CSA proposes framework for shareholder rights plans

The Canadian Securities Administrators has published a proposal for National Instrument 62-105 Security Holder Rights Plans.

It’s aiming to establish a comprehensive framework for the treatment of rights plans in Canada, which would provide the boards and shareholders of companies with greater discretion in how these plans are used.

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Rights plans are a defensive tactic often adopted by a company’s board in response to or in anticipation of an unsolicited or hostile take-over bid. The plans deter bidders from taking up and paying for target shares by letting other shareholders purchase additional shares.

They can do so at a significant discount if an acquirer exceeds a specified share ownership threshold.

Under the existing framework, regulators in Canada generally cease trade a shareholder rights plan after a limited period of time once the plan has given the target board sufficient time to respond.

Thus, the CSA is proposing regulators don’t intervene to cease trade a rights plan that has complied with the proposed framework. This is an important step in empowering the target board and shareholders in responding to a bid.

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The organization is concerned company boards don’t have the ability to respond to an unsolicited take-over bid by implementing a proper rights plan. It says it must be approached in a way that ensures shareholders support the use of the plan.

This is why the proposed framework would make sure a plan adopted by a board would only remain if it was also approved the majority of shareholders within specified time periods. Shareholders would also be able to terminate a rights plan at any time by majority vote.

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“The proposed rule will modernize, harmonize and codify an appropriate regulatory approach to rights plans in Canada,” says Bill Rice, chair of the CSA, and chair and CEO of the ASC.

He adds, “Barring exceptional circumstances, the decision to adopt and maintain a rights plan would be a matter for company boards and shareholders, not securities regulators.”

The CSA welcomes comments on proposed NI 62-105, which can be found on CSA members’ websites. The comment period is open until June 12, 2013.

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