TO DISCLOSE OR NOT TO DISCLOSE
We've heard a lot about Bill 198, which became law in Ontario three weeks ago and gives shareholders increased powers to sue public companies or executives when they utter or publish misleading statements about their businesses. No public company official with any brains is going to say a peep without fearing an onslaught of lawsuits.
But in the takeover world, it's what companies and their bosses don't say that may land them in hot water under the new law.
Brian Pukier, a mergers and acquisitions specialist with Stikeman Elliott LLP, says the new legislation puts increased pressure on public companies to reveal significant, or so-called material, changes. One change that may now be deemed material, he said, is confidential takeover discussions.
"Bill 198 increases the risks that limited disclosure about mergers and acquisitions activity could attract liabilities," he said.
Traditionally, public companies have tended not to reveal anything about takeover talks until a preliminary deal has been struck. The legal wisdom has been that merger negotiations are merely an expression of possible interest. Why trigger job anxieties among employees or provoke a stock-buying frenzy with news about takeover talks that may founder. As any M&A specialist will tell you, corporate closets are stuffed with takeover files that never led to a deal.
Under the new rules, Mr. Pukier said, "companies may be more inclined to insulate themselves from charges that they omitted disclosure."
Consider what just happened to Dofasco Inc. The Hamilton steel maker took a lot of heat last month for failing to reveal that it has been in and out of takeover negotiations with two separate bidders since last spring, a detail that the company only disclosed last month after it struck a preliminary agreement with ThyssenKrupp AG.
JUST SAY NO
There is a certain inevitability when a public company is targeted for an acquisition. A would-be buyer announces a bid, the target's stock price soars as impatient arbitrage investors rush in to buy out long-term shareholders, and the company finds itself under enormous pressure to fulfill fidgety investors' expectations by selling to the highest bidder.
Then there's Vincor International Inc. When New York-based Constellation Brands Inc. made a play for the Canadian wine maker in October, Vincor's board, along with Goodmans LLP partner David Matlow, the company's legal adviser since 1993, came up with the Just Say No defence strategy. Convinced that Constellation's $1.1-billion or $31-a-share bid was a stinker, Vincor rejected the offer. That's when the takeover story got interesting. Constellation walked away and no other suitors expressed any interest.
What was Vincor's secret weapon? Disclosure. To back up its argument that Vincor was worth more than Constellation had put on the table, the company pushed corporate disclosure to new heights by publishing extensive internal information in a directors' circular about the company's financial health, operations and prospects.
Mr. Matlow and Vincor officials aren't talking, but we understand that the weighty circular and a steady round of information sessions with such long-standing institutional shareholders as AIM Funds Management Inc. and Mackenzie Financial Corp. persuaded enough investors to hold on to their stock.
The good news for Vincor's stubborn shareholders is that their company wasn't sold at bargain prices. The bad news is that the wine maker's stock price has tumbled $6 to about $30 a share, the kind of slide that turns even the most patient investors into tetchy activists.
WHEN ACTIVISTS GO SHOPPING
Nobody likes to admit it, but Carl Icahn, Jerry Zucker and John Paulson are changing the takeover game in Canada. There are no shortage of directors who dismiss these powerful U.S. investors as crass opportunists seeking quick investment gains, no matter what the cost to Corporate Canada. That may be so, but there are some pretty compelling legal and market forces that are luring these shoppers north, and public companies had better brace themselves for more raids.
Last year, the three amigos swept into Canada, separately bought large stakes in three Canadian icons, Hudson's Bay Co., Fairmont Hotels & Resorts Inc. and Algoma Steel Inc., then began applying pressure for sweeping corporate makeovers. Mr. Icahn and Mr. Zucker took shareholder pressure to new extremes by reaching into their deep pockets and launching separate bids to acquire control, respectively, of Fairmont and HBC. Mr. Paulson is content for the moment with merely demanding representation on Algoma's board, but it may only be a matter of time before his onslaught turns the company into takeover bait.
Big-time U.S. investors are being drawn to Canada as part of a global hunt for higher investment returns to supplement lacklustre stock market gains. Last year, raiders realized that Canada was fertile ground for hostile takeovers because, unlike the United States, regulators and courts here tend to limit the defences companies can throw up when they have been targeted by an unfriendly buyer. Sharon Geraghty, an M&A specialist with Torys LLP, said Canadian regulators take a dim view of companies that erect anti-takeover defences, such as poison pill plans, for longer than 45 days.
"This has made Canada a good environment for hostile bids," Ms. Geraghty said. "The interesting question is what are the long-term effects on the economy and the Canadian business community."
TRUSTY MERGERS
The newest combatants on the takeover battleground were not supposed to even be on the field. When income trusts were first created a few years back, they were pitched as slow and steady vehicles that would deliver reliable yields. Well, that was then. Turns out these newfangled corporate inventions are so prolific and successful at raising cash from investors that they are itching to spend money buying competitors and consolidating their market dominance.
The only problem is that the legal framework for income trust takeovers is almost non-existent. The void is yielding some pretty inventive legal M&A work. "We have the flexibility to invent a lot of new ideas. . . . We're going to have to be increasingly creative with trusts in the M&A field," said Torys LLP partner and trust expert Philip Brown.
The biggest obstacle to income trust mergers is that old trust bugaboo -- taxes. When corporations marry, shareholders can be shielded from capital gains by rolling their old shares into the new company's shares. Income trusts can only roll over units from one trust to another if their founding declarations of trust are amended. If you are still with us, that means trust holders have to vote on the amendment and that means the odds are stacked against hostile takeovers in the trust sector.
Or so it seemed, until customs broker PBB Global Logistics Income Fund launched an unfriendly bid last fall for rival Livingston International Income Fund. PBB's creative Stikeman Elliott LLP lawyer Simon Romano came up with the bright idea of structuring its offer so that any Livingston unitholder that accepted its offer effectively gave PBB the power of attorney to amend their declaration of trust. The sweeping power of attorney grab never got tested because the two trusts negotiated an agreement last month, but watch for other nimble lawyers to experiment with the concept this year.
CORRECTION
Livingston International Income Fund bid to acquire PBB Global Logistics Income Fund, and Stikeman Elliott LLP lawyer Simon Romano advised Livingston on the pending merger of the two companies. Incorrect information was published yesterday.