About 30 per cent of target boards remained independent after a hostile bid over a 10-year period — one of several key figures highlighted in a study released by a Toronto law firm ahead of an impending proposal by the Canadian Securities Administrators that looks to level the playing field between bidders and target boards.
“The prevailing wisdom was that, once a company is put in play, a change of control is inevitable,” says Bradley Freelan, a lawyer at Fasken Martineau DuMoulin LLP and co-author of the study. “The study shows that where the hostile bidder was the first mover and put the target in play ... 28 per cent of targets remained independent, so I think it is fair to say that a change of control was not, in fact, inevitable.”
The study, published by Faskens and released on Feb. 19, offers a sweeping look at hostile takeovers in Canada over a 10-year period, from Jan. 1, 2005, to Dec. 31, 2014. It’s based on 143 unsolicited formal takeover bids for legal control of Canadian-listed public companies, and comes ahead of the CSA’s proposal on takeover bids, which looks to provide target boards with more ammunition to defend against hostile bids.
“There are a lot of changes going on in the public policy side and lots of people have views on what’s appropriate or what good governance is,” says Carol Hansell, a lawyer at Hansell LLP. “But in the absence of the data, it’s impossible to make a reasoned judgment.”
The general perception is that Canada is an extremely bidder-friendly jurisdiction, but the data show that the advantages of being a bidder may not be so lopsided after all. The study found that, while more than 70 per cent of all contests for control initiated by a hostile bidder went to the initial bidder or a third party, only 55 per cent of hostile bidders succeeded in a first-mover bid. In total, 28 per cent (35 targets) remained independent after a first-mover bid; of these, five remained independent when a first-mover bid faced competition.
“People might have thought, ‘Look, if there were very few targets that remained independent, that really shows that, yes, the system favours bidders over targets.’ I think this is less so,” Freelan says.
One example of a first-mover hostile bid that saw competition but in the end produced an independent board was Endeavour Silver Corp.’s 2010 run at Cream Minerals Ltd. The all-cash offer of 12 cents per share made by Endeavour was countered by Minco-Silver Corp., the target-supported competitor. Despite Minco’s offer, and Endeavour topping its previous offer in response, Cream remained independent.
Hooman Tabesh, executive vice-president and general counsel at proxy solicitation firm Kingsdale Shareholder Services, says he expected the number of independent targets to be lower, but says there are underlying facts in deals that even bidders may not be aware of. “A lot of these transactions are fact- and environment-based,” Tabesh says.
“For example, we don’t know how much of the stock was held by insiders. ... Sometimes even the bidder doesn’t know. For all the bidder knows, there may be a 30-per-cent position that is held by insiders which, had it known, would’ve never launched that bid — and that’s the reason why the company may remain independent.”
The study observed that, where the share concentration was less than 30 per cent held by insiders (directors, executives and stakeholders with 10 per cent), a board’s decision not to support a bid aligned with the outcome 83 per cent of the time. In contrast, the outcome aligned only 62 per cent of the time when share concentration was 30 per cent or more.
But remaining independent can potentially mean not realizing maximum value for shareholders. The study found that 60 per cent of targets that remained independent traded at a discount to the final bid price a year later.
“The primary reason for boards rejecting a bidder’s offer is because they are saying it’s not enough [consideration] and that we could do better by staying independent — and that’s every single file we’ve been involved in,” Tabesh says. “What that tells me is, as a shareholder, I’d rather the bidder be successful than not successful.”
The study found that it took an average of 41 days to find competition. The concern among some now is whether the new proposal – which looks to extend the bid period from 35 to 120 days in an effort to increase competition – will create a disincentive for initial bidders, as the study found that, when a bid faced competition, it was successful only 33 per cent of the time.
“I guess our concern is that, actually, it’s going to have the unintended consequence of decreasing the frequency of hostile bids, so you won’t ever get that into the auction to begin with,” Freelan says.