On February 1, 2008, Multilateral Instrument 61-101
Protection of Minority Shareholders in Special
Transactions became effective, replacing OSC Rule 61-501
and Québec's Regulation Q-27. Both rules contained
requirements for enhanced disclosure, independent valuations
and majority of minority security holder approvals for
specified types of transactions, specifically insider bids,
issuer bids, business combinations and related party
transactions. The effective date of MI 61-101 coincided with
the effective date of new rules governing take-over bids and
issuer bids across Canada, which are discussed in another
article. Structured as a multilateral instrument, it is
open to other jurisdictions to adopt the new rule but none has
indicated any intention of adopting it at this time. While Rule
61-501 and Regulation Q-27 were initially nearly identical,
amendments made in 2004 to Rule 61-501 were never formally made
to Regulation Q-27. This mismatch resulted in numerous
exemptive relief orders for issuers regulated by Regulation
Q-27. Additional consequential amendments would be required as
a result of the new bid regime. Thus the creation of a
multilateral instrument at this juncture allowed for all
necessary updates to be incorporated into a single instrument.
Only a few substantive changes were made in addition to the
consequential amendments. These are highlighted below.
Payments to Special Committee Members of the
One substantive change is the addition of a prohibition
against independent directors receiving a benefit not generally
available to security holders as a consequence of a
transaction. This is intended to prohibit, for example, the
payment of success fees to independent directors in the context
of the completion of a transaction (even if the intention to
provide the benefit is not formed until after the transaction
has been completed). The regulators have updated the companion
policy to the rule, Companion Policy 61-101CP, to include
guidance that affirms the value of having adequately
compensated members of a special or independent committee. The
guidance also affirms that committee members should be,
ideally, compensated by fixed sum payments that are set when
the committee is created.
Equity Participation by Target
The new rule's updated companion policy also includes
substantially expanded guidance on the treatment of directors
and senior officers of a target where they are provided an
opportunity to participate in the equity of the target issuer
following the completion of the transaction. This circumstance
has often arisen in the context of M&A transactions where
the acquirer was a private equity firm, but very little
concrete guidance was available to evaluate the effect of such
an equity participation opportunity on the regulation of the
transaction overall, including the possible additional
requirement of a formal valuation.
While the broad joint actor concept still applies generally,
the regulators have now clearly stated a threshold at which, in
their view, a related party may be considered to be a joint
actor with the offeror — that threshold being where
the related party becomes a 'control person' upon
completion of the transaction or otherwise comes to
beneficially own more than 20 per cent of the voting
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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