Securities laws leave firms with ‘no defence’
Given a few more years, it could have been Zarlink Semiconductor in pursuit of acquisition targets instead of being the one swallowed in a takeover itself, says former chair Adam Chowaniec.
Adam Chowaniec, former chair of Zarlink's board. (Photo by Mark Holleron)
The Ottawa company was in the midst of a turnaround that Mr. Chowaniec says was abruptly interrupted after Microsemi Corp. made a hostile purchase of the chipmaker.
In fiscal 2008, Zarlink lost US$48.4 million, just months after it paid $134.5 million to acquire Texas-based Legerity Holdings. A group of dissident shareholders subsequently waged an unsuccessful proxy battle, seeking to oust the board.
But Zarlink returned to profitability in fiscal 2010, hired a new chief executive, Gary Tanner, in February 2011 and launched a new version of its ClockCenter switching technology, among other products.
Mr. Chowaniec, the founder of Tundra Semiconductor and chair of several local corporate boards, including BelAir Networks and OSI Geospatial Inc., describes himself as "frustrated."
"We thought we were in a good position, and if we could just keep the momentum going for a couple of years we might be in a position to do acquisitions."
It wasn't to be. Microsemi made its hostile takeover offer of $3.35 per share in August, prompting Zarlink to quickly announce and implement a shareholders' rights plan while it solicited offers from other potential suitors.
What exactly happened next is under a non-disclosure agreement, but Mr. Chowaniec says it was Ontario securities laws that sealed the fate of the firm.
When Microsemi upped its offer to $3.98 per share, surpassing other bidders, the board was forced to accept it because of its fiduciary duty to shareholders to seek the best financial value for Zarlink.
It speaks to the need to change the securities laws, Mr. Chowaniec argues, especially considering the loss of locally headquartered companies such as Bridgewater Systems and DNA Genotek through takeovers this year.
The Ontario Securities Commission has publicly mulled measures such as changing shareholder rights' plans; in the United States, they can be implemented permanently, for example.
"It's a reflection of the fact that our TSX-traded companies are trading at valuations with substantial discounts to U.S. peers," Mr. Chowaniec says. "Then securities laws are written in such a way that you have no defence."
The counsel for Zarlink, McCarthy Tétrault, had been with the company since the late 1990s; partner Sonia Struthers lauded the management's enthusiasm and commitment to Ottawa.
"I can't disclose (everything), obviously, but Microsemi's bid in the circumstances was the best bid, taking into account all factors," says Ms. Struthers, who is based in Montreal.
"Price is of course a factor, but not always the most important. There's other things too: execution risk, whether it's financed, the solvency of the buyer."
Debbie Weinstein, of law firm LaBarge Weinstein, represented the dissident shareholders in the Zarlink proxy battle of 2008, but says she has no way of knowing if a different board would have done any better under the circumstances.
A bid can't be rejected offhand unless it undervalues the share price or has a number of conditions attached to it, she says.
"Thirty days is not a lot of time if it happens in the middle of summer," she says.
The best ammunition against a hostile takeover, besides shareholder rights plans and an aggressive public relations strategy, is to have a data room ready to go for other suitors to make offers, says Elisabeth Preston, a lawyer and partner at McMillan LLP's Ottawa office. She regularly advises publicly traded firms on mergers and acquisitions.
Besides the standard information such as quarterly financials, companies should have information on hand such as their top 10 customers and suppliers, and key employment metrics, she says.
"You don't really have time to scramble to get yourself ready. You should be ready to deal with it in a day or two days."