As Canadian securities regulators get ready to propose changes to even the playing field for target firms and hostile bidders, a new study finds targets may not be as disadvantaged as believed
In mid-March, Canadian securities regulators are expected to release a draft proposal to address concerns that current rules for hostile takeover bids favor bidders over target companies and don’t necessarily maximize value for shareholders. Instead of limiting the duration of shareholders’ rights plans, or poison pills – the main defense boards have used against unsolicited bids – or the actions of the target company’s board, the proposed amendments will dramatically expand the period during which a hostile bid must remain open, from 35 to 120 days, and mandate a minimum tender condition of a majority of the target’s shares.
To contribute to the debate, Fasken Martineau recently released a study of 143 hostile takeover bids made for Canadian listed companies over the past 10 years, which includes some surprising findings. The key difference between hostile bids in Canada and the US is that in Canada the poison pill will at some point be rendered inoperative, allowing the bid to proceed to shareholders, who are then able to decide whether or not to tender their shares.
‘So the board can’t just block the bid from proceeding,’ explains securities and M&A lawyer Brad Freelan, a partner at Fasken Martineau and co-author, with Aaron Atkinson, of the report, titled '2015 Canadian hostile takeover bid study’. ‘The concern is, for whatever reason, people feel the playing field isn’t level and that’s one of the impetuses behind changing the rules.’
To test whether the Canadian takeover bid regime favors bidders, the study assessed contest outcomes, starting from the premise that the target board, in most cases, wasn’t actively seeking a change of control when it was put in play by the bidder. Because competition emerged to challenge many of the 127 first-mover bids, the study also gauged the impact of the auction dynamic on outcomes. It also examined the potential impact of certain key factors within the parties’ control such as the premium and form of payment offered by the bidder and the target board’s recommendation.
‘We found in first-mover bids where a hostile bidder initiated a contest for control and put a target in play, bidders won 55 percent of the time, but targets remained independent 28 percent of the time,’ says Atkinson. ‘It really surprised some people how many targets do remain independent, which would cause one to question whether or not the playing field really is uneven.’
The study also finds that competition – in the form of another hostile bid or a friendly transaction being undertaken by the target – emerged 37 percent of the time, not as often as one might think. ‘But when a bid does face competition, the hostile bidder does very poorly: it wins only one third of the time,’ says Freelan.
‘If the objective of the new rules is to increase the likelihood of competition, if that were actually to be the case, it may never play out because bidders may think twice before launching an auction they have only a one-in-three chance of winning. I would think bidders need to have a 50/50 chance of success in their mind, and if they don’t perceive that, we may see fewer hostile bids and, perhaps more importantly, fewer threats of a hostile bid.’
If hostile bids are viewed as good for the market because they increase agency costs and potentially give shareholders a premium and an exit mechanism, ‘our view is a 120-day period could stifle bid activity,’ he adds.
Perhaps surprisingly, there is strong alignment between the outcome of a hostile bid and the board’s recommendation in relation to it, notes Freelan. That’s contrary to the belief among many market participants that without a rights plan, the board is pretty defenseless, which may contribute to an uneven playing field.
‘In cases where the board supported the hostile bidder, there was near perfect alignment,’ Freelan explains. ‘In all but one case, the hostile bidder was successful. But even in those cases where the board did not support the bidder, there was very strong alignment.’
He’s quick to add that the study doesn’t prove the board’s recommendation influences outcomes, but ‘there’s evidence the board’s recommendation may influence outcomes more than people would have thought.’
While the study isn’t likely to influence the proposal to be unveiled in the next couple of weeks, Freelan and Atkinson hope it could have an impact on the final rules when Canadian securities regulators consider all the comments received during the public comment period.
