Firms given fighting chance to fend off hostile takeover bids by foreign companies

Securities legislation set to change

Canadian public companies that resist hostile takeover bids have more time to prepare a response if changes being proposed by Canadian Securities Administrators (CSA) are enacted as expected later this year. The new regulations have been developed in response to growing concern that Canada's technology sector is being crippled as the rate of mergers and acquisitions (M&A) escalates — a trend exacerbated by low valuations and a lack of managerial talent.

The Information Technology Association of Canada (ITAC) has been at the forefront of efforts to push for the changes. In 2012 it released a paper outlining the problem and has subsequently been in discussions with the Ontario Securities Commissions and key ministers to advocate greater protection for companies targeted for takeover.

Current legislation provides targeted firms with 35 days to respond to a hostile bid, plus another 10 days if it chooses to implement a poison pill — a shareholder rights plan employed as a defence by a firm's board of directors against a takeover. Such a short timeframe also attracts firms skilled in the use of arbitrage to profit from the difference in two or more market prices.

The proposed changes are currently being circulated for comment with an end of June deadline. The CSA will then make any adjustments required with the changes to take effect this fall.

If new legislation is passed, the time a company has to respond will be extended from 35 to 120 days. In addition, the amount of shares a hostile bidder must own to force launch a takeover bid will increase from 10% to 50%.

"It will change the whole nature of hostile bidding … A board can reduce the time if it's a good deal or extend it and add a poison pill," says ITAC president and CEO Karna Gupta. "Right now Canada is losing out because companies are getting bought out at an early stage and at a lower rate. These companies are often undervalued and people will buy companies that cost less."

Gupta was CEO of Mississauga-based Certicom when it was acquired through a hostile bid by Research In Motion Ltd (now Blackberry) in 2009. And while he asserts that shareholders did not receive the full value locked in the company, he acknowledges that M&A activity is common element of doing business.

"The question is, does a company have the ability to deal with it (hostile bid) and address it in a full sum fashion," he says. "Right now, Canadian companies are handcuffed compared to their US peers."

When Canadian tech firms are acquired, the new foreign owner typically leaves the R&D function in place but strips away all corporate and administrative functions, depriving Canada of the C-suite talent in such short supply.

Public policy issue

Given that nearly all tech firms are R&D intensive and receive government assistance in the form of indirect (tax credits) or direct support, their loss to Canada becomes a critical S&T public policy issue .

"ITAC is fundamentally a free-market organization and will never advocate protectionist measures. However, many leaders in our industry are coming to conclude there is risk in maintaining an entirely uncritical view of the current pace of M&A activity," states the 2012 ITAC report. "Virtually every research-based tech venture in Canada receives some form of direct or indirect government support ... It is entirely appropriate, therefore, to analyse whether these public investments are returning the benefits anticipated."

When Gupta directed ITAC to embark on a full-fledged attempt to change Canada's securities regulations, he had formable support from two Ottawa tech titans — Sir Terry Matthews, chairman of Mitel Networks and private holding company Wesley Clover, and the late Dr Adam Chowaniec. Chowaniec in particular became a champion for the cause, articulating the nature of the problem and advocating moving closer to the US model.

For a variety of reasons including bankruptcy, liquidation, merger and acquisition, many of the start-ups launched in Canada disappear. Many companies with aspirations and business plans to grow into global enterprises see their growth trajectory halted against their will. — ITAC Paper

The first phase was triggered by the release of the ITAC paper — Building Stronger Tech Companies in Canada — followed by 18 months of lobbying, primarily targeted at the Ontario Securities Commission, the largest body of its kind in Canada.

Chowaniec was an ITAC board member from 2001 until his death earlier this year (R$, February 26/15), board chair in 2003-04 and even briefly served as president.

"Adam worked with me on the creation of the paper and bringing it before the OSC and several key ministers," says Gupta. "He knew this was an issue needing thoughtful discussion as it was crippling the tech industry. It was shrinking. Many couldn't see the problem but if it's not a problem then why can't Canada build large, global companies?"

The 2012 ITAC paper included a list generated by the Branham Group of 164 Canadian tech firms that had been acquired by foreign owners between 2004 and 2012. (A previous study by Doyletech identified 72 tech firms between 1993 and 2003).

Analysis by Byron Capital Markets suggested that the undervaluing of Canadian tech firms is systemic. It found that software firms are valued at a 23% discount relative to their US counterparts while hardware firms are valued at a 34% discount.

Problems companies face in accessing adequate access to markets, capital and C-suite talent contribute to lower valuations of public tech companies. Gupta acknowledges that the proposed changes won't solve the myriad issues facing Canada's tech sector — particularly affording firms the ability to grow, expand into global markets and build critical mass — but at least it's a start.

"Given where we were, I'm pleased that at last it gives companies a fighting chance and reduces play for the arbitrage that only wants to make a dime on the dollar, he says. "Time will tell but it's the best we could do short of changing the Canada Corporations Act. No one wants to do that because it opens up a constitutional discussion."

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