As a further leg to their harmonization stool, the Canadian Securities Administrators ("CSA") have published for comment a proposed National Instrument 62-104 – Take Over Bids and Issuer Bids (the "Instrument") and a related companion policy dealing with the harmonization of the statutory and regulatory requirements and restrictions governing take-over bids and issuer bids across Canada. The Instrument complements and broadens the reach of the CSA’s substantive harmonization efforts by initiating the process which will result in a uniform regime of bid rules operating much like the rules now in place across Canada for distributions and trades in securities under National Instrument 45-106 – Prospectus and Registration Exemptions and for corporate governance purposes under Notice 52-313 – Status of Proposed Multilateral Instrument 52-111 – Reporting on Internal Control Over Financial Reporting.
B. EXECUTIVE SUMMARY
While the stated purpose of the Instrument is laudable and the CSA are to be commended for their substantive harmonization efforts in respect of Canadian take-over bid and issuer bid legislation, some of the Instrument’s proposed substantive changes to the existing Ontario takeover bid and issuer bid scheme of regulation warrant careful consideration in order to determine whether such changes would be in the public interest.
As a harmonization initiative, the CSA are to be congratulated for preparing and publishing the Instrument for comment. With the implementation of the Instrument, the CSA intend to eliminate duplication and inconsistencies in existing take-over bid and issuer bid regimes and codify certain discretionary exemptions which have been routinely granted. While the Instrument does contain some consequential amendments to National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues, the Instrument does not amend Ontario Securities Commission Rule 61-501 – Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions or Quebec Regulation Q-27 Respecting Protection of Minority Securityholders in the Course of Certain Transactions.
In addition to provisions designed to carry out the harmonization of take-over and issuer bid requirements, the Instrument does include some proposed substantive changes to the existing Ontario bid rules which warrant further consideration and comment by market participants so that the CSA may determine whether such changes would be in the public interest. Among these changes are the following:
(1) Private Agreement Exemption: The Instrument proposes to amend the existing private agreement take-over bid exemption "by clarifying that the exemption cannot be relied on for additional purchases by the same offeror". Offerors relying on the private agreement exemption must complete their purchases within six months of an initial purchase and are restricted to using the exemption only once in relation to a particular offeree issuer. While there is a carve-out for certain intra-group transactions (e.g. between affiliates), the intent is to restrict the number of times an offeror may make use of the exemption. The CSA state that this restriction is necessary to ensure that the exemption is used for its original purpose of allowing limited transfers by groups of controlling securityholders rather than for the purpose of avoiding the formal bid requirements.
(2) Collateral Benefits: Under the existing securities legislation applicable to take-over bids, there is a strict prohibition on an offeror entering into any collateral agreement, commitment or understanding with any holder or beneficial owner of securities of the offeree issuer that has the effect of providing to the holder or owner a consideration of greater value than that offered to other holders of the same class of securities. Because of this prohibition, the CSA receives many applications for exemptive relief relating to compensation arrangements with employees and directors of an offeree issuer. Since 2004 the CSA have referred to and adopted as the basis for relief in these circumstances the regulatory approach taken in Rule 61-501 to the "collateral benefits" issue and the Instrument contemplates formal legislative adoption of similar provisions in order to obviate the need for individual applications for discretionary exemptive relief.
(3) Certain Variations to Bids: The Instrument contains a provision which would prohibit an offeror from making certain variations to a bid once the bid has been commenced:
- lower the consideration offered under the bid,
- change the form of consideration offered under the bid, other than to add to the consideration already offered under the bid,
- lower the proportion of outstanding securities for which the bid is made, or
- add new conditions.
The CSA specifically request comment on whether the aforementioned changes are so fundamental that they should trigger a new bid rather than be treated in a manner similar to any other variation or change to a bid.
(4) Acting Jointly or In Concert: The Instrument proposes to modify the existing legislative rebutable presumption applicable to determining whether persons or companies are acting jointly or in concert with an offeror in connection with the holding or acquisition of securities. If a person or company is acting jointly or in concert with an offeror, the existing statutory provisions consider that person or company to be an offeror and subject to the take-over bid regime. The Instrument would establish an acting jointly or in concert deeming provision for persons or companies, that as a result of any agreement, commitment or understanding with the offeror or any other joint actor or concert party, acquires or offers to acquire securities or intends to exercise any voting rights attaching to any securities together with every affiliate of the offeror. Under existing legislation, such persons or companies are presumed, but not deemed, to be acting jointly or in concert with an offeror. Associates of the offeror would continue to be subject to a rebutable presumption with respect to whether they are acting jointly or in concert with an offeror. The CSA notes that the Instrument’s contemplated deeming provisions may be the subject of exemptive relief but are not intended to be rebutable by evidence to the contrary unlike a presumption.
(5) Foreign Issuer Exemption: The Instrument contemplates that take-over bids for, and issuer bids by, a foreign issuer will be exempt from Canadian requirements, including French translation, if certain requirements are met, including (i) that the bidder reasonably believes that less than 10% of the outstanding securities of the class subject to the bid are beneficially owned by Canadian securityholders; (ii) the published market on which the greatest dollar volume of trading in securities of the class in the twelve months before the bid was outside Canada; and (iii) securityholders in Canada are entitled to participate the bid on terms at least as favourable as the terms that apply to the general body of securityholders. This new foreign issuer exemption would be in addition to the existing de minimis exemption (in respect of issuers with fewer than fifty securityholders in Canada holding less than 2% of the outstanding securities of the class subject to the bid).
(6) Odd Lots and Modified Dutch Auctions: The Instrument contemplates new exemptions from the bid requirement for proportionate take-up of deposited securities in order to permit issuers to buy odd lots and to effect Dutch auction issuer bids thereby removing the need for issuers to make applications to the CSA for routinely granted discretionary relief. 1100 Ottaw Ontario K1P 1J9
(7) Filing of Agreements: The Instrument includes a new requirement for bidders to publicly file copies of agreements, such as lock-up and support agreements, as well as other agreements of which the bidder is aware that could affect control of the target if the bidder has access to them and these agreements could be reasonably regarded as material to a tendering securityholder under the bid.
While the stated purpose of the Instrument is laudable and the CSA are to be commended for their substantive harmonization efforts in respect of Canadian take-over bid and issuer bid legislation, some of the Instrument’s proposed substantive changes to the existing Ontario take-over bid and issuer bid scheme of regulation warrant careful consideration in order to determine whether such changes would in fact be in the public interest.
The CSA are seeking comments on the proposed Instrument and companion policy and will accept comments until July 28, 2006.
If you have any questions or need more information, please contact either the author below or any member of the BLG Securities and Capital Markets Practice Group with whom you have consulted in the past.
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.