(Continued from "Canadian Take-Over Bid Rules – Overview - Part I")
This Practice Guide is the second of two Practice Guides which provide a general overview of potential applications of Canadian securities and other legal requirements to take-over bids occurring, in part, in Canada. The “Canadian Take-Over Bid Rules – Overview – Part I” Practice Guide sets out an introduction to Canadian take-over bid rules, including the definition of a take-over bid and a brief overview summary of requirements and conditions applicable thereto. This Practice Guide continues the prior Practice Guide, including a summary regarding take-over bid exemptions, early warning and insider reporting requirements, prospectus exemptions for securities exchange offers, impact of completing an offer on reporting issuer status and additional filing requirements. This Practice Guide represents a summary overview of many of the topics discussed. In many cases there are detailed rules where reference by necessity must be made to the text of the applicable rules.
Certain terms that are used in this Practice Guide (in bold font) which are defined in applicable securities legislation, rules, regulations or other instruments have the meanings so defined, without the definition necessarily being included or summarized in this Practice Guide.
Canadian public M+A transactions are most typically affected either by way of a take-over bid or a business combination under a statutory procedure (e.g., amalgamation or plan of arrangement) under the target company’s governing statute. The latter transactions are described in the “Statutory Business Combination Transactions – Overview” Practice Guide.
There are various exemptions from Canadian take-over bid and issuer bid requirements, including the following:
- Private agreement exemption, which exempts purchases from not more than five persons in the aggregate (including persons outside Canada) where a bid is not made generally to holders of the class and price paid (including fees or commissions) does not exceed 115% of the market price/value of the securities.
- Normal course purchase exemption, which exempts a bid for not more than 5% of the outstanding securities of a class in respect of which there is a published market and the aggregate number of securities acquired under the exemption in any 12 month period, together with other acquisitions within that period, other than under a non-exempt bid, does not exceed 5% and the value of the consideration paid does not exceed market price plus reasonable fees or commissions.
- Issuer acquisition or redemption issuer bid exemption, which exempts certain purchases, redemptions or acquisitions in accordance with or required by terms and conditions attached to securities (including an exercise of a holder right) or to meet sinking or purchase fund requirements, or required by a governing statute.
- Employee, executive officer, director and consultant issuer bid exemption, which exempts acquisitions of securities from current or former employees, executive officers, directors or consultants, provided that if there is a published market for the securities, the value paid is not more than the market price and the aggregate number or amount of securities acquired within any 12 months under the exemption is not more than 5%.
In addition, there are other exemptions applicable for foreign take-over offers, a de minimus exemption where there are fewer than 50 beneficial owners in the province or territory holding less than 2% of the outstanding securities of the class and an exemption for non-reporting issuers when there is a published market. These exemptions are less likely to be applicable to a public M+A transaction occurring in Canada, or in relation to a Canadian issuer.
Also, depending on the circumstances, where securities are privately acquired from a person who is not “in” the province, or whose last address as shown on the books of the issuer is not in Canada (i.e., where the beneficial owner is not Canadian and the shares are registered in the name of a holder whose address is not in Canada), the acquisition may not constitute a take-over bid, or require reliance on an exemption, provided there is no offer made to anyone else to acquire securities, and subject to anti-avoidance concerns. Such acquisition, and acquisitions under the private agreement exemption, can potentially be relied upon by an acquiror seeking to make a “creeping” acquisition of control and, conversely, can be a concern to target companies (and are a significant reason many target companies consider implementing shareholder rights plans).
MJDS Take-Over and Issuer Bid Exemptions. Under the “Multijurisdictional Disclosure System” (MJDS), certain take-over bids or issuer bids or involving certain U.S. issuers may be made generally on the basis of U.S. disclosure documents. This exemption is less likely to be applicable to a public M+A transaction occurring in Canada.
Early Warning and Insider Reporting Requirements
Early Warning Reporting Requirements. Acquisition of voting securities or equity securities, or securities convertible into such securities, of a reporting issuer, whether under an exempt bid or transaction that does not constitute a take-over bid, including treasury securities acquired from an issuer, representing 10% (5% when a take-over bid has already been made) of a class of securities, may trigger an obligation for the acquiror to file an early warning report and news release. There are requirements for further reporting for 2% increases or decreases in securities owned or controlled or directed, or material changes in reports previously filed. An acquiror that enters into a support agreement or lock-up agreements in respect of a proposed take-over bid may have to file an early warning report as a result of entering such agreements.
Moratorium. Until a 20% threshold is reached, the early warning reporting rules impose a moratorium prohibiting additional purchases beginning when a required report is required to be filed until the expiry of one day after the required report is filed. This does not apply to reports required to be filed during an existing take-over bid where the reporting threshold is 5%.
Insider reporting requirements. If an acquiror becomes or is an insider (e.g., 10% holder), and acquires additional securities, it may have to file an insider report reflecting the acquisitions (or dispositions). These requirements now include the concept of “post-conversion beneficial ownership”, for purposes of determining whether the 10% threshold has been reached, require inclusion of securities (including unissued securities, on a partially diluted basis) which are convertible into securities within 60 days and rights or obligations permitting or requiring the person, whether or not on conditions, to acquire beneficial ownership of securities. Directors and officers of a person (e.g. 10% holder) that becomes an insider may become reporting insiders required to file insider reports. Insiders of the target company that dispose of the shares under a take-over bid will likely have to file an insider report reporting the dispositions.
Securities Exchange Offer – Canadian Prospectus Exemptions
Canadian Prospectus Exemption Required. If a take-over bid or issuer bid is a securities exchange offer involving the issuance of securities of the offeror (or another issuer), or the target company, in exchange for the securities acquired under the bid, in addition to take-over bid and issuer bid requirements, and whether or not the bid is exempt from such requirements, the distribution of the securities being issued on exchange will need to be made in reliance upon an exemption from the prospectus requirement.
Prospectus Exemption. There is a prospectus exemption available for distributions of securities in connection with a take-over bid or issuer bid in a province.
Exempt Bids. The basis for this exemption is that a securities exchange circular containing prospectus-level disclosure is filed. If a take-over bid circular or issuer bid circular is prepared in connection with an exempt bid, the circular must meet the disclosure standards relating to the form and content for a bid circular for a formal, non-exempt bid for this exemption to be available.
MJDS Prospectus Exemption. National Instrument 71-101 provides an exemption from the prospectus requirements for the distribution of securities of an offeror or another issuer in a securities exchange issuer bid if prescribed eligibility criteria are met and the offeror complies with the requirements of the U.S. federal securities law applicable as a result of the consideration for the securities of the offeree issuer being at least in part securities of the offeror or other issuer.
Seasoning Period Resale Restriction. Securities acquired under the prospectus exemption referred to above are subject to a “seasoning period” resale restriction which includes, among other conditions, a requirement that the issuer of the securities is and has been a reporting issuer in a Canadian province or territory for the immediately preceding four months.
Exemption - Offeror a Reporting Issuer. If the offeror under the securities exchange bid was a reporting issuer on the date the securities were first taken up, and filed a securities exchange take-over bid or securities exchange issuer bid circular on SEDAR, and the first trade is not a control distribution, the seasoning period resale restriction will not apply. If the offeror is not a reporting issuer and does not intend to become one, the seasoning period will result in the securities being subject to an indefinite resale restriction, requiring reliance on a prospectus exemption for resale.
Resale Prospectus Exemptions
Non-Reporting Issuer Exemption. A prospectus exemption will be available to permit the first trade of a security acquired under the securities exchange take-over bid or issuer bid exemption if:
- the issuer is not a reporting issuer in any Canadian jurisdiction and was not such a reporting issuer at the distribution date
at the distribution date, after giving effect to the issue of the security (and other securities of the class at the same time or as part of the same distribution) Canadian residents
- did not own directly or indirectly more than 10% of the outstanding securities of the class/series; and
- did not represent in number more than 10% of the total number of owners directly or indirectly of the class/series; and
- the trade is made through an exchange or market outside of Canada or to a person outside Canada.
Convertible Securities. If a Canadian holder acquires convertible or exchangeable securities under the securities exchange take-over bid or issuer bid exemption and converts or exchanges those securities, there is a comparable exemption exempting the first trade of the underlying shares.
Other Resale Exemption. If the foregoing exemption is not available, the first trade could potentially be made in reliance upon other prospectus exemptions, such as the accredited investor exemption, or exemption for trades to the issuer.
Impact of Completing a Share Exchange Offer-Reporting Issuer Status
Offeror May Become a Reporting Issuer. If an issuer files a securities exchange take-over bid circular for the acquisition of securities of a reporting issuer and takes up and pays for the securities in accordance with the circular, or if the securities of the issuer become listed on a Canadian exchange, the issuer will become a reporting issuer in some Canadian provinces. (In some provinces it may be necessary for the acquiror to apply for a discretionary order ordering it to be a reporting issuer.) As such, the issuer will become subject to ongoing continuous disclosure requirements in that province, including requirements to prepare and file annual and quarterly financial statements and related management’s discussion and analysis, an annual information form, an annual information circular for shareholder meetings, material change and business acquisition reports and material contracts.
National Instrument 71-102 and MJDS Exemptions. Certain foreign issuers that meet certain conditions are exempt from many Canadian provincial continuous disclosure requirements on condition that they comply with the continuous disclosure requirements of the SEC or their designated foreign jurisdiction. Such issuers are also exempt from certain other requirements, including insider reporting requirements and early warning reporting requirements. The applicable conditions include the requirements that (i) not more than 50% of the issuer’s voting securities are owned, directly or indirectly, by Canadian residents, (ii) the majority of the issuer’s executive officers or directors are not Canadian residents, (iii) more than 50% of the issuer’s consolidated assets are not located in Canada, and (iv) the issuer’s business is not administered principally from Canada. In addition, certain U.S. issuers may, under MJDS, satisfy Canadian continuous disclosure requirements by using disclosure prepared in accordance with U.S. requirements.
Additional Filing Requirements
A take-over bid (or business combination transaction) will likely trigger additional reporting and filing requirements, including the following:
- Material Change Reports. Material change reports will likely be triggered in relation to the commencement of a take-over bid (or execution of an arrangement agreement).
- Material Documents. Any support agreement in relation to a take-over bid (or arrangement agreement) will need to be filed as a material contract.
- Business Acquisition Report. If the acquiror is a reporting issuer, it may have to file a business acquisition report within 75 days of the acquisition.
- Notice of Change of Corporate Structure. It may be necessary to file a “Notice of Change of Corporate Structure” reflecting the change of name of the target company, if applicable, the target company ceasing to be a reporting issuer or, if applicable, the acquiror becoming a reporting issuer.
Foreign Investment Laws
Reviewable Transactions. A take-over bid (or business combination transaction) could potentially be subject to review, or require approval, under the Investment Canada Act, if certain thresholds regarding assets in Canada are exceeded or the target company is in an area concerning Canada’s “cultural heritage or national identity”. Also, the Canadian government has the authority to review any foreign investment into a Canadian company to determine whether the investment could be injurious to national security.
Pre-Merger Notification Requirements. A take-over bid (or business combination transaction) could potentially be subject to pre-merger notification requirements under the Competition Act (Canada) if certain thresholds relating to Canadian assets or gross revenues are exceeded (see “Canadian Securities Laws – Overview” Practice Guide for more details on foreign investment and competition laws).
Other Statutory Regimes
Some specific industries or businesses in Canada (e.g. banks and insurance and trust companies, and transportation, broadcasting and telecommunications industries) are regulated by statutes that include ownership limitations or approval requirements.