The Canadian Securities Administrators (CSA) have published for comment significant proposed amendments to the Canadian take-over bid regime (the Proposed Amendments). The Proposed Amendments are an initiative of all CSA members and are intended to strike a fair balance among the interests of bidders, target boards of directors and security holders of target companies.
While the proposals do not recognize a target board's right to "just say no" to and block a hostile bid, the proposals will provide boards of directors of target companies with additional time to respond to such bids and shareholders with the ability to make "voluntary, informed and coordinated" decisions as to whether to tender their securities to the bid.
The Proposed Amendments would require that all non-exempt take-over bids:
- be subject to a mandatory tender condition that a minimum of more than 50% of all outstanding securities of the class subject to the bid (excluding those beneficially owned or over which control or direction is exercised by the bidder and its joint actors), be tendered and not withdrawn before the bidder can take up any securities under the bid (Minimum Tender Condition);
- be extended by the bidder for an additional 10 days once the Minimum Tender Condition has been satisfied and all other terms and conditions of the bid have been complied with or waived (the 10-Day Extension Period); and
- remain open for a minimum deposit period of 120 days, although a target company will be allowed to reduce the deposit period to not less than 35 days subject to certain conditions.
Minimum Tender Condition
The purpose of introducing a Minimum Tender Condition for all bids, including partial bids, is to prevent a situation (possible under the current rules) whereby a bidder may acquire control of, or a controlling interest in, a target company without a majority of independent security holders of the target supporting the transaction.
The introduction of this condition allows for a collective response by security holders and mitigates the pressure on security holders to tender out of a concern they will be left holding securities of a controlled corporation with reduced liquidity. Currently there is no mandated requirement for a bidder to include a minimum tender condition in a bid. While, as a practical matter, bidders often include such a condition in a bid, the bidder can establish its own minimum threshold and reserves the right to waive the condition. The Proposed Amendments do not preclude a bidder from establishing a higher minimum tender condition or waiving such higher minimum tender condition (so long as the mandated Minimum Tender Condition is satisfied).
10-day extension of bid
The 10-Day Extension Period has been introduced to allow target security holders additional time to tender once they are aware a majority of independent security holders have tendered to the bid. The 10-Day Extension Period will commence upon the expiry of the period that securities may be deposited under the bid, including any extension of the bid necessary to meet the Minimum Tender Condition or to satisfy any other condition of the bid (the Initial Deposit Period). Like the Minimum Tender Condition, this mandatory extension is intended to reduce the pressure on a security holder to tender prior to knowing the collective security holder response to the offer.
120-day period for bid to remain open
The new 120-day period for a bid to remain open is intended to provide target boards with additional time to consider and respond to an unsolicited bid (including the possibility of seeking alternatives to the bid). The 120-day requirement may be reduced by the target board to an Initial Deposit Period of not less than 35 days by issuing a press release.
However, the 120-day requirement is not intended to result in discriminatory treatment among competing offers. If the target's board reduces the 120-day deposit period for one bid, other outstanding bidders at the date of the press release or subsequent bidders who commenced bids prior to the expiry of the bid that was the subject of the shortened deposit period would be entitled to avail themselves of the shorter period.
To provide a level playing field, the proposed amendments contain provisions that prevent a bidder from being disadvantaged against another potential acquiror on the basis of the structure of the transaction. Therefore, if the target board announces an alternative transaction, such as a plan of arrangement or another change-of-control transaction, then the minimum deposit period for any outstanding or subsequent bid commenced before the completion or abandonment of the transaction need only be open for an Initial Deposit Period of 35 days (subject to the 10-Day Extension Period). In the CSA's view, a target board that has agreed to an alternative transaction does not need additional time to consider a competing bid.
Variation of the bid
A bidder who wishes to vary its bid must send a notice to all security holders and the deposit period for securities must not expire before 10 days after the date of the notice of the variation. The Proposed Amendments also provide that where the target board has permitted a reduction to the 120-day minimum bid period as described above and the bidder wishes to take advantage of the shortened period, the reduction in the bid period will constitute a variation of the bid and the deposit period may not expire before 10 days after the date of the bidder's required notice of variation.
The new proposals expressly prohibit variations of the terms of a bid after the bidder becomes obligated to take up securities. A bidder must immediately take up securities if, at the end of the Initial Deposit Period, the Minimum Tender Condition is satisfied and all other terms and conditions of the bid are satisfied or waived. There are proposed exceptions to this requirement where there is a variation to (i) extend the time for deposit of securities under the bid; or (ii) increase the consideration offered for securities subject to the bid. No withdrawal rights would apply in the case of an increase in consideration or an extension of no more than 10 days after the date of the notice of variation.
A number of the Proposed Amendments relate to partial bids. In particular, the new rules will introduce additional complexity to comply with the pro rata take up requirement applicable to partial bids. As stated above, the Minimum Tender Condition will apply to such bids. As is currently the case, bidders must take up securities tendered in a partial bid on a pro rata basis.
Upon the expiry of the Initial Deposit Period, assuming the bid conditions are met, the bidder will only be required to take up the maximum number of securities it can without contravening the pro rata requirements.
Upon expiry of the 10-Day Extension Period, the bidder will complete the pro rata take up for securities deposited but not taken up and those deposited during the 10-Day Extension Period. Holders whose securities are deposited before the expiry of the Initial Deposit Period but not taken up will not have the right to withdraw their securities during the 10 Day Extension Period. Partial bids cannot be extended beyond the expiry of the 10-Day Extension Period.
The CSA has requested comment on whether the current time period of 15 days after the launch of a bid is sufficient time for the target's board to form a "meaningful" recommendation to security holders on the merits of the bid and to issue its directors' circular.
It is clear that the proposals are the most important development in the regulation of take-over bids in recent years and will require target companies, prospective bidders and their respective boards and management to re-evaluate their strategies in dealing with bids. While there are a number of questions raised by the proposed amendments, those that boards and management are likely to find pressing include:
- under what circumstances would a target board shorten the 120-day bid period?
- since target boards would have the ability to shorten the Initial Deposit Period to not less than 35 days, under what circumstances would a target board select a period greater than 35 but less than 120 days?
- what ability will a hostile bidder have to influence the abridgement of the 120-day period to avoid uncertainty during the longer deposit period: for example, would the Proposed Amendments result in higher quality offers being made?
- in what circumstances will shareholder rights plans (poison pills) continue to be adopted? Although the CSA seems to be suggesting that 120 days is likely long enough for targets to consider alternatives to a bid, are there situations where a longer period would be justified? Further, can shareholder rights plans continue to serve an important purpose in respect of creeping acquisitions or activist activities (those done through purchases exempt from the take-over bid rules or "voting pills")?
The proposals can be accessed here. Comments are due by June 29, 2015.
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