Counterpoint: Canada needs a new regime for hostile takeovers

In this era of speed trading and hedge funds, securities commissions need to adapt to protect  long-term shareholders

Ideology can be blinding, even apparently when one’s secular faith involves the simple creed that those who own stocks are presumptively selfless while those who manage corporations are presumptively selfish and untrustworthy.
Leo Strine, Chief Justice of the Delaware Supreme Court, Columbia Law Review, 2014.

First, let’s be clear. The issue of boards’ duties and responsibilities in matters of unsolicited takeover offers is not a Quebec issue but a Canadian one.

Whether Valeant, a nominally Quebec-based corporation, succeeds in its efforts to take over Allergan should rest with the Allergan’s board and its assessment of the long-run interests of the company. Some seem to think that this Delaware approach to takeovers gives total, unchecked, authority to the board; but it is not a free lunch. The would-be buyer may call upon the courts to determine if indeed the board of the target company is acting in the best interest of shareholders.

Already back in 2007, the federal government in response to public outcry at the takeovers in short succession of Alcan, Falconbridge, Inco and others, set up the Competition Review Panel. In its report, the Panel recognized the untenable position of securities commissions and recommended that:

• “Securities commissions should repeal National Policy 62-202 (The policy that stripped boards of directors of all authority in takeover situations).
• Securities commissions should cease to regulate conduct by boards in relation to shareholder rights plans (“poison pills”).
• Substantive oversight of directors’ duties in mergers and acquisitions matters should be provided by the courts.
• The Ontario Securities Commission should provide leadership to the Canadian Securities Administrators in making the above changes, and initiate action if collective action is not taken before the end of 2008.”

In the U.S., boards of directors with enhanced powers have extracted much better deals for their shareholders. But not in Canada.

Take the case of Osisko. But for intricate financial gymnastics (involving the Caisse and CPPIB) that managed to stall the process and give the board enough time to arrange a better offer, Osisko would have been sold to Goldcorp for roughly $1 billion less than will ultimately be received by shareholders.

Take the recent case of Inmet Mining Corp. and First Quantum Minerals. Inmet’s board was dead set against a takeover by First Quantum. The latter made a bid; no other bidder has shown up. Despite the board’s opposition, Quantum simply put its offer to the shareholders. As enough of them handed in their shares the deal has been consummated. Under Canadian regulations, the board of Inmet had no other recourse; they believed that it was not in the long-term interest of Inmet to be acquired by Quantum at the offered price but were powerless to act. That does not make any sense.

How can anyone defend this dysfunctional regime? How can one pretend that this system is best for stable, long-term shareholders?

In a world of financial derivatives, speed trading, arbitrageurs, momentum players, hedge funds of all sorts, as soon as a takeover offer is made public, the shareholder base of the target company is swiftly and radically transformed. To consider these newcomers as the sole “deciders” of company’s fate, needing the benevolent protection of securities commissions against malevolent, conflicted management, seems like an imaginative scenario of times past.

Indeed, the funds of the hedge, mutual, institutional or arbitrage sorts are merely money managers for the real owners, their investors or future pension beneficiaries; but are these owners ever consulted in the matter?

Although many in Canada are not aware of the fact, Canadian corporate governance already complies with what the activist investors are fighting for in the United States; elimination of staggered boards and separation of power between the chair of the board and the CEO, both governance principles which make it easier to carry out a hostile takeover; combined with the widespread practice of majority voting for board members, these features of Canadian corporate governance provide shareholders with the means and tools to punish an errant board.

Finally, the quaint notion that management is, ipso facto, against the takeover of their company because of inherent conflicts of interest must be updated; because of the changes in compensation system for executives and board members, the concern has become that management and boards may be too receptive to a takeover offer that may not be in the long-term interest of the corporation and its stakeholders. The potential conflict of interest has switched side. Securities commissions should be alert to that phenomenon and assess measures to limit this sort of conflict of interest.

But, the Canadian securities commissions, with the OSC taking a leading role, should modernize a regime that has become disconnected from the current realities of financial markets and harmful to long-term shareholders as well as to Canadian society.