In May 2016, sweeping changes to the Canadian take-over bid regime came into effect. The stated purpose of the new rules included the goal of rebalancing the dynamics between hostile bidders and target boards by extending the minimum bid period to 105 days, and mandating a 50% mandatory minimum tender condition and a ten-day extension once all bid conditions have been satisfied or waived. We published our Canadian Hostile Take-Over Bid Study in the spring of 2015, just over a year before the new rules came into force. In that study, we expressed concern that strengthening a target board’s hand could result in a decrease in hostile bid activity. Over the past year, various commentators have suggested that the new rules have had no adverse impact on hostile bid activity. We are not so sure.
The basis for the conclusion stated by others that the new rules have had no impact on hostile bid activity is that, in the 12 months immediately following the enactment of the new bid regime, there were seven hostile bids, which is in line with the number of hostile bids initiated in each of 2014 and 2015. On its face, this analysis seems correct; however, on a closer review of the data, we believe this conclusion is overly simplistic and flawed.
First, the time periods being compared are not equivalent. By comparing the 12 month period that followed the enactment of the new bid regime against the data from prior calendar years, the period between January 1, 2016 and May 9, 2016 is not included in the analysis. During that period no hostile bids were initiated, perhaps due in part to concerns by potential bidders that, in anticipation of the new regime, the securities regulators might be more inclined to leave a shareholder rights plan (or “poison pill”) in place for a longer period since the minimum bid period would soon be tripling.
Second, the data set includes a bid made by a controlling shareholder who owned 67% of the target’s shares at the time of its bid. Bids by a party who already holds control are not comparable to bids for control in part due to the lack of practical alternatives available to the target. For that reason, among others, we excluded bids by controlling shareholders from our study. Removing the non-control bid from the analysis and comparing the results on a year-to-year basis paints a very different picture as shown below:
Third, and perhaps most importantly, it is simply too soon to assess the impact of the new regime. Seven bids in total over a 24 month-period is too small a sample size to draw any meaningful conclusions. In any event, leaving that criticism aside, a closer look at the sample actually reveals a 50% reduction in the number of unsolicited bids for control from 2015 to 2016 (from eight to four) and only three unsolicited bids in total in 2017, the lowest number of bids in any of the thirteen years we have analysed. Accordingly, the data simply do not support the conclusion that there has been no chilling effect on hostile bid activity.
We believe that a lively market for corporate control in Canada benefits bidders, targets and their respective shareholders. Given the stakes involved, we suggest a continued careful, empirical approach to evaluating the impact of the new rules. Contrary to what others have concluded, what we have seen to date suggests some cause for concern.