May 13, 2014

Should shareholders rule? No, let boards decide

Yvan Allaire | Financial Post

Boards of directors have the best record at extracting good deals for their shareholders.

In an opinion piece published in the Financial Post on May 6, (Shareholders should decide takeovers), Mr. Philip Anisman responds to my piece published in the Financial Post of April 30 (Canada needs a new takeover regime).

Mr. Anisman recycles the key arguments of “market discipline” and boards having to dedicate themselves to the singular goal of “maximizing shareholder value” when assessing an unsolicited offer to buy the company.

Of course, he has to acknowledge that “the fiduciary standard adopted by the Supreme Court of Canada in its BCE decision… would permit directors to just say ‘no’ to a takeover bid and would limit the unique market discipline provided by takeover bids. Whatever the merits of this position under corporate law, it does not govern the takeover bid provisions in the securities laws administered by our securities regulators.”

But that is my very point. Shouldn’t the provincial securities regulators adopt a regime for takeovers which is consistent with Supreme Court decisions? Is it appropriate for securities regulators to place themselves above the Supreme Court as interpreter of the Canadian Business Corporation Act? Is it not possible that the long-term interest of the company, not “maximizing shareholder value”, may call for the rejection of a particular hostile bid?

Why have many U.S. states adopted anti-takeover laws? Why should Canada, with a more vulnerable economy and a smaller industrial base, be more open than the U.S. to the vagaries of unchecked takeover games?

Carol Liao, having interviewed 31 Canadian legal practitioners, reports that, in their view, “directors are in the best position to unlock share value, as it is their fiduciary duty in the best interests of the corporation, but directors are being denied the proper tools to do so” (“A Canadian Model of Corporate Governance: Insights from Canada’s Leading Legal Practitioners”, Carol Liao, 2013).

Mr. Anisman refers to one study purporting to show the discounting effect of “poison pills” on share value. Well, in this area, academia is very uncertain as studies contradict each other and results are contingent on methodology, time frame, samples, etc.

But a comparison of two decades of M&A activity in the U.S., the 1980s – a period of unbridled takeovers – and the 1990s – a period subsequent to the adoption by some 30 states of laws granting boards more power in dealing with hostile takeovers – provides interesting data, as seen in the table nearby.

It would appear that the changes in U.S. state laws have indeed led to far fewer hostile takeovers; but the rate of successful takeovers actually increased and shareholders received a substantially better offer for their shares. Boards of directors with enhanced powers have extracted much better deals for their shareholders.

Mr. Anisman argues that hedge funds and arbitrage funds must have bought their shares from other shareholders and therefore one may conclude that these shareholders “can be viewed as supporting the bid.”

But there are other, plausible, reasons in the Canadian state of the investment and takeover market for this phenomenon to occur.

The current shareholders at the time the bid is made public know that, given Canadian regulations, there is a high probability that the takeover bid will be successful and that their individual interest is to sell at the price approximating the bid price even if they believe that it is not in the long-term interest of the company. (In fact more than 85% of hostile bids are successful in Canada.)

So, elementary financial calculus and their own fiduciary responsibility would incite an investment fund (mutual fund, pension fund, etc.) to sell its shares at the going price soon after the takeover offer; if the takeover bid were to fail (or be blocked by governmental bodies), the fund could buy back the stock at the pre-bid price and yet post a nice return boosting its yearly performance.

For the arbitrage funds and like-minded “investors”, the calculus is far different. It is remarkable that one would leave the fate of a company in their hands when the whole point of their actions is to support a quick completion of the takeover at the best price. That’s how they make their money!

Indeed, Canada needs a new takeover regime!