Canada: Mergers And Aquistitions Guide For Foreign Investment Banks And Bidders, 5th Edition

Take-Over Bid Rules: An Overview

TYPES OF M&A TRANSACTIONS

  • Take-over bids (like a U.S. tender offer)
  • Plans of arrangement
  • Amalgamations (like a U.S. merger)
  • Asset sales
  • Share sales (e.g., private purchase of control block)
  • Restructurings (e.g., spin-offs)
  • Going private transactions

TAKE-OVER BID REGULATION: GENERAL

Take-Over Bid Regulation

  • Take-over bids are regulated province by province, but Canadian securities regulators have harmonized the take-over bid regime across Canada under Multilateral Instrument 62-104 and National Policy 62-203 and, in Ontario, Part XX to the Securities Act and Rule 62-504
  • Applicable laws depend on where the target shareholders reside and where the target is incorporated

What Is a Take-Over Bid?

  • Offer to acquire voting or equity securities made to persons in a Canadian jurisdiction where the securities subject to the bid plus securities beneficially owned by the bidder and its affiliates and joint actors constitute 20% or more of the outstanding securities (partially diluted) of a class of securities
  • Equity securities include non-voting common shares
  • Trap for the unwary: calculation of current beneficial ownership includes securities convertible into the class of equity or voting securities within 60 days

Take-Over Bid: Definition

  • Indirect offers:
    • "Anti-avoidance" rule
  • Can apply where an acquiror acquires shares of a holding company that owns, where aggregated with the acquiror's shares, more than 20% of the shares of a public company
  • It is possible that the acquisition of convertible securities, particularly in-the-money convertible securities, could constitute an "indirect" offer for the underlying security

EQUAL TREATMENT RULES

Offer to All

  • Bid must be made to all holders of the class, but may be for less than all securities
  • Circular must also be sent to holders of convertible securities, including option holders

Identical Consideration

  • All holders must be offered identical consideration (or an identical choice of consideration)
  • If the bidder increases the price during a bid, everyone gets the new price, even holders whose shares have been tendered and taken up
  • Partial bids must be pro rata

No "Side Deals"

  • No collateral benefits, i.e., agreements or understandings which have the effect of providing a shareholder with consideration of greater value
  • Exceptions permit certain employee compensation and severance arrangements for management and other employees of target
  • Can also get securities commission ruling to permit a collateral agreement where there is a clearly established business or financial purpose relating to the making of the bid or the ongoing operations of target

Pre-bid Integration

  • Cannot acquire securities outside of bid within 90 days preceding bid unless bidder offers the same consideration and acquires the same percentage from each holder under the bid
  • Exception for normal course purchases on a stock exchange (pre-arranged trades are not normal course)
  • Toe-hold acquisitions where offeror intends to offer share consideration in the subsequent offer must be carefully planned
  • Securities so acquired will not count towards the 90% compulsory acquisition threshold, or as part of the minority for a "majority of the minority" vote on a second-step going private transaction

Purchases and Sales During A Bid

  • Bidder cannot offer to acquire or enter into any agreement or understanding to acquire the securities subject to the bid until its expiry
  • Bidder can purchase up to 5% of the outstanding securities on a recognized stock exchange if bidder states its intention to do so either in the take-over bid circular or in a subsequently filed press release. Purchases must be reported daily by press releases disclosing price and number
  • Securities purchased during a bid will not count towards the 90% compulsory acquisition threshold, or as part of the minority for a "majority of the minority" vote on a second-step going private transaction

Post-bid Integration

  • Cannot acquire securities outside of the bid within 20 business days after the expiry of the bid except by way of a transaction that is generally available to security holders on identical terms or normal course purchases on a stock exchange

Selling Restrictions

  • Bidder can't sell or enter into an agreement to sell target securities from the date of announcement of the intention to make a bid until expiry of the bid
  • Bidder can agree to sell securities taken up under the bid at a future date, but only if it discloses its intention in the circular

SUFFICIENT TIME RULES

  • Deposit period of at least 35 days
  • No take-up for 35 days but must take up and pay for securities where bid conditions have been fulfilled or waived within 10 days after expiry of the bid
  • Withdrawal permitted:
    • At any time before securities are taken up by bidder
    • For 10 days after a change in the bid
    • If securities have not been paid for within three business days of take-up
  • Bid must be kept open for 10 days after an amendment (unless it is solely a waiver of a condition in an all-cash bid)

SUFFICIENT INFORMATION RULES

  • Bid can be commenced by either mailing or advertisement. Bid can be commenced by advertisement if, concurrently with (or before) the advertisement, the bid is filed and delivered to the target, a security holders list is requested and within two business days of receipt of the security holders list, the take-over bid circular is sent to security holders on the list
  • Bidder must prepare and mail take-over bid circular to all holders of the class of securities sought and holders of convertible securities
  • Must make additional mailings if bid terms changed or important information has changed or arisen (except changes out of bidder's control)
  • Target must prepare and mail a directors' circular within 15 days of the bid containing an acceptance/ rejection recommendation by the board
  • If target board is unable to make a recommendation, the circular must disclose the reasons for not making a recommendation
  • Bid may contain any conditions except a financing condition
  • Bids typically include a minimum deposit condition to ensure that bidder can obtain the remaining shares not deposited through a second-step going private transaction. Condition would typically require deposit of at least (i) two-thirds of outstanding shares and (ii) a majority of the minority
  • If bid is an "insider bid" or "related party transaction" under applicable corporate or securities law, a valuation of target's securities and of any non-cash consideration being offered may be required unless an exemption is available
  • In Canada, in contrast to the U.S., no securities commission clearance is required for share exchange take-over bids

ABUSIVE TRANSACTIONS

  • Securities regulators will intervene to halt a take-over bid, even if it complies with all of the foregoing rules, if it is abusive of the target shareholders, the public or the capital markets
  • Securities regulators also have the power to intervene to prohibit target boards of directors from taking inappropriate defensive measures to block a bid for its securities

Plans of Arrangement

WHAT IS AN ARRANGEMENT?

  • Common alternative to take-over bids for negotiated M&A transactions
  • Corporate reorganization of target pursuant to applicable corporate law
    • Agreement is negotiated with target and support agreements are often negotiated with significant security holders
    • Independent committee of the board of directors of target may be formed where the transaction may give rise to potential conflicts of interest or is otherwise justified
    • Target applies to court for interim order prior to mailing the proxy materials specifying the required shareholder approval
    • Target calls special security holders' meeting to approve the arrangement
    • Arrangement becomes effective after it is approved by target security holders and by the court, and articles of arrangement are filed by target
  • Securities of any class of target may be exchanged for any other securities or property, including cash. In addition, assets, including subsidiaries, can be distributed to shareholders or other parties, and the order of all the steps to be effected by the arrangement can be specified, which assists in tax planning
  • Court will consider whether arrangement is "fair and reasonable"
    • In 2008 BCE decision, Supreme Court of Canada articulated a framework to assess whether an arrangement is fair and reasonable. Court must be satisfied that (i) the arrangement has a valid business purpose, and (ii) the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way
    • Determination is focused on security holders whose legal rights are being arranged rather than security holders affected only in respect of their economic interests
    • In determining whether these tests are met, court will consider (i) the necessity of the arrangement to the continued operations of the target, (ii) the level of approval by the target's security holders, (iii) the proportionality of its impact on affected groups, (iv) the reputation of directors and advisors who endorse the arrangement, (v) whether the arrangement has been approved by a special committee of independent directors of the target, (vi) the presence of a fairness opinion from a reputable expert, and (vii) the access by shareholders to dissent and appraisal remedies

ADVANTAGES OF ARRANGEMENTS

  • Lower acceptance thresholds than bid
    • Generally two-thirds of the votes cast at the meeting in person or by proxy
    • No prohibition on a merger party voting target securities held by it, provided it is not an interested party" for purposes of business combination rules in Multilateral Instrument 61-101
  • One-step acquisition eliminates "bridging" and financing risks
  • Tax planning opportunities
    • Ability to clearly order transaction steps around the effective time
    • Allocation of basis to assets to be divested
    • Distribution of safe income and return of capital
  • Greater flexibility in dealing with target's assets
  • Facilitates implementation of "exchangeable share" structure
  • Flexibility in dealing with stock options and warrants
  • Collateral benefits and pre-bid purchases are not prohibited
  • Possible to offer "unequal" consideration
  • Permissibility of financing condition (although this would generally be unacceptable to target boards)
  • Flexibility in dealing with public debt (and other creditors)
  • Availability of 3a-10 registration exemption in the U.S.

DISADVANTAGES OF ARRANGEMENTS

  • More cumbersome and time consuming than take-over bids because of proxy solicitation and court proceedings
  • Potential timing disadvantage in the face of a subsequent competing bid
  • Fairness hearing may be used as a forum for challenge by security holders
  • Ability of complainants to appeal court order may delay closing
  • Process is target-driven, rather than acquiror-driven

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