Canada: Amendments To Takeover Bid Regime

Last Updated: April 21 2016
Article by Nigel Behrens

On February 25, 2016, the Canadian Securities Administrators ("CSA") announced the adoption of amendments (the "Amendments") to Canada's takeover bid regulations as set out in National Instrument 62-104 – Takeover Bids and Issuer Bids ("NI 62-104"). The Amendments, expected to come into force on May 9, 2016, substantially conform to the proposed amendments to the takeover regime published by the CSA in March of 2015. However, notably, the 120 day minimum bid period proposed in March has been lessened to 105 days (the "Minimum Bid Period"), which is still a significant increase from the 35 day period under the current regime.

This softening of the Minimum Bid Period reflects an apparent compromise by the CSA, taking into account concerns and comments it received in response to its March 2015 proposals. The feedback received included indications of a preference, by some jurisdictions and participants, for a 90 day minimum bid period. Concerns were raised that the proposed 120 minimum bid period, and obligatory 10-day extension, could interfere with the compulsory acquisition provisions generally available where a takeover bid is accepted by securityholders of not less than 90% of the shares subject to the bid within 120 days after the date of the bid. Two exceptions to the Minimum Bid Period will permit shorter minimum periods (to as short as 35 days) when: (i) a target issuer's board of directors ("Board"), in their sole discretion, consents to a shorter bid; or (ii) a target issuer announces the entering into of an alternative transaction.

Main Elements of the Amendments

Minimum Bid Period – Non-exempt takeover bids ("Bids") must remain open for a minimum of 105 days.

Minimum Tender Obligation – Bids must contain a minimum tender of more than 50% of the 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 any joint actors ("Minimum Tender"). The Minimum Tender obligation also applies to partial bids, thereby increasing bid obligations on another front for hostile bidders.

Obligatory 10-Day Extension – After the Minimum Tender has been met and, if all other terms and conditions of the Bid have been satisfied and/or waived, Bids must now be extended for an additional 10-day period by the offeror (the "10-Day Extension").

Anticipated Effects of the Amendments

Less Pressure to Tender – The CSA expects that the obligatory Minimum Tender and 10-Day Extension will address the "pressure to tender" and coercion concerns associated with the existing tender process. Previously, the possibility that an offeror would waive its minimum tender condition or refuse to extend its bid, had the negative result of forcing securityholders' hands. Securityholders that did not support a Bid were prompted to tender rather than risk being left holding less liquid securities of the offeree issuer. The obligatory Minimum Tender is aimed at preventing or, at least, lessening this pressure on target securityholders.

Increased Incentive for Friendly Transactions or Proxy Battles – The Minimum Bid Period reallocates some leverage to a target issuer's Board by providing an increased period of time to find an alternative transaction or negotiate a more favorable bid. As a result, hostile bidders may face additional deal uncertainty causing new need to reconsider the benefits of choosing the path of a negotiated transaction rather than issuing an unsolicited takeover bid. That being said, given the Amendments, if bidders are unable to negotiate a friendly transaction with the target issuer, they may be more inclined to initiate a proxy battle rather than launch a hostile bid.

The Utility of Shareholder Rights Plans Will Be Reduced – The Amendments also do not specifically make any changes to the CSA's approach to shareholder rights plans or other defensive tactics under National Policy 62-202 – Take-over Bids — Defensive Tactics. However, we believe that shareholder rights plans will be of limited practical use going forward and as such, will only be adopted in rare circumstances. As a result, applications to securities commissions to cease trade shareholder rights plans is expected to become less common or even eliminated entirely.

Role and Duties of Target Boards in the Context of a Takeover Bid Do Not Change – The Amendments do not change the responsibilities of a target board to exercise the duty of care and to act in good faith and in the best interests of the issuer in the context of a Bid. Therefore, target board members will have to consider whether waiving the Minimum Bid Period is in the best interests of the target issuer in light of the alternative of taking advantage of the extended period to find value-enhancing alternatives or allow unsolicited proposals to arise.

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.

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