Canada: Maximizing Shareholder Value Through Process: Canada's New Take-Over Bid Rules

On February 25, 2016, the Canadian Securities Administrators (CSA), which is the association of provincial and territorial securities regulators, published its final amendments to the take-over bid system, which harmonize the rules across all jurisdictions in Canada. The changes, as reflected in National Instrument 62-104 Take-Over Bids and Issuer Bids and National Policy 62-203 Take-Over Bids and Issuer Bids largely reflect the proposed amendments made on March 31, 2015. There are, however, some notable changes designed to facilitate the review process of boards of directors, which are required to maximize shareholder value as part of their fiduciary obligations in the face of a take-over bid.

The permitted bid period—the period of time that a target is given to respond to a take-over bid—has been reduced to 105 days, from the originally proposed 120. This is up significantly from the current, relatively short, 35-day period. Although not as drastic of a reduction as some had called for (90 days), the new period reflects the need for issuers to adequately evaluate the bid and any alternatives, as well as prepare a response to bids. It may be seen as tipping the balance in favour of boards to delay take-overs and possibly ward off bidders, but it does, at the very least, reduce the chilling effect that an even longer period would have had on potential bidders. In the event that the board deems that length of time is not necessary in order to make a determination, it may elect to waive the 105-day mandatory permitted bid period, so long as the new period is no shorter than 35 days. The 105-day period also permits issuers to take advantage of provisions regarding compulsory acquisitions for squeeze-out transactions when 90% of the shares subject to the bid have been tendered within 120 days of the commencement of the bid.

All non-exempt take-over bids will be subject to a minimum tender of more than 50% of the outstanding securities of the class that is subject to the bid by the offeror. This will effectively prevent bidders from engaging with the shareholders of the target unless a majority of them have signed on—making partial bids more onerous.

Once the minimum tender requirement of 50% of the outstanding securities of the class that is subject to the bid is met (and all other conditions have been complied with or waived), the bid must be extended for an additional 10-day period.

Although the CSA did not make changes to National Policy 62-202 Take-Over Bids – Defensive Tactics, it is likely that, unless there are extraordinary circumstances, shareholder rights plans will expire on the 105th day. This will obviate the need for what are commonly known as "pill hearings" before securities commissions prior to that date. Plans have typically been cease-traded after periods of 50-90 days at such hearings, where the commission determines that the plan has afforded the target board adequate time to evaluate and respond to the bid. These amendments further entrench the idea that the "just say no" defense is rarely effective in Canada; "just say slow" is the better description of the extent of a board's defense strategy.

Substantial changes were also made to National Instrument 62-103 The Early Warning System and Related Take-Over Bids and Issuer Bids, which provide "greater transparency about significant holdings". Among other changes, the amendments: (i) require disclosure of decreases in ownership, control or direction of 2% or more; (ii) require disclosure when ownership falls below the 10% threshold; and (iii) enhance the level of detail required in early warning reports regarding the future intentions of acquirors and the purpose of the transaction. Significantly, the CSA chose not to implement an earlier proposed change to lower the reporting threshold to 5%, which would have brought the system in line with the United States and assisted in preventing creeping take-overs.

The amendments come into effect on May 9, 2016 (or, in Ontario, when legislation assenting to the amendments is proclaimed). The prior rules remain in effect for bids commenced prior to that date.

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