September 15, 2014

Canada, insofar as rules regarding the acquisition of public companies went,  had a reputation as being closer in spirit to the acquirer-friendly UK than the US (the land of the poison pill and the aggressive merger defence).

Last week the collectivity of Canada’s securities regulators (all 13 of the provincial and territorial regulatory agencies) came together to agree on new rules governing M&A. The rules will be implemented on a national basis in 2015; given that Canada has a diffuse and fractious regulatory environment, agreement on this matter is more remarkable than it might at first glance might seem (at least to a non-Canadian observer).  The process may have been stimulated by Board-friendly proposals first articulated in 2013 by Quebec’s regulator.

At present the Board of Directors of a public company in receipt of an unexpected – or hostile – bid can generally count on about two months to respond. Competition Bureau of Industry Canada oversight can stretch timeframes – though often at the back end of a process rather than at the front (where critical interactions with shareholders take place).The new rules, designed to level the playing field between Boards and potential acquirers, extends this period to roughly four months.

Given that Boards are by definition part time entities, and that developing and formatting a thoughtful response takes time, two months was viewed as an exceptionally short window for boards to either seek out a better offer from another buyer, articulate a reason for refusing to do the deal (and subsequently convince shareholders of the merits of this point of view), or pursue both in the hopes of stimulating an improved bid from the bidder.

The longer period is particularly important in a allowing boards to gather together M&A and strategic advisers, analyse an unanticipated offer and lay out a convincing rationale as to why independence would offer more substantial value creation to shareholders. (The role of an independent MA& adviser at this point becomes particularly important.)

Mr Howard Wetston,  Chairman of the Ontario Securities Commission, was queried about the change during an interview reported in the Globe and Mail. He lauded the new proposals as creating “balance” between the responsibilities of Boards and the interests of shareholders. He pointed out that these proposed changes acknowledge the “rights” and “privileges” of shareholders whilst according Boards “the ability to address a bid and alternatives’.

It also addresses problems caused by what was becoming an increasingly convoluted patchwork of M&A rules driven by court rulings and precedents in different provincial courts.

Indeed most market participants seem happy with the rules. Even the arbitrage community has seemed content. In an era of low interest rates the carrying cost of financing the leveraged purchase of shares is low, and the four month window provides additional time for higher bids to emerge.