Michael Ford (post until Oct. 31/19)
Corporate, Securities

Defensive tactics to defend against an unsolicited take-over bid

By Cameron MacCarthy and Joe Rattan

Recent changes to Canadian securities laws (as of May 2016) have created longer time frames and higher tender bid thresholds, amongst other things, in respect of take-over bids. These changes have been implemented to improve the integrity of the take-over bid regime. However, the receipt of an unsolicited take-over bid is still something that a target’s board of directors is often unprepared for. Thus, a target may be left scrambling for possible alternatives to combat or defeat such a bid, with little time to do so. Therefore, evaluating some of the tactics available to an issuer defending against an unsolicited bid still warrants discussion and consideration.

Historically, the most 'well-known' tactics have been the use of a shareholders rights plan (or 'poison pill'), and the search for a white knight.

A shareholders rights plan is where the target‘s board issues rights to shareholders, which allow those shareholders to acquire common shares of the target at a large discount, rights that are triggered in the event of an unsolicited bid by a third-party. The effect of the rights being triggered, and acted upon, is a dilution of the shares of the target, and this dilution will in some circumstances cause the transaction price for the third-party bidder to increase past the point of it being a profitable undertaking. There is the chance, however, that the acquirer will petition securities regulators to rule that the rights plan should be nullified in that it unduly interferes with the target shareholders’ ability to accept the bid.

A white knight is a favourable third party (perhaps a current security holder or an outside entity) whom a target seeks out in the face of an unsolicited bid to attract a superior bid for the target’s shares. If successfully done, the favourable and friendly white knight becomes the likely successful bidder for the target, and on the surface, the superior bid makes the acceptance of the white knight’s bid in the best interests of the current shareholders and of the corporation. At the same time, however, the white knight could become hostile at a later date which could outweigh any initial benefit of a friendly takeover.

A defensive tactic, while not new but that has attracted more attention in part from the recent decisions in this case and this matter, is a target concurrently undertaking a private placement upon receiving an unsolicited bid. In this decision, both the Ontario and British Columbia securities regulators held that certain factors must be considered in determining if a private placement can be undertaken in the face of an unsolicited bid. These factors are: (1) determining if the private placement has a legitimate corporate law purpose (i.e. raising capital for investment or growth versus being proposed solely to defeat the unsolicited bid); and (2) whether the private placement is, in fact, a defensive measure, requiring intervention by regulators and/or courts, even if the private placement is intended to achieve a corporate law purpose. If a target can legitimately satisfy these factors, and if the private placement does not frustrate management’s duty to act in the best interests of the target, a private placement will likely be permitted in the face of an unsolicited take-over bid. The decision confirms that while this is a legitimate action to take by a target, each situation analyzed is highly fact specific. It, therefore, remains to be seen what will happen in the next case that comes before a securities commission.

It is important to note that Canadian securities regulators ultimately leave the decision to tender shares to the target’s shareholders, and will exercise their discretion to prohibit defensive tactics that might frustrate the open take-over bid process and that have the effect of denying shareholder ability to make independent informed decisions (National Policy 62-202). Having said that, defensive tactics can still be used by a target if such tactics do not offend NP 62-202 or other securities laws. A skilled and proactive board, therefore, needs to be aware of its options in advance of facing an unsolicited take-over bid. Being versed on the available defensive tactics, as well as the mechanics of how to implement those tactics, will allow a potential target’s board to be more proactive and responsive to an unsolicited bid, should those circumstances arise.

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