Structure of New Bid Regime
The Canadian securities regulators have announced that regulatory initiatives designed to harmonize and consolidate existing rules governing take-over bids and issuer bids in Canada will come into force on, and accordingly apply to bids commenced after, February 1, 2008. At that time, the new Canadian bid regime will become a product of three regulatory measures:
- Multilateral Instrument 62-104 – Take-over Bids and Issuer Bids will govern the conduct of take-over bids and issuer bids in all provinces and territories in Canada, except Ontario;
- Part XX of the Securities Act (Ontario) and OSC Rule 62-504 – Take-over Bids and Issuer Bids will govern the conduct of take-over bids and issuer bids in Ontario only; and
- National Policy 62-203 – Take-over Bids and Issuer Bids, to be adopted in all provinces and territories, including Ontario, will provide interpretive guidance with regard to certain provisions of the bid regime and the conduct of parties involved in a bid.
At the same time as the coming into force of the new bid regime, securities regulators in Ontario and Québec have announced that measures to harmonize and consolidate rules in those provinces requiring enhanced disclosure, independent valuations and minority security holder approval for certain types of related party transactions are also expected to come into effect. Specifically:
- Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions will replace OSC Rule 61-501 and Québec Regulation Q-27 and govern the conduct of insider bids, issuer bids, business combinations and related party transactions in Ontario and Québec.
A number of the changes proposed in MI 61-101 are consequential changes resulting from the proposed implementation of the new bid regime. However, the new instrument also introduces certain substantive changes. The most significant are a new prohibition against members of special committees of independent directors receiving payments or other benefits that are contingent upon completion of a transaction, and new interpretive guidance in circumstances where related parties, such as directors and senior officers, are provided with an opportunity to maintain or acquire an equity interest in an issuer upon completion of a transaction. This harmonization between Ontario and Québec will also eliminate the need to apply for discretionary exemptive relief in Québec to the extent of any technical disparities that existed between OSC Rule 61-501 and Québec Regulation Q-27.
New Bid Regime is Not a Legislative Overhaul
The new bid regime does not represent a wholesale reconstruction of the existing rules governing the conduct of take-over bids and issuer bids in Canada. Rather, the new regime is principally a harmonization and consolidation initiative that effectively results in a re-codification of the existing bid regime. To that end, the rules relating to the method and timing of making a take-over bid or issuer bid, and issuing a directors circular, are substantially similar to the existing requirements in Canada.
In addition, the proposed bid regime codifies various discretionary exemptions that have historically been available on a case-by-case basis. For example, the new regime includes an exemption from the proportionate take-up rule for "Dutch auction" issuer bids, an expanded exemption for foreign take-over bids and issuer bids in respect of issuers with limited Canadian share ownership and an exemption from the "collateral benefit" rule in the context of a take-over bid for certain employment related compensation.
Safe Harbour from Collateral Benefit Prohibition
The new bid regime maintains the current prohibition against the offeror, or any person or company acting jointly or in concert with the offeror, from entering into any collateral agreement, commitment or understanding that has the effect of providing a security holder with consideration of greater value than that offered to other security holders. This so-called "collateral benefit" prohibition resulted in discretionary relief being sought from, and routinely granted by, securities regulators to permit payments to directors, officers and employees that were fundamentally employment arrangements as opposed to payments for securities. Many transactions have historically been structured as business combinations or mergers in order to avoid the necessity of obtaining regulatory relief. The new bid regime introduces certain employment compensation related exceptions to the "collateral benefit" prohibition. These exceptions, in large measure, mirror similar exceptions to the definition of collateral benefit in MI 61-101 that applies to business combinations and related party transactions.
Filing of Agreements
A new requirement has been added in the bid regime that mandates the filing by an offeror of agreements such as lock-up agreements, acquisition agreements, any agreements between the offeror and directors or officers of the target company relating to the bid, and any agreement of which the offeror is aware that could affect control of the target company, including an agreement with change of control provisions or a securityholder or voting trust agreement, that the offeror has access to and which can reasonably be regarded as material to a tendering securityholder in deciding whether to accept or reject the bid. A target company is also required to file copies of such agreements. The bid regime permits redaction of portions of these agreements under certain conditions, including a determination by the filer that it has reasonable grounds to believe that disclosure of the provision would be seriously prejudicial or would violate confidentiality provisions. Despite the ability to redact, any redaction must be accompanied by a brief description of the information that has been redacted. Further, the Canadian securities regulators have advised that it would not be appropriate for a filer to omit or redact an entire document on the basis that the information in the document is subject to confidentiality.
This new filing requirement is a significant disclosure development that is likely to put considerable incremental pressure on a target board confronting a hostile take-over bid and, more generally, raises questions about the types of change of control provisions that ought to be disclosed, depending on the terms and circumstances of the bid and whether such information would ultimately be material to a security holder’s decision to tender to the bid.
Acting Jointly or In Concert with the Offeror
As is the case under the existing requirements, the new bid regime provides that whether a person is acting jointly or in concert with an offeror is a question of fact. However, the new regime also provides that certain categories of relationships are deemed to be ones in which a person is acting jointly or in concert. In particular, "affiliates" of the offeror and entities with an agreement, commitment or understanding with the offeror to acquire securities that are the subject of the bid are deemed to be joint actors. Under the existing requirements there is a rebuttable presumption that these relationships are ones in which a person is acting jointly or in concert, which has allowed an offeror to make its own determination based on its knowledge of the facts. Unlike a presumption, a deeming provision cannot be rebutted by evidence to the contrary. The new regime maintains a rebuttable presumption of acting jointly or in concert in respect of "associates" of the offeror, which includes any entity of which the offeror beneficially owns or controls more than 10% of the voting securities, and entities with an agreement, commitment or understanding with the offeror to exercise jointly or in concert any voting rights attaching to securities of an entity whose securities are the subject of a bid.
Variation of Certain Terms of the Bid
Although not expressed as a prohibition, the Canadian securities regulators have provided guidance with regard to the following variations to a bid: lowering the consideration offered under the bid; changing the form of consideration offered under the bid, other than by offering additional consideration; lowering the proportion of outstanding securities for which the bid is made; or adding new conditions to the bid.
The securities regulators have indicated that, depending on the circumstances, these variations may be so fundamental that the regulators may exercise their public interest mandate to ensure that security holders are not prejudiced by the variations. The regulators could intervene to cease trade the bid, require that the deposit period for tendering securities be extended or require that an offeror commence a new bid with the varied conditions. The adoption of this policy is unlikely to have much effect on take-over bids generally, as these "fundamental" variations are rarely permitted in bids supported by a target and even hostile bidders usually improve, not diminish, the attractiveness of their bid after its launch.
Foreign Take-over Bid Exemption
The new bid regime introduces a new exemption from the take-over bid and issuer bid requirements in circumstances where the following conditions are satisfied:
- at the date of commencement of the bid, less than 10% of the securities subject to the bid are held by security holders with an address in Canada and the offeror reasonably believes that security holders in Canada beneficially own less than 10% of such securities;
- the published market on which the greatest volume of trading in such securities occurred during the 12 months preceding the commencement of the bid was not in Canada;
- 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; and
- the materials relating to the bid are sent to security holders in Canada and if no materials are sent to security holders, but rather a notice or advertisement is published, a notice or advertisement of the bid is filed and published in at least one major daily newspaper in the local jurisdiction in Canada.
This is an important exemption that expands considerably upon the pre-existing de minimis exemption from the application of the take-over bid rules and will facilitate compliance with the Canadian take-over bid regime by bidders and targets in jurisdictions outside of Canada where these pre-conditions are satisfied.
Modified Dutch Auctions and Odd Lot Programs
It is not uncommon for an issuer making an issuer bid to do so using a "modified Dutch auction" under which shareholders are permitted to specify a price within a range of prices at which they are prepared to accept the issuer bid, thereby allowing the issuer to establish the offer price at the minimum price necessary to acquire a specified number of securities. It is also not uncommon for issuers to provide in their issuer bids that the issuer will acquire any odd lots of securities from shareholders who would be left holding an odd lot of securities following the issuer bid. Currently, in order to launch an issuer bid on these terms it is necessary to obtain discretionary exemptive relief from the proportionate take-up and payment requirement. Such exemptive relief is routinely granted but obtaining it may affect the timing of the bid. The new regime contains specific exemptions from the proportionate take-up requirement designed to enable these issuer bids to proceed without the need for discretionary exemptive relief.
Delivery of Securityholder List
Target issuers that are not subject to a legal obligation to furnish a security holder list to an offeror proposing to commence a take-over bid, such as income trusts, will be subject to a requirement to do so similar to that which applies to federally incorporated corporations.
Normal Course Purchase Exemption
The new bid regime continues to provide an exemption from the take-over bid requirements for a bid at a price not in excess of the market price (as defined) for not more than 5% of the outstanding securities of a class during any 12-month period. Under the new regime, an offeror that has acquired securities under a formal take-over bid is entitled to acquire a further 5% of the securities under this exemption, whereas under the existing requirements an offeror could not rely on this exemption for a period of 12 months following the completion of the formal take-over bid.
Amalgamations, Mergers, Reorganizations and Arrangements
As a result of an amended definition of the term "issuer bid", it will no longer be necessary to seek discretionary exemptive relief from the application of the issuer bid requirements where the acquisition by the issuer of its own securities is a step in an amalgamation, merger, reorganization or arrangement that is subject to securityholder approval. The definition of "take-over bid" contains the same exemption.
Emmanuel Pressman is a partner in Osler’s Corporate Practice Group and Co-Chair of the firm’s Mergers & Acquisitions Specialty Group. Donald Gilchrist is a partner in the firm's Business Law Department, his practice focuses on mergers and acquisitions and corporate finance. Stan Magidson is a partner in the Calgary office of Osler, heading up the business law practice in Western Canada. Robert Yalden is a partner in the firm’s Business Law Department and Co-Chair of the firm’s Mergers and Acquisitions Group. Jeremy Fraiberg is a partner in the Business Law Department in the firm’s Toronto office.
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