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The Swan Song of Poison Pill Hearings?

Author(s): Jeremy Fraiberg, Emmanuel Pressman, Alex Gorka, Robert M. Yalden

Nov 30, 2015

In what may be the last major rights plan decision prior to the implementation of proposed amendments to the take-over bid regime (Proposed Amendments - PDF) that will give target issuers 120 days to respond to a hostile take-over bid, the Alberta Securities Commission (ASC) ordered today that Canadian Oil Sands Limited’s (COS) shareholder rights plan will be cease traded 91 days after Suncor Energy Inc. (Suncor) formally commenced its $4.3 billion hostile bid for COS.

The largest hostile bid in Canada this year, Suncor’s offer commenced on October 5, 2015 and was intended to be structured as a 60-day “permitted bid” under COS’ rights plan in effect at that time. Suncor made its offer after the release of the Proposed Amendments – the most significant changes to the take-over bid regime in 15 years – but before they have come into force. 

Under the Proposed Amendments, which we have described in a previous Osler Update, all non-exempt take-over bids (including partial bids) will be subject to the following new requirements:

  • 50% Minimum Tender Requirement – Bids will be subject to a mandatory minimum tender requirement of more than 50% of the outstanding securities of the class that are subject to the bid, excluding those beneficially owned, or over which control or direction is exercised, by the bidder and its joint actors.
  • 10 Day Extension Requirement – Following the satisfaction of the Minimum Tender Requirement and the satisfaction or waiver of all other terms and conditions, bids will be required to be extended for an additional 10-day period.
  • 120 Day Bid Period – Bids will be required to remain open for a minimum of 120 days, subject to two exceptions. First, the target issuer’s board of directors may issue a “deposit period news release” in respect of a proposed or commenced take-over bid providing for an initial bid period that is shorter than 120 days but not less than 35 days. If so, then all other outstanding or subsequent bids will also be entitled to the shorter minimum deposit period counted from the date that other bid is made. Second, if an issuer issues a news release that it has entered into an “alternative transaction” – effectively a friendly change of control transaction, such as an arrangement – then all other outstanding or subsequent bids will be entitled to a minimum 35-day deposit period counted from the date that other bid is made.

Against this regulatory backdrop, and having regard to what the COS board concluded was an opportunistic bid by Suncor made in unique and volatile market circumstances and timed to expire just after the release of critical budget information, COS’ board authorized the adoption of a second, tactical rights plan that provided for a 120-day permitted bid. The Suncor bid was not a permitted bid for purposes of this second rights plan.

In explaining its order, the ASC noted that the Proposed Amendments are not yet in force and applied the factors set out in the previous Royal Host and Regal decisions in determining not whether, but when it was time for the pill to go.  The ASC found that although COS did not obtain shareholder approval of the second rights plan, this fact was not determinative.  The ASC concluded there was still a real and substantial possibility that COS could surface a superior alternative if its value maximizing process was given more time to unfold.  Accordingly, the ASC concluded that a total of 91 days was appropriate, and ordered the rights plan to be cease traded at 6:00 p.m. (Calgary time) on January 4, 2016.  Formal written reasons for the ASC’s decision will be released in the coming weeks.

It is unclear when the Proposed Amendments will be implemented, and if there will be any changes to them in the wake of comments received by the Canadian Securities Administrators (CSA).  It is possible they will be adopted in the first half of 2016. 

Pending their implementation, the ASC’s decision is highly relevant to hostile take-over bids made during this transition period.  The ASC’s decision is a welcome acknowledgment that target companies with existing rights plans that have 60-day permitted bids may legitimately require more than 60 days to respond effectively to a hostile bid and that circumstances can and often will change between the time of initial board and shareholder approval of a 60-day permitted bid rights plan and the time of an actual hostile bid.

A notable omission from the Proposed Amendments is how rights plans will ultimately be treated following their adoption. This is of particular interest considering that the Proposed Amendments arose out of competing proposals from the CSA and Autorité des marchés financiers of Québec (AMF) on rights plans and defensive tactics more generally. The AMF and the balance of the CSA’s members have previously aired different perspectives on the most appropriate approach to the regulation of defensive tactics, which may account for the Proposed Amendments’ silence on this issue.

If implemented in their current form, we anticipate that the Proposed Amendments will have the following effects on Canadian rights plans:

  • Rights plans will be waived by targets or cease traded by securities regulators after a 120-day formal bid, absent unusual circumstances, and therefore securities regulators will be called upon much less frequently to hold hearings as to when “the pill must go.” This will result in greater regulatory certainty as to timing of bids than under the current regime.
  • Since the Proposed Amendments will give a target issuer 120 days to respond to a hostile bid, in many cases target issuers may conclude that they have sufficient time to respond to a hostile bid without needing to adopt a rights plan. Accordingly, we would expect that there will be less of an incentive for issuers to adopt rights plans either “strategically” at their annual meetings or “tactically” in the face of a bid.
  • As the Proposed Amendments do not apply to exempt bids, there will still be a role for rights plans in protecting target issuers against “creeping bids,” such as bids made through the normal course purchase and private agreement exemptions. We therefore expect issuers that are concerned about the possibility of creeping bids to continue to adopt rights plans.

We would encourage the CSA to provide guidance on their proposed approach to rights plans when the Proposed Amendments are implemented.  As the COS rights plan litigation has illustrated, the current regime results in uncertainty as to how much time target issuers have to respond to a bid.  The CSA should make the rules and timelines as clear as possible in the circumstances.

*Osler is acting for COS in response to Suncor’s hostile bid and represented COS before the ASC.