On September 11, 2014, the Canadian Securities Administrators (CSA) announced that they have reached agreement on a harmonized approach to updating the regulation of take-over bids in Canada and will be proposing amendments to the legislation, instruments and rules that make up Canada's take-over bid regulatory regime to implement such policy.
The stated goal of the CSA's proposed amendments is to rebalance the current dynamics between hostile bidders and target boards by facilitating the ability of shareholders to make voluntary, informed and coordinated tender decisions and providing target boards with additional time to respond to hostile bids.
PROPOSAL
The proposed amendments would require that all formal take-over bids:
- Be subject to a minimum tender condition of more than 50% of the outstanding securities of the class subject to the bid (excluding target securities held by the bidder and its joint actors)
- Remain open for a minimum of 120 days, subject to the ability of the target board to waive the minimum period to a period of no less than 35 days, provided that when there are multiple bids the waiver is granted in a non-discriminatory manner
- Be extended for 10 days after the bidder satisfies the minimum tender condition and announces its intention to immediately take up and pay for the deposited securities
Previously, in March 2013, the CSA and Quebec's Autorité des marchés financiers (AMF) had announced separate alternative approaches to regulating defensive tactics by target companies. These proposals have now been abandoned in favour of the new harmonized approach to take-over bid regulation. For more details on the prior CSA and AMF proposals, please see our March 2013 Blakes Bulletin: Securities Regulators Propose Alternative Approaches to Defensive Tactics.
The CSA advised that, at this time, it is not contemplating any changes to the current take-over bid exemptions or its approach to the regulation of defensive tactics by target boards in the context of a hostile take-over bid. Absent from the announcement is any guidance on how the regulators plan to regulate shareholder rights plans (also known as "poison pills") once the new regime is adopted.
The CSA intends to publish the proposed amendments for review and comment in the first quarter of 2015.
IMPLICATIONS
By mandating a minimum tender condition of more than 50% of the securities of the class subject to the bid (excluding securities held by the bidder and its joint actors), the proposed amendments would make it more difficult to complete a formal bid for less than all of such outstanding securities (also known as a partial bid) as the 50% minimum tender condition will apply regardless of the percentage of securities that the bidder wishes to acquire. A bid for 25% of the shares of a target would need to be supported by holders of at least 50% of the outstanding shares to be successful, with take-up presumably being pro-rated. The minimum tender condition would effectively create a referendum on the merits of the bid, with take-up only being allowed if a majority of disinterested target shareholders agree to participate in the hostile transaction.
The goal of such policy is to reduce the pressure on individual shareholders to accept a deal that they might otherwise reject were it not for the concern of being left behind with a potentially less liquid investment, an inability to participate in the benefit of a control premium or being subject to a "squeeze-out" transaction for the same consideration but on a delayed basis. Such a mandatory minimum tender condition will particularly impact any significant shareholder that might wish to increase its ownership position in a target without taking the target private, as securities owned prior to the bid will not be factored into the calculation of whether the minimum tender threshold is met.
A 20% shareholder seeking to purchase an additional 5% of a target's shares by way of a formal bid will need 40% of the public float (being 50% of the shares not owned by the bidder or joint actors) to be tendered for the offer to be successful.
Requiring hostile bids to be outstanding for at least 120 days (subject to a waiver by the target board) is a significant change from the current take-over bid regime, where bids are required to be outstanding for 35 days. Shareholder rights plans are often employed by target boards to delay a target's ability to take-up securities under a hostile bid, but Canadian securities commissions have typically cease-traded such plans after approximately 65 to 75 days, clearing the way for bidders to complete their bids.
In the Blakes 2014 Canadian Hostile Bid Study, the average number of days to the first take-up, if any, in a hostile take-over bid was 71 days, and in only 5% of transactions reviewed was the first take-up on or after 120 days. Hostile bidders will therefore be faced with longer time horizons and will need to plan accordingly. For example, as Canadian take-over bids cannot be subject to a financing condition, bidders who are financing cash consideration will be required to arrange for materially longer financing commitments, which may bear an associated increased cost. In theory, the longer time horizon should also increase the likelihood of a competing transaction being identified and announced.
Given the intended mandatory minimum time period of 120 days, as compared to the historical 65-to-75-day timing for cease-trading shareholder rights plans, we anticipate that Canadian securities regulators will not permit shareholder rights plans to remain in place beyond the 120th day of a bid, since their primary purpose of buying time for the target to find alternative buyers will no longer be relevant. Rights plans may still have utility under the new regime to prevent creeping take-overs by way of transactions exempt from the formal take-over bid rules.
Of the proposed amendments, requiring a 10-day extension after the first take-up under the bid – which also acts to reduce an otherwise potentially coercive aspect of the bid regime – will be the least controversial, as most bidders already provide such an extension in bids for strategic purposes. Once bidders have taken up securities under the bid – assuming their goal is to acquire all of the shares of the target – most bidders will extend their bid to encourage additional tenders and attempt to reach the compulsory acquisition threshold in the relevant corporate statute.
When the British Columbia Securities Commission recently asked for submissions from the parties in its hearing relating to the cease-trading of Augusta Resource Corporation's shareholder rights plan on whether a 10-day post-take-up extension should be required, HudBay Minerals Inc., the bidder, voluntarily agreed to the mandatory 10-day extension without argument.
CONCLUSION
Until such time as the CSA's proposed amendments are implemented, it should be business as usual for hostile take-over bids in Canada. Given that the proposed amendments have not yet been published and that public consultation will be necessary prior to adoption, it will likely be at least mid-2015 before the amendments – as they may be revised based on public consultation – are in force.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
