While controversial, mini-tenders are permitted in the Canadian markets. This blog provides a brief overview of mini-tenders and summarizes two recent examples, which demonstrate the considerations surrounding whether or not a mini-tender will succeed.
What is a mini-tender?
A mini-tender is an unsolicited and widely disseminated offer to purchase less than 20% of the outstanding voting or equity shares of a public company. It is not subject to the disclosure and procedural protections of formal take-over bid regulation. In Canada, mini-tenders are generally made for significantly less than 20% of outstanding shares at a substantial discount to market. The Canadian Securities Administrators provide guidance with respect to mini-tenders in CSA Staff Notice 61-301 – Staff Guidance on the Practice of "Mini-Tenders". The Canadian early warning system under Section 5.2 of National Instrument 62-104 – Take-Over Bids and Issuer Bids requires shareholders to report when their ownership, control or direction over voting or equity securities of a reporting issuer reaches 10%, and to further report at 2% increments thereafter. Mini-tender offers do not relieve the offeror of the requirements of the early warning system. In the U.S., a mini-tender offer must be for not more than five percent (5%) of a company's securities.
The use of mini-tender offers sometimes attracts caution from regulators who may have concerns regarding lack of disclosure and procedural protections. Adding to this intrigue, mini-tender offers are often made at a share price that is less than market price. Companies may warn securityholders whose shares are subject to a mini-tender to be aware of this discount and any other alleged deficiencies, or to exercise caution with respect to the offer. Notwithstanding these important considerations, there are some benefits associated with mini-tenders. For example, such an offer may entice certain shareholders because it avoids the brokerage commissions that are associated with a typical sale.
Intervention of Regulators
A mini-tender offer may attract the attention of securities regulators where they consider offers to be abusive or otherwise contrary to the public interest. The public interest jurisdiction of the regulators is broadly interpreted. The following two recent examples highlight issues related to mini-tenders.
1. Catalyst Capital Group Inc. and Hudson's Bay Co. (2019)
On August 19, 2019, Catalyst Capital Group Inc. ("Catalyst") announced its receipt and acceptance of 10.05% of Hudson Bay Company's ("HBC") outstanding common shares. This transaction represents a successful mini-tender (93.5% uptake by shareholders) and by offering shareholder protections Catalyst was able to avoid regulatory intervention based on public interest.
Catalyst purchased the shares at a price of $10.11 per share (or approximately $187 million total). The price offered by Catalyst was at a significant premium to both the market price and to an alternative proposal of $9.45 per share, initiated by a group led by HBC's Executive Chairman (the "Insider Buyout Proposal"). A special committee of HBC's board of directors had previously determined that the Insider Buyout Proposal was inadequate. By contrast, Catalyst's interests were said to be consistent with HBC's minority shareholders and Catalyst was motivated by a desire to maximize value for all shareholders. It's also worth noting that Catalyst allowed shareholders 27 days to accept the offer, slightly less than the 35 day minimum tender rule applicable to take-over bid rules.
2. Group Mach Acquisition Inc. and Transat A.T. Inc. (2019)
On August 2, 2019, Mach Acquisition Inc. ("Mach") offered to purchase 19.5% of Transat's outstanding Class B voting shares, at a price of $14.00 per share (the "Mach Offer"). Transat obtained a cease order from the Financial Markets Administrative Tribunal (the "Tribunal") in Quebec on the grounds that the terms of the Mach Offer made it "abusive, coercive and misleading" and contrary to the public interest.
The Mach Offer followed a final arrangement agreement between Transat and Air Canada, under which Air Canada was to acquire all of Transat's outstanding securities at a price of $13 per share. The express intention of the Mach Offer was to defeat the plan of arrangement between Transat and Air Canada.
After establishing its jurisdiction to intervene in the public interest, the majority of the Tribunal determined that the Mach Offer was abusive towards shareholders and capital markets more broadly. The Tribunal had three concerns: 1) the time period for shareholders to consider the offer; 2) the disclosure of the offer; and 3) the potential obtaining of dissent rights in respect of greater than 20% increasing their ability to thwart the Air Canada bid. Specifically, shareholders were given only 11 days to respond to the offer, which was riddled with inconsistent and potentially misleading disclosures. The structure of the Mach Offer was also problematic because it provided that if greater than 19.5% of the Class B voting shares were tendered, such shares would be taken up on a pro rata basis, but it still gave Mach the right to vote and exercise dissent rights for all shares tendered. Despite the lack of regulation targeting transactions below 20%, the Tribunal's analysis was informed by market and public interest protection that gave rise to the regulation.
What is the secret to success?
Ultimately, in the absence of any applicable regulation, the secret to a successful mini-tender offer is to operate within the public interest.
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