TORONTO (Reuters) - Canadian securities regulators want to change the rules on takeover defenses to make it more difficult for hostile bidders to buy Canadian companies, according to officials and lawyers briefed on the matter.
The plan, due to be published in draft form on March 14, is designed to bring more coherence to Canada’s regulatory regime after conflicting provincial rulings on so-called “poison pill” defenses to fend off unwanted suitors, the sources said.
“There has been some criticism over the years that Canada is too bidder-friendly and that companies should have more tools at their disposal to fight hostile bids,” said Ralph Shay who heads the securities law group at Fraser Milner Casgrain in Toronto.
Poison pills effectively raise the price of a hostile bid by giving all existing shareholders, excluding the hostile bidder, the right to buy additional stock in the target company at a discount.
In Canada, boards of companies that are targets of a hostile bid typically have limited time in which to bring an alternate proposal before shareholders, as provincial regulators usually quash poison pills 45 to 60 days after a bid is launched.
In recent years, regulators allowed poison pills to stay in place indefinitely in certain cases, since a majority of the shareholders of the target companies had ratified them.
“We did have divergent decisions, which created a bit of uncertainty for market participants,” said John Emanoilidis, a partner with Torys, a Toronto law firm.
In 2010, the British Columbia securities regulator quashed a poison pill defense initiated by Lions Gate Entertainment, while it was being eyed by corporate raider Carl Icahn, ignoring a planned shareholder vote on the matter.
In contrast, Ontario’s regulator ruled in 2009 that a poison pill set up by former rare earth processor Neo Materials could stay in place indefinitely as a majority of shareholders backed it.
The new rules are being proposed by the Canadian Securities Administrators (CSA), an umbrella group representing provincial authorities. There is no single national watchdog overseeing securities regulation in Canada.
While foreign takeover bids are not specifically targeted by the plan, a string of recent bids have stirred anxieties in Canada about the vulnerability of domestic companies, experts say.
One of the most controversial was BHP Billiton’s (BHP.AX) (BLT.L) $39 billion hostile bid for Potash Corp POT.TO, the world’s largest fertilizer maker, in 2010. The Canadian government blocked the deal on the grounds it would bring no “net benefit” to the country.
“The recent flurry of foreign buyouts has sparked a debate over the sufficiency of tools that are available to the boards of Canadian companies,” said Emanoilidis, who co-chairs the M&A practice at Torys. “By putting this proposal forward, the CSA is providing more tools to directors.”
Separately from the CSA initiative, the regulator for the province of Quebec said it is planning its own proposal that would give even more power to the boards of target companies in Quebec than the ones being floated by the umbrella group.
The CSA plan, which would bring Canadian rules more in line with those in the United States, would allow companies to keep poison pills in place almost indefinitely once they have the backing of a majority of shareholders.
The Quebec regulator wants to go further, proposing to allow a target company’s board to impose the pill unilaterally, even without shareholders’ consent.
“From a policy perspective, enabling boards to negotiate with a bidder strikes me as a good proposal,” Louis Morisset, the superintendent of securities markets in Quebec, said in a phone interview.
“We as regulators should recognize that boards of directors have a fiduciary duty to the corporation and should limit our intervention to clear cases of abuse,” he said.
Last year, an unsolicited, C$1.8 billion ($1.75 billion) bid for home improvement retailer and distributor Rona Inc RON.TO by U.S.-based Lowe’s Cos (LOW.N), sparked a wave of political opposition in Rona’s home province of Quebec, forcing Lowe’s to withdraw its proposal.
Morisset said the Quebec proposal was not a response to any specific deal, and he did not expect it to impede future bids for Canadian companies.
Quebec’s ruling Parti Quebecois had pledged ahead of provincial elections last year to do more to combat takeovers of companies based in Quebec.
Morisset denied that the Quebec regulator’s stance on the poison pill issue was driven by political considerations, saying instead “I presume our proposal will be well received ... by the political authorities in Quebec.”
A period of public consultation will begin after both the Quebec and CSA proposals are published. The plans were first reported by the Globe and Mail, which cited unnamed sources.
The CSA expects to present a draft policy in mid-March, said Mark Dickey, a spokesman for the Alberta regulator, which currently heads the rotating leadership of the CSA. He declined further comment.
Editing by Peter Galloway and Andrew Hay