I INTRODUCTION
The Canadian takeover bid (TOB) regime under MI 62-104 (“62-104”) regulates the bidder while the U.S. TOB regime mainly oversees board conduct. The Canadian and U.S. takeover systems differ mainly with the primacy of shareholders and boards, respectively. Canadian securities law statutes emphasize shareholder democracy. Delaware jurisprudence shows a board-centric model in takeovers at the expense of short-term shareholder profits. The Canadian TOB system has more shareholder protections than its U.S. counterpart. This gives shareholders voting ability on takeover bids, thereby enhancing value.
II DIFFERENCES IN SHAREHOLDER TAKEOVER PROTECTIONS
Canadian securities regulators have relied on a modified version of the Revlon duty. The Revlon principle was established by the Delaware courts and suggests that target boards have a duty to seek the best price available for shareholders. The goal of NP 62-202 (“62-202”) is to protect the interests of target shareholders by creating shareholder equality, identical consideration, and continuous disclosure. In its simple form, 62-202 requires regulators to intervene when defensive tactics prevent shareholders from responding to TOBs. This protects shareholders through a vote, fairness hearing, or board determination.
First, the conflict in 62-202 is finding a balance between the board’s fiduciary duties to maximize shareholder value while protecting the ability of shareholders to tender to the bid. Limiting the role of the board creates a “responsibility vacuum” where shareholders can affect a control change while owing no duties in connection with that result. Unlike Canadian boards, U.S. boards can choose a suitable framework under s. 102(b)(7) of Delaware General Corporation Law (“DGCL”). The 1985 Delaware Supreme court decision in Van Gorkom showed the depletion of director duties as director judgment trumps short-term shareholder profits. This can prevent shareholders from voting on takeover bids, affecting their ability to tender to an attractive bid. This does not protect investors and may reduce shareholder value.
Second, there are major differences in the treatment of poison pills among the two TOB regimes. Poison pills make it prohibitively expensive for acquirers through dilution in voting power and economic position in the target company. While poison pills do not change the value of the company, wealth is redistributed from the acquiring company to shareholders. A poison pill gives the target time to find competing offers to maximize selling price and increase the negotiating power of the target. In Canada, poison pills give directors limited discretion since they expire after 45-75 days from bid inception. Under s. 157 of DGCL, poison pills do not require shareholder approval, nor do they expire. This allows U.S. target directors to deny a takeover bid with a “just say no” defense under DGCL. It also allows the bidder to negotiate with the board, thereby bypassing shareholders. The Circon case illustrated the speed of U.S. board approval without a shareholder vote. This fails to protect shareholders in voting on a TOB.
The 2011 Delaware Chancery Court decision in Airgas upheld the right of the Airgas board to maintain a pill during a hostile takeover bid. In Airgas, Chancellor Chandler III concluded that “the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors.” The Airgas decision is inconsistent under DGCL which allows shareholders to limit a board’s authority on poison pill issues. As Delaware courts defer to boards on the use of poison pills, investors may accept takeovers at lower prices. This can harm shareholders by failing to capture more value through competitive bidding.
Third, there are concerns with bidders making cash offers and avoiding disclosure, diluting transparency for target shareholders. Under DGCL, boards are not required to accept all cash bids despite shareholder support. Under DGCL, U.S. boards can adopt the “just say no” defence despite a premium offered to shareholders. The 2010 OSC decision in Magna required enhanced disclosures and showed the risks of insufficient investor disclosures during a hostile TOB. Additional disclosures allow target shareholders more time to review the merits of a transaction, thereby safeguarding shareholders.
Fourth, although the U.S. takeover regime gives discretionary powers to boards, Canadian minority shareholders are protected against the oppressive actions of controlling shareholders under MI 61-101 (“61-101”). 61-101 was designed to safeguard against the undue capturing of the private benefits of control at the expense of minority shareholders. The 2008 Supreme Court of Canada (SCC) decision in BCE showed the protections under the CBCA oppression remedy given to bondholders whose values would significantly decline by the leveraged takeover. The takeover was an opportunity for BCE shareholders to capture over $10.3B of lost enterprise value from weak board governance by neglecting to pursue various strategic options. The decision in BCE showed that where the interests of the corporation conflict with shareholders, under s. 122(i) of the CBCA the duty of directors is to the corporation.
Finally, there are concerns over unequal consideration paid to target shareholders tendering to a bid at a low premium above the pre-bid price. Other discriminatory measures include controlling shareholders offered a premium, while neglecting to offer minority shareholders the same premium. This is unjust for shareholders for which no offer was previously made. The U.S. shareholder profile is more dispersed with a higher volume of large-cap issuers on NYSE/NASDAQ than any other capital market. Over 25% of all TSX companies have controlling shareholders, the highest of any developed exchange. The Canadian takeover regime aims to minimize inequities and offers takeover protections for minority shareholders.
III VARIANCES IN SHAREHOLDER VALUE-ADDED FROM PROTECTIONS
The Canadian and U.S. takeover regimes yield differences in shareholder value from various protections given to shareholders. Under DGCL, directors may use a variety of defensive mechanisms to prevent an inadequate takeover bid before reaching a shareholder vote. The Delaware approach is at odds with the Canadian approach where boards may not deny shareholders the ability to vote on a takeover bid. Canadian issuers have limited takeover defences as shareholder primacy prevails. Shareholders ultimately decide whether to accept or reject a bid. Airgas reaffirmed the director primacy of U.S. boards. This gives U.S. target boards more negotiating power and control in takeovers, increasing premiums for shareholders.
Under s. 122(1)(b) of the CBCA, the duty of care obligates Canadian boards in a takeover bid to get the best price for shareholders through acting as auctioneers. This is consistent with the Revlon duty under DGCL. BCE illustrated that the fiduciary duty analysis of maximizing shareholder value applies during TOBs. BCE showed that Canadian boards have limited options to prevent a TOB. This allows shareholders to vote on TOBs that provide opportunities to unlock shareholder value.
In addition, in Canada unlike the U.S., poison pills are regulated by securities regulators who rely on their public interest jurisdiction to intervene in contested takeovers. In the 2007 decision in Pulse Data, the ASC prevented the poison pill from expiring and emphasized the duty of the target board owed to the corporation and not only to shareholders. The 2010 BCSC decision in Lions Gate showed the challenges for a target board to keep a poison pill during a hostile bid. Pulse Data and Lions Gate show shareholder approval is not a conclusive factor in allowing a poison pill to expire. Canadian boards cannot use a “just say no” defence by unilaterally denying shareholders the ability to vote on TOBs. This protects shareholders by allowing them to vote on bona fide TOBs.
Canadian securities regulators can prohibit target boards from taking inappropriate defensive measures to prevent a takeover. 62-202 gives regulators takeover protections that encourage unrestricted auctions for shareholders. The 2006 OSC decisions in Sears and the 2010 OSC decision in Magna showed regulatory interference when transactions are perceived to be abusive or coercive towards minority shareholders. The practice of U.S. issuers using staggered boards makes it difficult to gain board control by limiting the number of directors elected in any year. Empirical evidence shows that neither poison pills nor staggered boards increase shareholder value. The excessive entrenchment of U.S. boards having wide discretionary powers has prevented shareholders from voting on TOBs, thereby compromising value. U.S. shareholder protections are limited as director primacy dominates board decisions in takeovers.
IV CONCLUSION
Canadian takeover regulations under securities law gives shareholders more statutory protections compared to its U.S. counterpart under Delaware corporate law. The director primacy of U.S. boards can enhance value through premiums for shareholders. Canadian courts and regulators have a clear bias towards shareholder primacy in TOBs. The U.S. Dodd-Frank Act may shift the governing power from boards to shareholders through greater voting rights, transparency, and disclosure. This may strengthen U.S. investor protections in takeovers, thereby increasing value.
- Harvard Business School (HBS) Case Study, “Circon (A) (Abridged)”, at 6.
- Airgas, supra note 2, at 5.
- INSEAD Case Study, The Bid for Bell Canada Enterprises (BCE), at 15.
- Bebchuk, Cohen, and Ferrell, “What Matters in Corporate Governance?” 22 Review of Financial Studies (2009), at 792.