an unsolicited take-over bid, thereby limiting the value of any such toehold position;
- prohibit unsolicited bidders from having any voting rights with respect to shares held at the date of launching the unsolicited take-over bid, until the other shareholders restore the voting rights of the bidder by a 66⅔ percent vote. This would have the effect of raising the percentage of shares required to be acquired through the bid to complete a going private transaction;
- prevent unsolicited acquirers from changing the composition of the board of directors of the target corporation for a specific time period by prohibiting them from replacing any director prior to the expiry of his or her term. The Québec Act already contains provisions allowing staggered terms of up to three years. However, the Toronto Stock Exchange (TSX) requires TSX-listed issuers to hold annual elections for all directors.
One of the objectives of the recommended amendments to the Québec Act is to encourage negotiated acquisition transactions. The potential amendments to the Québec Act do not address proxy voting contests. It is important to note that the proposed recommendations only relate to the Québec Act and therefore any corporation with a head office in Québec but federally incorporated or incorporated under another jurisdiction would need to amend its statutory jurisdiction to continue its incorporation under the Québec Act in order to adopt the defensive measures proposed by the task force. By way of example, if any of the recommendations were now enacted, a company such as Osisko Mining Corp., which is a federally incorporated corporation with a head office in Québec, would not have access to any of the defensive measures against the unsolicited bid that is currently being undertaken by Goldcorp Inc.
The task force also recommended that the Civil Code of Québec be amended in order to ensure that similar protection measures apply to all entities constituted in Québec, such as trusts, that could be subject to an unsolicited take-over bid.
The task force made the following recommendations concerning securities regulators and related legislation:
- allow the board of directors of a corporation subject to an unsolicited take-over bid to fully exercise its fiduciary duties pursuant to the Autorité des marchés financier’s (AMF) proposal to this effect. Under the AMF proposal, courts would determine the propriety of defensive tactics – including rights plans – as part of their jurisdiction over the discharge of directors’ fiduciary duties. Securities regulators would only intervene where a board’s actions or decisions are clearly abusive of shareholders rights or negatively impact the efficiency of capital markets;
- convert the “Bureau de décision et de révision” into a specialized administrative tribunal made up of judges from the Court of Québec.
For a more detailed overview of the Canadian Securities Administrators’ and AMF’s proposals, please refer to our Osler Update of March 15, 2013.
The task force also made the following recommendations in order to encourage the establishment and maintenance of head offices in Québec:
- defer taxation on employees receiving shares through employee share purchase plans until the time of sale of those shares;
- provide more favourable tax treatment of the gains on stock options than elsewhere in Canada;
- defer the taxation on gains when a business is transferred from one generation to the next for as long as the business remains active in Québec;
- promote the financial and operational participation of Québec investment funds to facilitate the transmission of Québec corporations to a new generation of Québec owners.
While the government of Québec believes that such defensive measures and tax incentives are crucial for the protection of Québec’s economy and businesses, it is not yet known if and when the government will implement these recommendations. The two opposition parties in the province have vowed to oppose any of the measures that the government may try to pass and as the government is a minority government it may well face elections before it is able to introduce, let alone enact, provisions that would give effect to these proposals. Furthermore, it is unclear how these proposals will affect the Canadian Securities Administrators and the AMF proposals dealing with shareholder rights plans and other defensive measures currently found in National Policy 62-202 Take-Over Bids--Defensive Tactics, though the task force strongly supports the AMF’s proposal.
Authored by: Robert M. Yalden, Clay Horner, Bastien Gauthier