CANADIAN UPDATE: Bold Proposals Against Unsolicited Take-over Bids of Québec Businesses
Executive Summary: Québec’s Task Force on the Protection of Québec Businesses has proposed that companies adopt new measures against unsolicited take-overs, including aggressive measures such as:
- a variable voting right which would be determined by the length of time a shareholder holds shares of a corporation,
- enabling boards of target companies to fully exercise their fiduciary duties, and
- various tax measures to promote the purchase and holding of shares of a company by its employees and its controlling shareholders.
On June 7, 2013, Québec’s Minister of Finance and the Economy, Nicolas Marceau, announced the creation of the Task Force on the Protection of Québec Businesses. The mandate of the Task Force was to study measures that would help Québec companies better protect themselves against unsolicited take-over bids, and to maintain and develop corporate headquarters in Québec. The Task Force was formed in part as a result of events that occurred during the summer of 2012 when Lowes, a U.S. company, attempted to seize control of RONA, one of Québec’s flagship public companies.
On February 20, 2014, the Task Force released its report to the public, after several months of work. In its report, the Task Force concludes that there is a need to adopt new measures against unsolicited take-overs. To this end, the Task Force makes a series of nine recommendations, many of which are bold and the first of their kind in Canada.
The Report’s Recommendations
The report proposes amendments to the Business Corporations Act (Québec) and the Securities Act (Québec). It further proposes a reform of the Bureau de décision et de révision, the Québec tribunal that specializes in securities, as well as various tax measures to encourage the purchase and holding of shares of a company by its employees and controlling shareholders.
Recommendations Concerning the Business Corporations Act (Québec)
The Task Force recommends certain amendments that are inspired by measures adopted in certain jurisdictions in the United States and Europe.
Among the recommendations proposed is the adoption of a variable voting right which would be determined by the length of time a shareholder holds shares of a corporation. To this end, the Task Force recommends that a corporation be permitted to provide additional voting rights for voting shares held by any beneficial shareholder for at least two years. This measure may however be removed from the articles of incorporation of the company by a special resolution (two-thirds of the votes cast).
The Task Force also seeks to permit a corporation to adopt restrictive provisions which would prohibit certain transactions when it is the subject of a take-over bid that is not approved by its board of directors. More specifically, the following measures are proposed:
- A five-year ban on certain transactions such as mergers or other combinations of assets with those of the bidder, or a major sale of assets representing 15% or more of the target corporation’s assets;
- The obligation on the bidder to return to the corporation profits realized in the 24 months following the take-over on the resale of securities of the corporation acquired during the 12 months preceding the launch of the bid;
- The inability to terminate the mandate of a director before the end of his/her term; and
- The inability for a bidder to exercise the voting rights attached to the shares it holds after the commencement of the offer, which may not be waived unless the other shareholders (excluding directors and officers who are shareholders) pass a special resolution (two-thirds of the votes cast) restoring the voting rights to the offeror of a take-over and its related parties.
These protective mechanisms could also be removed from the articles of a corporation by a special resolution (two-thirds of the votes cast).
The Task Force further seeks to apply the measures described above to certain non-corporate entities created under Québec law that may be subject to hostile bids, such as trusts.
Recommendations for Securities Regulators
The Task Force supports the proposal of the Autorité des marchés financiers, which aims to enable boards of companies that are the subject of unsolicited take-over bids to fully exercise their fiduciary duties. This is a topic more fully discussed in a previous publication.
The Task Force further recommends transforming the Bureau de décision et de révision, into a tribunal composed of judges of the Court of Québec, in accordance with the model provided by the Tribunal des professions.
Recommendations Relating to the Development and Sustainability of Corporate Headquarters
The Task Force recommends various tax measures to promote the purchase and holding of shares of a company by its employees and its controlling shareholders:
- By deferring the taxation of employees and shareholders of listed companies to the time of sale of the shares rather than the time of acquisition thereof;
- By providing more favourable tax treatment to gains on stock options than elsewhere in Canada;
- By allowing owners and significant shareholders of a company to defer the taxation of gains on the transfer of ownership of the company to another generation;
- By allowing family trusts to defer the realization of the gains attributed to their significant participation in a company to the time of sale, rather than every 21 years, as long as the company remains active.
Finally, the Task Force proposes to examine legislative and regulatory changes needed to promote the financial and operational participation of Québec investment funds to facilitate the transfer of Québec companies in favour of Québec successors.
The Impact of These Recommendations on the Québec Economy
In its report, the Task Force acknowledges that an overly protective legislative approach could lead to a certain level of complacency among public companies, and a diminished level of interest in the financial markets which could contribute to a decrease in value of Québec public companies. The Task Force also commissioned a study by an economist, which concluded that, on an overall basis, protective measures could negatively affect the value of shares. The Task Force states that, in its opinion, these potential consequences are less significant than the negative effects that may result from the loss of corporate headquarters in Québec.
The Reaction of the Minister of Finance and the Economy
Québec’s Minister of Finance and the Economy received the recommendations of the Task Force very favourably. He announced that he would seek to propose legislative changes to implement the measures providing adequate defences to those companies wishing to adopt them. However, on March 5, 2014, Pauline Marois, the Prime Minister of Quebec, called a provincial election for April 7, 2014. Accordingly, no legislation will be tabled to implement the proposed changes until the outcome of that election is determined.
The proposed measures will undoubtedly be the subject of significant debate within the business community, both inside and outside Québec.
Several influential members of Québec’s business community have expressed similar concerns to those set forth in the Task Force report and will likely welcome the conclusions and recommendations of the report. However, several other prominent members of the business community have expressed concerns about the negative effects of the proposed defensive measures. It was further observed that the loss of corporate headquarters can result as easily from negotiated transactions as from unsolicited offers. It was also noted that several major Québec-based companies have a class of shares with multiple votes, which limits the risk of unsolicited offers.
While any legislation to implement the proposed changes will now have to wait until after the provincial election on April 7, Davies will continue to monitor the situation closely and will notify of any developments in this area.