Originally published February 2007
In this issue of The Material Change Report, Paul Simon of our Toronto office reports on the new regime for take-over bids in Canada.
On February 1, 2008, new rules governing take-over bids in Canada came into force. Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids ("MI 62- 104") will govern take-over bids, issuer bids and insider bids in all jurisdictions other than Ontario, where Part XX of the Securities Act (Ontario) (the "OSA") has been amended and Ontario Securities Commission Rule 62-504 Take-Over Bids and Issuer Bids ("OSC Rule 62-504") has been enacted to reflect provisions parallel to MI 62-104. In all provinces and territories, National Policy 62-203 Take- Over Bids and Issuer Bids ("NP 62-203") also came into force on that date.
Furthermore, the Ontario Securities Commission ("OSC") together with the Autorité des marchés financiers in Québec have introduced harmonized requirements in Ontario and Québec relating to the protection of minority security holders in certain types of transactions. Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions ("MI 61-101") and the related Companion Policy, will replace OSC Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions and Regulation Q-27 Respecting Protection of Minority Securityholders in the Course of Certain Transactions.
Some of the key changes to the Canadian take-over bid regime contained in the above-noted instruments and legislative amendments are outlined below.
Summary of Amendments
Exception to Prohibition Against Collateral Agreements
There continues to be a prohibition against a person or company who is making a takeover bid from entering into any collateral agreement which has the effect of providing a security holder with consideration of greater value than that offered to other security holders generally. However, the new take-over bid rules contain an exemption from the prohibition permitting employment compensation arrangements, severance arrangements or other employment benefit arrangements, that provide:
- an enhancement of employee benefits under a group plan if such enhanced benefits are generally provided to employees of the successor to the business of the target issuer;
- a benefit that is received solely in connection with the security holder's services as an employee, director or consultant of the target issuer or the successor to the business of the target issuer, if:
- the security holder beneficially owns or exercises control or direction over less than 1% of the outstanding securities of the target issuer; or
- an independent committee of the directors of the target issuer, acting in good faith has determined that:
In order to rely on the exemption outlined in subparagraph (b) above, the following conditions must be satisfied: (i) the benefit must not be conferred for the purpose of increasing the amount of consideration paid to a security holder for securities deposited under the bid; (ii) the conferring of the benefit is not conditional on the security holder supporting the bid; and (iii) the full particulars of the benefit are disclosed in the bid circular or directors' circular.
The codification of an exception to the prohibition against collateral agreements is a significant exemption. It will not only reduce the need for exemptive relief applications going forward, it also provides clear guidance with respect to the type of collateral agreements that can be entered into with employees of the target issuer. This exemption will provide bidders with greater flexibility to negotiate employment and compensation arrangements with key employees of the target issuer without violating the prohibition against collateral agreements.
Acquisitions During Take-Over Bid
The new rules permit an offeror to change its intention regarding acquisitions of the target issuer's securities during the take-over bid, provided that the changed intention is announced in a news release at least one day prior to making such purchases. This change provides bidders with greater flexibility during the course of a bid to acquire additional securities of the target issuer.
Filing of Documents
The new rules require the bidder to file any bidrelated documents including lock-up agreements, voting agreements, deposit agreements, or any other agreement to the effect that a security holder will deposit securities to a takeover bid. Similarly, it must file any agreement between the bidder and (i) the target issuer or (ii) the target issuer's directors or officers. Furthermore, the new rules also require the bidder or the target to file any other agreement that could affect control of the target issuer, including any agreement with change of control provisions, that can reasonably be regarded as material to a security holder in deciding whether to deposit securities under the bid.
A provision in a document may be omitted or redacted if there are reasonable grounds to believe that the disclosure of the provision would be seriously prejudicial or would violate confidentiality provisions or the provision does not contain information relating to the filer or its securities that would be necessary to understand the document. However, in the filed document, a brief description of the information that has been omitted or redacted must be included immediately after such omitted/redacted provision.
Requirement to Deliver Security Holder List
The new rules stipulate that when a person or company makes or proposes to make a formal take-over bid for the securities of an issuer, and the target issuer is not otherwise required by law to provide a list of security holders, the target issuer is required to provide a list of holders of such securities and any known holder of options or rights to acquire any such securities, to enable the offeror to deliver the take-over bid circular in the same way a Canada Business Corporations Act corporation is required to do.
Foreign Take-Over Bid Exemption
The new take-over bid regime also contains new provisions in respect of exemptions relating to foreign take-overs. Generally speaking, the take-over bid rules do not apply where: (i) less than 10% of the outstanding securities of the class subject to the bid are beneficially owned by Canadian security holders; (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) security holders in Canada are entitled to participate in the bid on terms at least as favourable as the terms that apply to the general body of security holders.
Furthermore, any materials relating to the bid are required to be filed and delivered to security holders in Canada. If the bid materials are not in English, a brief summary of the terms of the bid prepared in English (or in French in the case of security holders resident in Québec) must be filed and delivered to security holders in Canada. Alternatively, if no material relating to the bid is sent to security holders, but a notice or advertisement of the bid is published in the foreign jurisdiction of the target, an advertisement of the bid must be made in a daily newspaper and also filed, setting out how security holders may obtain a copy of or access to the bid documents.
This exemption is far broader than the previous exemption which applied only if there were fewer than 50 security holders in the province holding less than 2% of the securities subject to the bid and the take-over bid was made in one of the few jurisdictions recognized for purposes of the exemption.
Modified Dutch Auction Insider Bid Exemption
Under the new rules, certain exemptions from the issuer bid rules enable issuers to effect Dutch-auction issuer bids and thereby eliminate what used to be the need for issuers to make applications for routinely granted discretionary relief.
Acting Jointly or In Concert
The new rules contain a deeming provision (as opposed to the former rebuttable presumption) that deems persons or companies which are affiliates of the offeror and persons or companies with an agreement, commitment or understanding with the offeror or any other joint actor or concert party, to acquire or offer to acquire securities or exercise any voting rights attaching to any securities to be acting jointly or in concert with the offeror. Associates of the offeror continue to be subject to a rebuttable presumption with respect to whether they are acting jointly or in concert with an offeror.
Source of Funds
If any funds used for the payment of deposited securities are to be borrowed, the takeover bid circular must now specify the name of the lender. Accordingly, lenders should be aware that when they are financing a takeover bid, their name will appear in the takeover bid circular.
Variation or Change of a Bid
NP 62-203 indicates that where a bidder varies the terms of its bid after the bid has been commenced, to:
- 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 securities commissions may, depending on the particular circumstances, exercise their public interest jurisdiction to ensure that target security holders are not prejudiced by the variation. The concern of the securities commissions seems to be that the target security holders may not have enough time and information to react to these types of change or variation.
Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions
MI 61-101 came into force on February 1, 2008, and contains requirements that are substantially similar to those currently set out in OSC Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions and Regulation Q-27 Respecting Protection of Minority Securityholders in the Course of Certain Transactions. The most significant amendment in MI 61-101 relates to provisions in respect of independent directors. In particular, MI 61-101 prohibits a member of an independent committee from receiving a payment or other benefit from an issuer, interested party or a successor entity that is contingent upon the completion of a transaction to which MI 61-101 relates. Accordingly, compensation of directors involved in independent committee mandates should be set or determined when the committee is created and be based on a fixed sum or based on the work involved and not tied to the outcome of a particular transaction.
The Companion Policy to MI 61-101 contains guidance with respect to equity participation by related parties. In particular, the opportunity of an employee, officer or director of an issuer to maintain an equity interest or acquire an equity interest may be considered to be a "connected transaction" and accordingly, could be considered to be a joint actor with the bidder. Bidders considering offering equity participation to related parties pursuant to the exception to the prohibition against collateral agreements should be aware of this guidance to ensure compliance under MI 61-101.
Private Agreement Exemption
Early drafts of the new rules proposed amendments to the private agreement exemption. In particular, proposed amendments would have limited the private agreement exemption to one transaction involving the target issuer's securities. In response to several comments in respect of this proposed amendment, the change was not made under the new rules. Accordingly, bidders can continue to rely on the private agreement exemption without facing the strict limitation of one transaction in respect of the securities of a target issuer.
With the coming into force of the various national and provincial instruments and amendments to the OSA effective February 1, 2008, there is now a more harmonized and streamlined take-over bid regime in Canada. While there are some significant changes to the take-over bid rules, the new regime can more accurately be characterized as an update as opposed to a complete revision to well-established take-over bid principles in Canada.
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.