Yesterday morning, the Canadian Securities Administrators (the CSA) published the long-awaited amendments to Canada's take-over bid regime (the Amendments) under Multilateral Instrument 62-104 – Take-Over Bids and Issuer Bids. We believe that these Amendments may result in the increased use of proxy fights and bully M&A tactics by acquirors to effect acquisitions of commodity issuers.
Key Features of Amendments
There are three key features of the Amendments affecting "non-exempt" take-over bids:
- 105 Day Requirement. Take-over bids must remain open for a minimum deposit period of 105 days (the 105 Day Requirement) (as opposed to the current 35 day timeframe) unless (i) the target board states in a news release an acceptable shorter deposit period (provided that it is not less than 35 days); or (ii) the target announces that it has entered into an "alternative transaction", in which case the original take-over bid will be subject to a shorter 35-day minimum period. The CSA had initially proposed a minimum deposit period of 120 days.
- Mandatory Minimum Tender Condition. All bids must include a condition that more than 50% of the outstanding securities that are subject to the bid must be tendered (excluding securities owned by the bidder itself or its joint actors), which may not be lowered or waived.
- Mandatory Extension. The bid period must be extended by at least 10 days after a bidder has received tenders of more than 50% of the outstanding securities. The purpose of this requirement is to provide target shareholders who did not initially tender their shares the opportunity to take-up the offer after the bid crosses the new mandatory minimum tender threshold.
The CSA's stated purpose of the Amendments is to "enhance the quality and integrity of the take-over bid regime while rebalancing the dynamics among bidders, target company boards of directors and target company shareholders during a take-over bid."
More Proxy Battles and Bully M&A Tactics for Commodity Issuers
We believe that the Amendments may result in an increased use of proxy fights and bully M&A tactics by acquirors to effect acquisitions of commodity issuers in circumstances where they would have otherwise done so by hostile bid under the current (and soon to be amended) take-over bid regime. Under the current regime and in the context of a typical take-over bid, bidders are given multiple opportunities to withdraw their bids, including as soon as 35 days after the bid is launched and every 10 days thereafter. Under the new 105 Day Requirement, such "off-ramps" are no longer available and bidders will be required to leave their bids open for 105 days, which proposition may be less appealing to acquirors seeking to acquire commodity issuers. As such, acquirors would be required to commit themselves to a fully financed fixed bid price over a 105 day period knowing that a swing in the underlying commodity price may make the bid financially unviable, as commodity issuers are susceptible to volatile fluctuations in share prices over short periods of time, particularly in the current environment and market.
One way for a prospective acquiror to avoid the application of the new and more onerous takeover bid regime will be to instead employ more traditional activist tactics to effect an acquisition, such as running agitation campaigns, starting proxy fights, or using bully M&A tactics, such as the use of shareholder supported bear hug letters (which is an offer of a price higher than the trading price made to restrict the target's options). These tactics offer a seemingly safer avenue through which an acquiror can influence a board or seek board control and ultimately effect an acquisition in possibly a more efficient and cost-effective manner.
From our discussions with securities regulators, we understand that this potential outcome was anticipated. While the Amendments clearly give target boards incrementally greater leverage in a hostile or unsupported context as compared to the existing regime (although not outright control like in the U.S.), it has been widely known and accepted that Canada has one of or the most shareholder friendly legal regimes for an advanced and highly developed capital markets jurisdiction, and there are multiple ways in which acquirors can achieve "hostile" acquisitions under Canadian corporate law. That said, commodity issuers should operate with a heightened level of awareness that these activist tactics may be employed against them and begin to focus on activism preparedness.
Effectiveness of Amendments
Except in Ontario, the Amendments will come into force on May 9, 2016. In Ontario, NI 62-104, and the related Amendments will come into force on the later of (a) May 9, 2016, and (b) the day on which certain sections of Schedule 18 of the Budget Measures Act, 2015 (Ontario) are proclaimed into force.
The Amendments can be accessed here.
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