The CSA Proposes a New Framework for Shareholder Rights Plans and Amendments to the Early Warning Reporting Regime

Last week, the Canadian Securities Administrators (CSA) published a proposed new regulatory framework for shareholder rights plans under National Instrument 62-105 Security Holder Rights Plans, and significant changes to Canada’s early warning reporting regime with proposed amendments to National Instrument 62-103 Early Warning System and Related Take-Over Bids and Insider Reporting Issues, Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids and National Policy 62-203 Take-Over Bids and Issuer Bids.

These proposals represent significant developments in the Canadian securities law landscape in an attempt to address, among other things, defensive tactics in M&A transactions and increasing shareholder activism.

Shareholder Rights Plans

Background

Historically, Canadian regulators have taken the position that shareholder rights plans may only legitimately be used to delay a hostile bid for a limited period of time to allow the target’s board of directors to explore strategic alternatives (generally 45 to 60 days). Canadian regulators will generally strike down or “cease trade” a shareholder rights plan after this period, at a hostile bidder’s request.

Proposed Rules

The proposed rules provide a mechanism for target boards to have greater control over a hostile bid process while reinforcing the Canadian policy position that shareholders should have the freedom to decide on the merits of a hostile bid. Canadian regulators will generally no longer intervene to cease trade shareholder rights plans that comply with the rules and are approved by shareholders. The proposed rules provide that shareholder rights plans:

  • are effective immediately but must be approved by a majority of shareholders within 90 days of the earlier of the date of adoption or the date a hostile bid was commenced;
  •  must be approved at each annual meeting following the year of initial approval by majority vote of shareholders to remain effective;
  •  may not be implemented within 12 months of when a plan was not approved or terminated by shareholders (other than in response to a subsequent hostile bid, subject to shareholder approval within 90 days);
  •  can be terminated by the shareholders at any time by majority vote;
  •  can only be used as a defense against a take-over bid and not for other purposes (such as a proxy solicitation); and
  •  cannot discriminate between bids.

Shares held by a hostile bidder will be excluded from any shareholder vote to adopt, reconfirm, amend or terminate a shareholder rights plan.

More Time to Consider Strategic Alternatives

Where a shareholder rights plan is adopted in response to a hostile bid, Canadian regulators will not intervene to cease trade the plan during the up to 90-day period between commencement of the bid and the shareholder meeting called to approve the plan, giving the target board more time to explore strategic alternatives. If a strategic alternative is not identified during the 90-day period, the target board may either cancel the shareholder meeting and allow shareholders to tender to the bid or continue soliciting proxies to obtain approval of the plan at the shareholder meeting.

Standing versus Tactical Rights Plans

Depending on the date a bid is launched, annually approved shareholder rights plans (“standing plans”) could give target boards considerably longer to explore alternatives (up to a year), subject to the ability of a hostile bidder to acquire a sufficient number of shares to requisition a shareholder meeting to terminate the plan prior to its next annual confirmation. However, it remains to be seen if shareholders—and shareholder advisory services—will support giving boards up to 12 months to delay shareholder consideration of a bid. Alternatively, a rights plan may be implemented only in response to a hostile bid (“tactical plans”). Adopting a tactical plan would eliminate the time and expense associated with approving a plan at the annual shareholder meeting, while still giving the board time to respond to an unsolicited bid and leaving shareholders with the final say on the merits of the plan and the unsolicited bid.

Early Warning Reporting Regime

Proposed amendments

The proposed amendments to the early warning regime bring Canada in greater alignment with the United States, the United Kingdom and other jurisdictions, and improve transparency in light of growing shareholder activism in Canada. The most significant of the proposed amendments:

  • reduce the reporting threshold from 10% to 5%;
  • require “equity equivalent derivative” positions (derivatives that substantially replicate the economic consequences of ownership) and securities lending arrangements to be accounted for when calculating whether the 5% threshold has been reached;
  • require disclosure if an investor’s ownership percentage drops below 5%;
  • require disclosure of increases and decreases in ownership of 2% or more;
  • result in increased disclosure of both economic and voting interests; and
  • restrict eligible institutional investors from using the alternative monthly reporting regime if they solicit, or intend to solicit, proxies.

Lower Reporting Thresholds

Increasing shareholder activism has prompted the CSA to come to a view that greater transparency in shareholdings is required in Canada, and accordingly has proposed reducing the reporting threshold from 10% to 5%, the level at which shareholders of Canadian companies may generally requisition a shareholder meeting. Equity derivatives and securities lending arrangements will be included within the 5% threshold. The lower threshold should result in a significant increase in reporting given the number of investors that have share positions in reporting issuers of between 5-10%.

Hidden Ownership and Empty Voting

The CSA has proposed measures to address concerns of “hidden voting” and “empty voting”. “Hidden voting” occurs where an investor acquires a substantial economic interest in an issuer without requiring public disclosure, notwithstanding such interest could be converted into voting securities. “Empty voting” occurs when an investor acquires voting interests through derivatives or lending arrangements without acquiring the corresponding economic interests. Under the current rules, which are based on the concepts of beneficial ownership, control or direction, these types of interests are not required to be disclosed. The proposed amendments require both economic and voting interests to be disclosed.

New Reporting Threshold for Decreases in Ownership

Any decrease in ownership of 2% or more will require disclosure, which is a departure from the existing regime which requires reporting of increases of 2% or more and gives the investor the discretion to determine whether a decrease in ownership is a material fact requiring disclosure. In addition, a decrease in ownership below the 5% reporting threshold will require disclosure.

Enhanced Disclosure

Early warning reports will require enhanced disclosure, in particular with respect to the intentions of the person acquiring the securities and the purpose of the acquisition. This will give the market a better opportunity to evaluate the purpose of the acquisition and its impact.

Alternative Monthly Reporting

The alternative monthly reporting (AMR) regime is intended to apply to passive investors, but can currently be used by investors who intend to actively engage shareholders and solicit proxies. The CSA believes that this is not consistent with the intent of the AMR regime. Accordingly, it is proposed that eligible institutional investors that solicit, or intend to solicit, proxies in respect of director elections or reorganizations, amalgamations, mergers, arrangements or similar corporate actions will not be permitted to use the AMR system.

Time for Comment

The CSA have requested comments with respect to the shareholder rights plan proposals and early warning regime amendments by June 12, 2013.