The present meets the future in Suncor Emery Inc.’s unsolicited $4.3 billion takeover bid for Canadian Oil Sands Limited.
When COS adopted a second poison pill that would require Suncor to double its 60-day minimum bid period or seek an order terminating the pill, it brought into focus the Canadian Securities Administrators’ proposed new takeover bid regime, for which the comment period closed in June. Regulators have provided no hint when the new rules will come into force, but many observers expect implementation in early 2016.
“I’m not at all surprised that COS adopted a strategy that brings things into conformity with the new rules,” says Amanda Linett of Stikeman Elliott LLP in Toronto. “What we’ll have to see now is which rules the regulators will apply.”
Under the new “just say slow” regime, takeover bids must be remain open for a minimum of 120 days, though target boards may in certain cases shorten that period to 35 days. Shareholders will still have their say on a bid by way of a new 50 per cent minimum tender condition. If the minimum condition is met, undecided shareholders will have 10 days to accept. Exemptions are unchanged under the new rules.
The extended bid length gives other interested bidders a longer period to intervene, creating uncertainty for the initial bidders, especially if they are hostile. In turn, the uncertainty can give boards more negotiating leverage.
By contrast, under the existing regime, directors must issue a circular evaluating the bid within 15 days, and bids must remain open for only 35 days. While defensive measures such as poison pills are frequently used to buy time, bidders can generally obtain regulatory orders to cease trade the pills within 60 or perhaps 90 days.
As it turns out, Suncor structured its bid as a permitted bid under a pre-existing COS poison pill. The bid was open for 60 days and featured a minimum tender condition of over 50 per cent that, if met, would require Suncor to extend its bid for a further 10 days.
Should Suncor extend its bid to deal with the second pill, its bid would remain open for 120 days. But should it apply for a cease trade order, securities regulators might cap the bid period at 60 days in conformity with the general practice under the old rules.
“In support of its position, Suncor would argue that its original bid was a permitted bid that conformed with a poison pill that had been approved by shareholders,” says John Emanoilidis of Torys LLP in Toronto.
As it turns out, COS’ strategy in this interim environment is not new to the market. Just a few weeks ago, after Total Energy Service Inc. announced its intention to make a takeover bid for Strad Energy Services Ltd. Strad responded by adopting a pill that required a takeover bid to remain open for 120 days to qualify as a permitted bid.
“Total decided not to go ahead because of the uncertainty over that length of time,” Emanoilidis said.
Suncor faces similar uncertainty.
“The interim period before implementation is always very tricky because regulators are loath to treat a proposal as if it had been implemented,” says Emanoilidis’ partner Cornell Wright. “Still, what the target did here is a smart tactical move that was entirely predictable.”
After all, it’s not as if a 120-day minimum period is completely foreign to Canadian regulators.
In June 2014, , the British Columbia Securities Commission allowed Augusta Resource’s poison pill in response to HudBay Minerals’ hostile bid to remain in place for an unprecedented 156 days. At the time, the CSA had published a proposal that would allow a pill to remain in place where it had been approved by shareholders on an annual basis or within 90 days of a bid.
At the heart of the BCSC’s reasoning, however, was the fact that Augusta shareholders had approved the pill in the face of the HudBay bid. The Commission stoutly denied that the proposed new rule had governed its decision.
COS shareholders, however, have not given their approval to the second pill. Still, Emanoilidis believes that the second poison pill could stand.
“It wouldn’t be a stretch for the regulators to say that 120 days is right while we wait for the new rules to be implemented — especially because there’s a general consensus out there that the new rules are the right kind of rules.”