Corporate take-overs are currently riding a wave of unprecedented popularity. In 1995 both the frequency and the value of the recorded take-overs in Canada and the United States far surpassed those of any other era in history. The motivations underlying these consolidations are assorted, ranging from the potential revenue stability of diversification, to the cost-savings of economies of scale, to the ego-oriented desires of business leaders to own an empire. Likewise, the consequences of take-overs are numerous and distinct, varying according to the make-up of the particular corporations, the skills of the players involved, and the ambitions underlying the transaction. Nevertheless, notwithstanding the peculiarities which serve to highlight the contrasts between corporate reorganizations, all take-over scenarios possess at least one fundamental similarity: the potential to inflict change on the personalities involved in the deal.
Every take-over situation is characterized by the presence of a variety of interested parties, or stakeholders, whose interests may be fundamentally affected (beneficially or detrimentally) by a merger. These stakeholders include the target corporation (the offeree), the buying corporation (the offeror), employees, and an offeree's management and shareholders. In an effort to help safeguard the rights and interests of such stakeholders, the federal government of Canada responded by installing take-over laws and regulations within the Canada Business Corporations Act.
A second response to the take-over phenomenon, in this case originating from the corporations targeted for take-over, was a plethora of defensive tactics - such as poison pills, golden parachutes, and white knights - which could be used by an offeree's management to thwart its acquisition by an offeror. Such defenses, however, present the danger that an offeree's directors may exercise them for purely self-motivated reasons. In an effort to prevent such an abuse of power, and to protect the rights and interests of shareholders of offerees, the Canadian courts proceeded to strike down defensive strategies which were inconsistent with the fiduciary duties owed by directors to their shareholders under the CBCA.
Thus, the intent of this paper is two-fold. First of all, to review the objectives behind the CBCA's take-over provisions, to analyze the degree to which the objectives have so far been satisfied, and to propose regulatory changes which would allow the CBCA to better protect and balance the rights and interests of the stakeholders in take-overs. Second, to review the most common take-over defenses, to analyze the fiduciary duties of directors of Canadian corporations during a take-over attempt, and to propose methods of achieving a fairer, more effective means in Canada of controlling such defenses.
The paper is divided into five sections, as follows: Part I contains an introduction; Part II provides background information on take-overs, including an analysis of how various stakeholders are affected by consolidatory transactions; Part III addresses the numerous issues related to the regulation of take-overs by the CBCA; Part IV is devoted to the topics of defensive tactics and fiduciary duties; and Part V provides a conclusion to the paper.
History of Take-overs
The history of take-overs in the United States and Canada has been characterized by four cycles or waves - periods of high levels of take-overs followed by periods of relatively low activity. The four waves occurred between 1897 and 1904; 1916 and 1929; 1965 and 1969; and 1984 and 1989.(17) The first wave, beginning after the Depression of 1883, was stimulated in the United States and Canada by the development of large national markets and the expanding overseas markets for manufactured products. Firms wanting to grow as quickly as possible during these opportunistic times bought other corporations in the same industry in order to acquire their additional manufacturing capacity. Lax federal anti-trust laws and the relaxing of corporate laws made it easier for corporations to finance their take-overs, thus further strengthening this period of horizontal integration.
The second wave of take-overs, commencing in 1916, was founded on a desire to reduce operating costs and maintain profit margins through the economies of scale offered by vertical integration.(20) As a result, offeror corporations acquired both supplier and buyer firms in their attempts to internalize previously external risks. Contrasting the first and second waves, George Stigler, the economics Nobel Laureate, described the former as a "merging for monopoly" and the latter as a "merging for oligopoly." This period of consolidation came to an abrupt halt in 1929 with the crash of the stock market that had been partially fueling it.(22)
The third take-over wave led to the rise of corporate conglomeration in Canada and the United States. While the previous waves had been directed at the integration of firms within one's own industry, 80% of the mergers that took place throughout this period were conglomerate-oriented and involved the take-over by offerors of offerees from different industries. This cycle was driven by a variety of different corporate motivations, including a desire to circumvent tough anti-trust laws which had made it very difficult to pursue either horizontal or vertical integration strategies of expansion, and an attempt to achieve greater financial stability through diversification of products and industries.
The fourth wave of take-overs that swept through Canada and the United States in the 1980s was characterized by the mega size and prominence of the offerees, and by the more hostile, aggressive tactics of the offerors. As well, this period witnessed a transformation in industries, spurred on both by the deregulation of industries such as airlines and banks, and by the arrival of primarily speculative investors who rapidly purchased and resold corporations purely for profit.
Although it has yet to be labelled as such, the period between 1992 and the present has seen the rise of a fifth wave of take-overs and mergers in Canada and the United States. Following the recovery of the United States economy from the 1990-91 recession, as corporations once again began to seek to expand, take-overs were viewed as a quick and efficient manner in which to do exactly that. This "fifth wave" of consolidation has thus far largely avoided the super-leveraged, debt-financed transactions of the 1980s, observing instead take-overs financed primarily through the increased use of equity instruments.
The quantity and economic value of the mergers and acquisitions that have occurred in North America since 1990 have steadily increased, with there being no hint of the trend slowing down in either Canada or the United States. This continued and substantial growth in corporate take-overs signifies the importance of ensuring that the take-over regulatory regime be as efficient, effective and fair as possible.