Examples of Defensive Tactics – Securities Regulation

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You can grab notes on other topic from here.

  • Issue new shares
  • Seek a “white knight”
  • Issuer bid for own shares
  • “Crown Jewel”: sell of asset coveted by bidder. Or, grant option to third party to purchase “jewel” at low price if hostile bid succeeds
  • Bust-up fee with white knight: if white knight’s bid is unsuccessful, target must pay a significant sum to white knight (i.e. substantial debt on hand for successful bidder—less valuable company)
  • Delay the bid: commence litigation seeking an injunction until litigation is resolved, i.e. competition laws, poison pill (see below)

Regulation tends to encourage defensive tactics. It also facilitates white knight defences.

Union Enterprise (Unicorp Tender) (Example)

Example of defensive tactics – bought a pig farm to make company unattractive to bidder (too extreme, but case was before sec law)

Facts: Union enterprises was a massive utility company in Canada. Then a little nobody company, Unicorp makes hostile bid for union enterprises. Directors don’t like that, they get lots of perks, fight goes on for months. Costing Unicorp millions, union enterprises to fight it. Looks like unicorp is going to win. And Union Enterprise comes up with a smart idea. Decide they need a pig farm. Find two people that own one worth $10m, say “we’re going to pay you $80m for your pig farm, but won’t give you cash, will give you new shares of Union Enterprises.” If you do that, will expect you not to tender your shares to the unicorp bid. Makes bid at least $80m more expensive b/c new shares out there they have to buy. Also makes it hard b/c those 80m shares won’t be tendered to the bid, and if you win bid and buy union enterprises, you get a utility AND a pig farm!

They do the deal. Scorched earth – make it so unattractive bidder won’t want the company anymore. Unicorp still buys union enterprises, somehow was allowed to happen. Before they had defensive tactics.

Labatts (just an example)

Example of defensive tactics: used a poison pill (change in ownership would trigger tax liab); after this case brought in law re: defensive tactics (however, board did it’s job to buy time and eventual had a preferable bidder)

Facts: Labatts was controlled by Brascan, owned 40-50% of Labatt. Had big fight with CEO of Labatt. Rumour they’d be taken over (Labatt), so everyone wanted it, they owned beer company, TSN, Toronto blue jays, food, etc.. For months, speculation someone was going to make a takeover bid for Labatts.

  • So they decided poison pill ^ turned down by SHs, so evidence it would absolutely be in play. Had some time (unusual) to prep for takeover bid (it’s usually by surprise). Saw stupid provision in income tax act – if we turn TSN from a corporation into a partnership, then we can trigger $150m tax liability on a change of control of Labatts. If someone acquires control of Labatts, will pay $150m of tax for nothing, if we change from corp to partnership, but only triggered if someone gains control. So changed it, didn’t tell anyone.
  • Then Onex makes hostile t/o bid at huge premium to market. Everyone thought it was over, Labatts done. Time is $ for takeover bids, Labatts wants white knight, Onyx wants it to go quickly. Onyx sees change, goes nuts ^suing board, suing directors, everyone. (after defensive tactics introduced)

Onex Argument: “these guys are crooks b/c they entrenched themselves, denied SHs right to decide if they want to take our bid or not by creating an artificial $150m tax liability for no reason” ^ This actually levelled the playing field, and allowed Onex and Labatt to talk about it (Onex realized it would be long and drawn out if they didn’t talk to the board). But then someone else came and bought it from Belgium (COMPANY DID THEIR JOB, THEY BOUGHT TIME)

Max Milk and Beckers

Example of attempt by Max Milk to find a white knight

Facts: fierce rivals for years. Couche-Tard made an offer to buy Max Milk, then made a deal with Beckers (paid a lot). Sold shares on condition that they wouldn’t tender them to Couche-Tard. 2 years later Couche-Tard bought both!

  1. Due Diligence – can restrict access
  • Want to find white knight. Example of making info available to all bidders except you.
  • Every time bid is made on hostile basis, everyone gets access except original bidder. And when OG bidder sues all directors, never heard of success

Sun Media and TorStar

Example where info was not made available to bidder. Also in this case, complained to competition bureau. Worked out since delay led to higher bid.

Facts: Sun Media went to competition bureau to buy itself time to think about TorStar bid.

  • If in the same industry, might complain to anti-competition bureau and maybe a better bid comes along. But keep in mind you can’t fix this one!!
  • SH of Sun Media and TorStar angry – took decision out of their hands! However, directors insulated b/c they bought time – then Quebecor made a higher bid! So it worked out.

Second Cup

Example of poison pill- not actually used, just threatened to give opp to talk

Facts: Owned partially by Cara. Made bid to own rest of company. Existing directors put in a poison pill (once x% acquired then every SH, gets ability to buy shares)

  • NO ONE has ever actually triggered a poison pill – just threatened often to give an opp to talk
  1. Golden Parachutes – all legal.
  • Temptation to offer everyone a huge severance in case they get taken over b/c it’s the acquiror’s money. This is LEGAL.
  • Policy argument is: important to behave in best interests of SHs, so if they give you that golden parachute, relieving you of any personal concerns of losing your job, so you can just act BIC
  1. Poison Pills
  • “Rights Plan” – Put provision in articles of corp saying “if someone acquires more than 20% of shares of this company, every SH of this company automatically [except person owning 20%] gets the right to buy 10 more shares at a penny”
  • Makes the company impossible to buy b/c there are 10X as many shares that everyone acquires for a penny, so astronomical price.
  • Almost every company subj to poison pill threatens to sue, every single company says don’t push us or we’ll exercise our rights plan, every company fighting takeover bid is afraid of implementing it, no company in history of world has ever executed a rights plan.

Again, levels the playing field:

  • tells acquirer just relax. Talk to us. Because we need to talk. If you think you’ll dictate terms, we have a weapon. It buys time, it levels the playing field, and it creates a bit of leverage for there to be a negotiation

Main Principles:!) takeover bids are a good thing; 2) primary objective of t/o bid legislation is protection of bona fide interests of SHs of target company; 3) second purpose/ objective: create a reg framework where bids can happen in an open and even-handed manner; 4) Regulators believe it is inappropriate to specify a code of conduct for directors b/c that code runs risk of being insuff in some cases and excessive in others; 5) SH approval desirable (BUT this is unrealistic); 6) administrators believe that unrestricted options produce most desirable results in t/o bids and are reluctant to intervene in contested bids; 9) although auctions are best and don’t want to intervene, administrator will punish you if your action is to deprive SHs of opp/ rt to respond to a bid; 10) cannot come to administrator to get prior approval for defensive tactic

o SEC COMM CAN LIFT IT!!, but rarely would. (e.g. Cara for Second Cup) o Don’t lift it usually b/c think it creates opportunity for someone to come in at a higher price b/c that’s what they want.

You can grab notes on other topic from here.

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