Law Times

Law Times • augusT 8, 2016 Page 9 www.lawtimesnews.com Lawyers say landscape shifting Tackling takeover law regime changes BY JIM MIDDLEMISS For Law Times M ergers and acquisi- tions lawyers are grappling with changes to Canada's takeover law regime that gives management more wiggle room to maneuvre in hostile takeovers but stops short of allowing them to just say no to a takeover bid. The changes, which came into effect in early May, are still playing out, but lawyers agree the landscape has shifted. "They are very significant changes," says Alex Moore, a mergers and acquisitions lawyer at Davies Ward Phillips & Vine- berg LLP. "The amount of time target boards are going to get is very significant." Bennett Jones LLP lawyer Jeff Kerbel says, "It dramatically changes the landscape." There are two key areas that are impacted. First, a takeover bid must remain open for 105 days, compared with the previ- ous rule, which required that a bid only be open for a minimum of 35 days. Under the new rules, the board can now shorten the period, but it must still be a min- imum of 35 days. The second and more im- portant change is that bids must now be accepted by 50% of the target company's shareholders, which excludes the shares held by the bidder. This is called the "majority acceptance standard." While the changes seem simple, the reality is that it will impact how companies move forward with their bids, lawyers say, and they add deal risk to the equation. First, on the extended time frame for bids, Amanda Linett, an M&A lawyer at Stikeman Elliott LLP, warns there is "a lot more execution risk for a hostile transaction." "Companies like to [close deals] quickly," she says. "Can- ada is very commodity driven. You never know what's going to happen to the price [of oil and gas or minerals]." By moving from a regime that was looking at slightly more than a one-month bid period to a regime where the bid period is almost triple that, a lot can hap- pen. For example, the spot price for a barrel of WTI crude de- clined to US$31.68 last Janu- ary from US$46.22 in October, more than a 30-per-cent drop in only a few short months. That wreaks havoc with valu- ations and pricing and keeps financiers on the hook for the term of the bid period. As well, the extended period provides boards with more time to strategize, which was one of the concerns with the previous regime — target companies were simply rushed and forced into making hasty decisions in re- sponse to hostile bids. "It allows a lot more time to assess and deal with a hostile bid and find a potential white knight," Linett says. Moore notes that under the old system a company could adopt a poison pill, but even then it would only extend the bid another 45 to 60 days, less than the new amount. "Stretch- ing that out to 105 days is a very significant change." Walied Soliman, an M&A lawyer at Norton Rose Fulbright LLP, says, "I think we are going to see an increase in bully M&A and shareholder activism as a re- sult of the new takeover regime." The extended bid period, he predicts, "will result in po- tential acquirers saying, 'Hey, I don't want to take the price risk and other associated underlying commodity risks for 105 days when I can run a proxy battle [for control of the board].'" Soliman says he expects to see more battles for control of companies through proxy fights and greater pressure placed on major institutional sharehold- ers by wannabe acquirers hop- ing that major shareholders will push boards to support potential bids — hence what he calls bully M&A. "The result of moving to 105 days is going to drive us to a U.S.- type response from acquirers," he says. Lawyers say the move to a majority acceptance standard could also roil Canada's trad- itionally peaceful M&A waters, which have historically favoured acquirers and usually results in target companies succumbing to a takeover bid. "Takeover bids used to be premised on the idea of individ- ual offer and acceptance," says Kerbel. "I could make a takeover bid and pick up whatever was ten- dered to me. If the guy in the of- fice beside you didn't like the bid and you tendered, I could pick up your shares and not his," he adds. By adopting a rule requiring 50% shareholder approval, Ker- bel says, it moves the vote from an "individual to a collective de- cision." "If you like the bid and he doesn't, I can only pick up your shares if a majority of the shares other than those held by me are tendered," he says. Moore adds that by allotting extra time to a bid it will likely "require more resources and more patience." The changes eliminate "any and all bids" where an acquirer could put a bid out there and "slowly chip away," says Moore. "It fundamentally changes the leverage you have." That will impact bidding strategies and tactics. The new rules from the Ca- nadian Securities Administra- tor, which were a long time in the making, also include a pro- viso that if a bid reaches the 50% mark it must be extended by 10 days to allow other shareholders to tender and alleviate any coer- cion concerns. So what will be the fallout? Moore predicts there will be more legal squabbles over tendering. He says it is a "pretty significant hurdle getting 50% of shareholders to tender. There will be fights over people who are blocking transactions." Kerbel says the new rules will "make it harder to do transac- tions than it used to," but Cana- da is still not at the point of the United States, where boards can just say no to a takeover bid. One area to watch, Stikeman's Linett adds, is cross-border, du- al-listed companies based in the U.S. that trade in Canada and the U.S. "Technically, they are going to be caught by the takeover bid rules, which I don't think was the intent of the regulators," she says. LT FOCUS Jeff Kerbel says 'takeover bids used to be premised on the idea of individual offer and acceptance.' © 2016 Thomson Reuters Canada Limited 00239HQ-55275-CE Rely on Oosterhoff on Wills to clarify every aspect of succession AVAILABLE RISK-FREE FOR 30 DAYS Order online: www.carswell.com Call Toll-Free: 1-800-387-5164 | In Toronto: 416-609-3800 Order # 987251-65203 $165 Softcover approx. 1250 pages July 2016 978-0-7798-7251-0 Shipping and handling are extra. Price(s) subject to change without notice and subject to applicable taxes. 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