On August 11, 2019, Quebec's Financial Markets Administrative Tribunal (the Tribunal) issued its decision in Transat AT Inc. v. Group Mach Acquisition Inc. In a 2-1 majority decision, the Tribunal invoked its public interest jurisdiction and issued a cease trade order against the offer made by Group Mach Acquisitions Inc. (Group Mach) to acquire 19.5% of the outstanding Class B voting shares (Class B shares) of Transat A.T. Inc. (Transat) at a price of $14.00 per share (the Group Mach Offer).
While the Group Mach Offer was structured as a "mini-tender" (such transactions generally fall outside the scope of the formal take-over bid rules), the Tribunal's decision highlights the broad discretion that securities regulators have to block transactions that are considered to be abusive to investors and the capital markets, notwithstanding strict compliance with securities laws.
On June 27, 2019, Transat and Air Canada announced the execution of a definitive agreement, pursuant to which Air Canada would acquire all of the issued and outstanding shares of Transat at $13.00 per share, by way of a plan of arrangement (the Air Canada Arrangement). The special meeting of Transat's shareholders to consider and vote on the Air Canada Arrangement was scheduled for August 23, 2019.
On August 2, 2019, Group Mach issued a press release announcing its offer to acquire not less than 19.5% of the Class B shares of Transat at a price of $14.00 per share. The Group Mach Offer stated that under no circumstance would it acquire more than 19.9% of the Class B shares and that pro-rationing would be employed in the event that more than 19.5% of the Class B shares were deposited under the Group Mach Offer. The Group Mach Offer was structured in this way to ensure that it was not subject to the take-over bid rules under National Instrument 62-104 – Take-Over Bids and Issuer Bids (NI 62-104), which generally apply when an offer is made for 20% or more of a class of an issuer's outstanding securities. These types of offers are commonly referred to as "mini-tenders".
The Group Mach Offer was made with the stated purpose of defeating the Air Canada Arrangement and required depositing shareholders to appoint a Group Mach representative as their nominee and proxy in order to vote the tendered shares against the Air Canada Arrangement, as well as assign all other rights (including dissent rights) over the deposited Transat shares to Group Mach. The structure of the Group Mach Offer provided Group Mach with the right to vote and exercise dissent rights for all shares tendered, notwithstanding the potential for any pro-rationing that may be employed in connection with the take-up of deposited shares, or the fact that Group Mach could subsequently abandon the Group Mach Offer in its entirety.
Transat promptly applied to the Tribunal seeking to cease trade the Group Mach Offer and to prohibit the use of any proxies obtained by Group Mach from Transat shareholders on the grounds that the Group Mach Offer was "highly abusive, misleading and coercive" and contrary to the public interest.
The majority of the Tribunal began by summarizing the statutory framework together with the relevant case law and highlighted the principles to be considered in determining whether to intervene on the grounds of public interest. In applying these principles, the majority of the Tribunal focused on three primary factors in finding that the Group Mach Offer was abusive and that the Tribunal should exercise its public interest jurisdiction to issue a cease trade order:
- The timeframe afforded to shareholders to consider the Group Mach Offer;
- The structure of the Group Mach Offer; and
- The disclosure provided in the Group Mach Offer.
Inadequate time to consider the Group Mach Offer
The Group Mach Offer provided that depositing shareholders must tender their shares by August 13, 2019, giving Transat shareholders just 11 days (7 business days) to evaluate the Group Mach Offer. While the Tribunal acknowledged that the formal take-over bid rules, which require a minimum 35 day deposit period, did not apply to Group Mach's mini-tender, they noted that allowing shareholders sufficient time to make informed decisions was a basic concept of public interest generally provided for under securities laws. Given the complexity of the Group Mach Offer, and the brief deposit period thereunder, the Tribunal found the Group Mach Offer to be coercive as it would have the effect of causing shareholders to act quickly out of fear of missing out on an opportunity and would detract from free and informed decision making.
The Group Mach Offer structure is abusive
In reviewing the overall structure of the Group Mach Offer, the Tribunal noted that there were no rules or regulations preventing the Group Mach Offer from being structured to avoid the application of the formal take-over bid rules under NI 62-104 or with the stated purpose of defeating a competitor's offer. Notwithstanding this fact, the Tribunal identified a number of interrelated elements that, when considered together, raised public interest concerns that required intervention from the Tribunal. These included the following:
- The Group Mach Offer was structured to avoid the formal take-over bid rules, thereby depriving shareholders of the protections afforded to formal bids.
- The primary purpose of the Group Mach Offer was to defeat the Air Canada Arrangement.
- The Group Mach Offer gave Group Mach the potential to exercise voting control and rights of dissent over substantially more than the 19.5% of the Class B shares, with the further possibility that Group Mach could withdraw its offer after having exercised these rights.
- The Group Mach Offer was unfair to the holders of Class A shares who could not participate in the Group Mach Offer. Holders of Class B shares acquired after the record date for the Transat shareholder meeting were similarly unable to participate in the Group Mach Offer.
- As more shareholders tendered under the Group Mach Offer, the less advantageous such offer would be to the depositing shareholders (due to pro-rationing) and the more likely it was that the Air Canada Arrangement would fail, thereby disproportionately benefiting Group Mach.
The Tribunal found that the limited disclosure provided by Group Mach in connection with the Group Mach Offer and its solicitation of proxies was inconsistent and had the potential to be misleading. In particular, the disclosure regarding the ability of Transat shareholders to revoke proxies and/or deposited shares was noted as being irrevocable in certain cases and revocable in others. Additionally, the disclosure indicated that the Group Mach Offer would provide "certainty of value" and would generate "near term liquidity"; however, the Tribunal noted this would only apply to a limited portion of the shares held by a Transat shareholder in the event that a large number of shares were tendered to the Group Mach Offer. Given the short timeline which shareholders had to respond to the Group Mach Offer, the Tribunal was of the view that the inaccuracies in the Group Mach disclosure were likely to cause confusion, thereby contributing to the abusive nature of the Group Mach Offer.
In finding that the Group Mach Offer was an innovative proposal which was outside the scope of the specific regulatory framework for take-over bids, the dissenting judge would have dismissed the Transat application. The dissenting judge highlighted the following key points in reaching his decision:
- The Group Mach Offer took the form of a mini-tender, which the securities regulator and legislature had deliberately chosen not to regulate. As the formal take-over bid rules did not apply they should not be used to inform the public interest analysis.
- While the Canadian Securities Administrators had published suggested disclosure practices for mini-tenders (CSA Staff Notice 61-301 – Staff Guidance on the Practice of "Mini-Tenders"), compliance with the CSA Staff Notice was not at issue and the Group Mach Offer in fact complied with the recommended disclosures.
- Despite the short deposit period, the Group Mach Offer provided adequate time for institutional investors to assess the Group Mach Offer. Any difficulty faced by retail investors was not so severe as to require the issuance of a cease trade order, which would deprive all shareholders of their right to choose between competing offers.
- The local securities regulator had failed to contact Group Mach with any suggested remedial amendments for the Group Mach Offer, and instead had simply joined the Transat application as an impleaded party.
- In light of the almost non-existent regulation of mini-tenders, the description of the terms and conditions included in the Group Mach Offer materials was not so flawed so as to be abusive to Transat shareholders or the capital markets in general.
Following the majority decision of the Tribunal to invoke its public interest jurisdiction and cease trade the Group Mach Offer, Air Canada nevertheless raised its offer price under the Air Canada Arrangement from $13.00 to $18.00 per share and in doing so, was able to enter into a voting support agreement with a significant Transat shareholder. Approximately 95% of the Transat shareholders present at the shareholder meeting voted in favour of the Air Canada Arrangement. As of today (November 18, 2019), Transat and Air Canada continue to pursue domestic and foreign regulatory approvals, including under the Competition Act (Canada).
This decision serves as a reminder to market participants that securities regulators have broad powers under the public interest jurisdiction and may intervene on novel and complex transaction structures notwithstanding the absence of any breach of securities laws or compliance with the regulatory framework.
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