Canada’s takeover bid regime was overhauled in 2016, with the intention of rebalancing the dynamics among offerors, target boards, and target shareholders (the “New Takeover Regime”). The New Takeover Regime comprises three key elements:
- bids must remain open for a minimum of 105 days (unless the target board reduces the period - to a minimum of 35 days - or enters into an “alternative transaction”);
- for a bid to succeed, more than 50% of the outstanding shares of the class that are subject to the bid, excluding shares owned by the bidder, must be tendered (the “Minimum Tender Condition”); and
- bids must be extended for at least 10 days after satisfaction of the Minimum Tender Condition.
The New Takeover Regime was initially expected to have a meaningful impact on the hostile bid landscape in Canada, though it left potential offerors and the boards of potential target companies, as well as their advisors, with important questions. As the New Takeover Regime created significantly more risk for bidders, the incentive for bidders to focus their energies on friendly deals was expected to increase. At the same time, the regulators’ tolerance for defensive tactics was expected to decrease, given the length of time boards would have to seek out better offers and the required shareholder support inherent in the new rules. In particular, while the New Takeover Regime did not result in any change to National Policy 62-202—Take-Over Bids—Defensive Tactics (“NP 62-202”), which is generally aimed at ensuring that shareholders are not denied the ability to make a fully informed decision about whether to tender to a takeover bid, it was expected that the new rules would vitiate the tactical poison pill, the primary tool used by target boards to defend against hostile bids prior to the changes, in almost all cases.
The orders of the Ontario Securities Commission (the “OSC”) and its counterpart in Saskatchewan, the Financial and Consumer Affairs Authority (the “FCAA” and, together with the OSC, the “Commissions”) in connection with Aurora Cannabis Inc.’s (“Aurora”) takeover of CanniMed Therapeutics Inc. (“CanniMed”), along with their recently released joint reasons for those orders (the “Reasons”), shed light on the application of the New Takeover Regime. The Reasons generally offer the following lessons:
- for bidders and targets, they confirm the expectation that regulators would defend their rebalancing of interests by enforcing the New Takeover Regime strictly;
- for targets, they confirm that absent exceptional circumstances the regulators retain little patience for tactical poison pills, though questions remain as to how they will treat shareholder-approved rights plan that comply with proxy-advisor recommendations;
- for bidders, properly drafted lock-up agreements - even “hard” lock-up agreements - are an important and acceptable element of the Canadian M&A landscape, though care should be taken to ensure these agreements do not result in “joint actor” status in the circumstances of the particular bid; and
- at the same time, elements of the Reasons reflect a policy-driven approach, allowing flexibility for future transactions that may come before the Commissions. The diversity of fact patterns that emerge in the hostile takeover process can be expected to render an original analysis in every case.
Aurora’s Bid for CanniMed
The facts leading to the Reasons are now quite well known. In November of 2017, certain large shareholders of CanniMed, two of whom had representatives on CanniMed’s board of directors, disagreed with the board’s decision to proceed with an acquisition of Newstrike Resources Inc. Rebuffed by the board, these shareholders entered into agreements with Aurora under which they agreed to tender to a takeover bid by Aurora. Importantly, these “lock-up agreements” were of the type commonly known as “hard” lock-up agreements, meaning that the shareholders would be required to tender to an Aurora bid even if a higher competing bid were to be made. Aurora then commenced a formal takeover bid. Aurora had been initially approached by a representative of the CanniMed shareholder without a seat on CanniMed’s board, but it appeared to the Commissions that the locked-up shareholders had likely shared material undisclosed information amongst each other and with Aurora.
The Newstrike acquisition and the Aurora takeover were cast, at least by Aurora, as mutually exclusive, in that the Aurora bid was conditional on the Newstrike acquisition not proceeding. The CanniMed board, for its part, recommended a rejection of the Aurora bid and a vote in favour of the Newstrike acquisition and, to prevent Aurora acquiring an even greater blocking position, implemented a tactical poison pill (the “Rights Plan”) that prevented Aurora from acquiring any further shares, or entering into any further lock-up agreements, whether “hard” or “soft”.
Before the New Takeover Regime, the tactical dance of bidders and targets would inevitably culminate in a hearing before the applicable securities commission. The role of the regulators in this dance appears to be unchanged by the New Takeover Regime, though the timing and analysis will likely be different. Both Aurora and CanniMed sought orders from the Commissions, including to cease trade the Rights Plan, to grant relief from certain elements of the New Takeover Regime and to find that Aurora was acting jointly and in concert with the locked-up shareholders. The reaction of the Commissions to both parties’ requests provide valuable guidance for potential bidders and potential targets on how the Commissions intend to enforce the New Takeover Regime, including the strict interpretation of some of its key provisions and the treatment of defensive tactics.
Poison Pills Under the New Takeover Regime
Since the 1980s, shareholder rights plans, commonly known as “poison pills”, have been an integral part of the public M&A landscape in Canada. Over the years, public companies, major investors, securities regulators and proxy advisors had come to a common expectation of the structure and role of poison pills, and a long line of decisions by the provincial securities commissions had established that while poison pills would be tolerated for a reasonable amount of time to allow a target’s board to seek a competing bid, they would ultimately be cease traded, usually after about 60 to 70 days.
The regulators’ logic for this compromise arises from the principles expressed in NP 62-202, which generally are aimed at ensuring that shareholders are not denied the ability to make a fully informed decision about whether to tender to a takeover bid. In other words, in the context of takeover bids, the regulators are concerned with protecting shareholder choice.
Noting that prior poison pill decisions have little value in light of the New Takeover Regime, particularly since it was designed specifically “to provide sufficient time for other bids to surface without the need for Commission intervention to determine how long before a poison pill must be terminated,” the Commissions cease traded the Rights Plan. The Commissions cited four elements of the Rights Plan as problematic, all of which interfered with the predictability of the New Takeover Regime:
- its blocking of the exemption under the takeover bid rules that would allow Aurora to acquire up to an additional 5% of CanniMed through market purchases (the “5% Exemption”);
- its prevention of lock-up agreements, whether “hard” or “soft”;
- the fact that it replicated key requirements of the New Takeover Regime with variations in how those requirements could be satisfied, in a way that served “no useful purpose”; and
- the fact that it deemed certain bidders to beneficially own shares of locked-up shareholders where those shareholders were not necessarily “joint actors” under the takeover bid rules.
The result was that the Rights Plan “had primarily a tactical motivation” and “could operate to deny CanniMed shareholders the potential benefits of the Aurora Offer,” contrary to NP 62-202.
While the swift cease-trade of a tactical poison pill is not surprising under the New Takeover Regime, the Commissions’ implicit endorsement of hard lock-ups adds a new element of uncertainty to the takeover landscape. Bidders should be encouraged that tactical rights plans that prevent hard lock-ups are more likely to be cease-traded. However, non-tactical, shareholder-approved rights plans that are compliant with proxy-advisor recommendations have long included provisions that separate “soft” from “hard” lock-ups, permitting the former and prohibiting the latter. Whether regulators will have more patience for these rights plans under future fact patters remains unclear; in the meantime, unless further notice follows from major investors (via proxy advisors or otherwise), it is not expected that public companies with rights plans in place will amend the long-accepted lock-up provisions, which are well-known to bidders, have been approved by shareholders and have the support of proxy advisors acting for major investors.
Exemptive Relief from the New Takeover Regime
Aurora asked the Commissions to shorten the 105-day bid period on the basis that the Newstrike transaction represented, in substance if not in form, an “alternative transaction” under the New Takeover Regime, a designation that would result in the bid period reducing to 35 days. At the same time, CanniMed asked the Commissions to deny Aurora access to the 5% Exemption.
The Commissions denied both applications, preferring to allow the New Takeover Regime to govern, without a clear justification on the facts for exemptive relief. The Commissions stated:
“Predictability of the regime, and particularly applicable time periods, is an important objective of take-over bid regulation and these reforms… Given the rebalancing that has occurred as a result of the amendments to the Canadian take-over bid regime, we are reluctant to make piecemeal changes to timing requirements that affect planning by bidders and target companies and that would make bid pricing and secondary market price determinations less predictable.”
In the name of predictability, therefore, and on an analysis that showed that the policy rationale underlying the exception to the 105-day bid period in the face of an “alternative transaction” did not apply on these facts, Aurora was required to keep its bid outstanding for 105 days.
Similarly, the Commissions found no reason on the facts to disallow the 5% Exemption, noting that “the 5% exemption is an established feature of the Canadian take-over bid regime. Prohibiting the use of the 5% exemption may be appropriate in the public interest if the policies underlying the take-over bid regime are undermined by allowing its use. That is not the case here.” Other facts, in other cases, presumably where shareholder choice could be adversely affected, may render a different result.
The Parameters of Acting Jointly or in Concert
Had the Commissions found that Aurora and the locked-up shareholders were acting jointly or in concert, significant regulatory impediments would have arisen for Aurora’s bid. Not only would the bid have required a formal valuation and the other requirements for “insider bids”, but the shares of the locked-up shareholders would have been excluded from the Minimum Tender Condition.
Acting jointly or in concert remains a question of fact, subject to provisions that deem or presume that certain actions confer or do not confer “joint actor” status. Ultimately, the key question is “whether the parties are acting together to bring about a planned result.” CanniMed’s special committee submitted that Aurora and the locked-up shareholders were joint actors on two bases: first, that the locked-up shareholders shared material non-public information with Aurora in a joint effort to effect the bid; and second, that hard lock-up agreements themselves, and the way they were negotiated, suggested joint action.
On the latter submission, the Commissions held that lock-up agreements are an established element of public acquisitions in Canada and that the joint actor provisions of the takeover bid rules do not distinguish between hard and soft lock-ups. However, they went further, noting that the increased deal risk to bidders under the New Takeover Regime may make the pursuit of lock-ups by bidders more necessary. In other words, the rebalancing of the regime appears to have re-balanced the acceptability of lock-ups as well, whether “soft” or “hard”. As noted above, whether this affects major investors’ support of traditional, shareholder approved rights plans that prevent hard lock-ups remains to be seen.
In addition, while the lock-up agreements contained voting provisions, the Commissions found that those provisions were directly related to the agreement to tender to the Aurora bid, and therefore did not confer joint actor status. This guidance will be helpful for bidders looking to craft compliant lock-up agreements in the future.
Whether the sharing of material non-public information created joint actor status involved a highly fact-based analysis in which the Commissions noted several problematic elements. Nonetheless, they found in the circumstances that in spite of possible improper activity by nominee directors, as a matter of corporate law, and possible improper use of material non-public information by various parties, only some of which would have been cleansed by disclosure, the Commissions determined that Aurora and the locked-up shareholders were not joint actors.
The Commissions have confirmed their commitment to the New Takeover Regime. Tactical poison pills will rarely be tolerated, exemptive relief will rarely be granted and the treatment of other elements of the takeover landscape, such as hard lock-up agreements, will be rebalanced commensurately with the regime itself. How that rebalancing will ultimately affect the fate of shareholder-approved rights plans remains to be seen. At the same time, the diversity of fact patterns that emerge in the hostile takeover process can be expected to render an original analysis in every case, and while the principles of the New Takeover Regime will be adhered to strictly, the regulators retain flexibility where shareholder choice is threatened.
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