Acquisition structures
While several different methods exist to acquire control of a Canadian public company, public company M&A transactions in Canada are most commonly effected by a "plan of arrangement" and less frequently by a "take-over bid." These transaction structures are outlined below.
Plan of arrangement
Overview
A statutory arrangement, commonly referred to as a "plan of arrangement," is a voting transaction governed by the corporate laws of the target company's jurisdiction of incorporation. It is first negotiated with the target company's board of directors and remains subject to the approval of the target company's shareholders at a special meeting held to vote on the proposed transaction. Notably, an arrangement also requires court approval. Due to the ability to effect the acquisition of all of the outstanding securities of a target in a single step and its substantial structuring flexibility, the majority of board-supported transactions are structured as arrangements.
Court supervision and approval
Unlike any other transaction structure typically used to effect a change of corporate control, an arrangement is a court-supervised process.
The target company applies to court to begin the process of effecting the arrangement. An initial appearance will be made before the court for an interim order setting the procedural ground rules for the arrangement, which is almost always uncontested. The interim order will specify, among other things: (i) the manner in which a special meeting of the shareholders will be called and held (e.g., form of proxy solicitation materials and disclosure documents to be sent to security holders, record date for establishing security holders entitled to vote on the transaction, applicable notice periods, time and place of meeting); (ii) the persons entitled to vote at the meeting; (iii) whether any class of persons will be entitled to a separate class vote; and (iv) the requisite approval thresholds required to approve the arrangement.
Once the meeting of the target company shareholders is held and the arrangement resolution has been approved by the requisite majorities of security holders, the target company seeks a final court order approving the arrangement. The final order will be granted if the court is satisfied that the arrangement is "fair and reasonable." While disaffected stakeholders can appear at the final order hearing to challenge the arrangement, the vast majority of arrangements are approved without opposition.
Due to the ability to effect the acquisition of all of the outstanding securities of a target in a single step and its substantial structuring flexibility, the majority of boardsupported transactions are structured as arrangements.
Shareholder approval
Although the shareholder approval threshold for an arrangement is generally subject to the discretion of the court and addressed at the procedural hearing when the interim order is sought and obtained, an acquiror will typically propose that it seek the same approval threshold as would be required under the applicable corporate law statute governing the target company if the arrangement steps were effected outside the arrangement process. In most Canadian jurisdictions this threshold is 66⅔% of the votes cast at the meeting of the target company's shareholders. The approval of a majority of the minority shares voted at the meeting may also be required in circumstances where the transaction involves participation by a related party of the target company (see "Minority shareholder protections" below). Depending on the jurisdiction of incorporation, option holders may be afforded the right to vote as part of the same class as common shareholders. Other convertible securities like warrants and convertible debentures are typically not given the right to vote in an arrangement, unless their rights under the applicable indentures or contracts are being altered as part of the arrangement in a manner that is not fair and reasonable.
Take-over bid
Overview
A take-over bid is a transaction by which the acquiror makes an offer directly to the target company's shareholders to acquire their shares. Although the board of directors of the target company has a duty to consider the offer and an obligation to make a recommendation to its shareholders as to the adequacy of the offer, the take-over bid is ultimately accepted (or rejected) by the shareholders. As the support of the target board of directors is not legally required, a take-over bid is the only practical means to effect an unsolicited or hostile acquisition. Take-over bids are also used infrequently for friendly transactions. A take-over bid is the substantive equivalent of a tender offer under U.S. securities laws.
Legislation and governing principles
Take-over bids are regulated under a uniform regime adopted by each province and territory
A take-over bid must be made to all registered holders of the class of voting or equity securities being purchased (and sent to all registered holders of securities convertible into or exercisable for such voting or equity securities), but need not be made for all shares of that class, such that "partial bids" are permitted. The same price per security must be offered to each holder of the class of securities subject to the bid.
There are also minimum standards relating to the conduct of the bid, including disclosure requirements, the timing and delivery of take-over bid materials, and rules designed to ensure the equal treatment of all security holders.
A formal take-over bid is made pursuant to a disclosure document commonly referred to as a take-over bid circular. This document must contain prescribed information about the offer, the offeror and the target company. When the offered consideration consists (in whole or in part) of securities of the offeror, the circular must also include prospectus-level disclosure about the offeror. It is generally not necessary to pre-clear the contents of a take-over bid circular with the securities regulators in Canada and the take-over bid circular is not generally subject to their review once it is filed, absent a complaint being made.
When does a take-over bid occur?
Determining whether a take-over bid exists is based on objective factors and, in particular, on the percentage of voting or equity securities beneficially owned or controlled by the offeror (and any joint actors) plus the number of additional securities subject to the take-over bid. The take-over bid threshold is 20% of any class of voting or equity securities. In determining whether the threshold level of ownership by the offeror will be crossed, the number of securities beneficially owned by the offeror includes securities that the offeror has a right or obligation to acquire within 60 days (e.g., through options, warrants or convertible securities) and securities held by affiliated entities and joint actors. In order to attract the jurisdiction of Canadian take-over bid rules, the offer must be made to a person who is either in Canada or is registered in the books of the target company with a Canadian address.
Equal treatment of shareholders
A cornerstone objective of the take-over bid regime is the equal treatment of all security holders of a target company. To this end, the take-over bid rules: (i) require that all holders of the same class of securities of the target company be offered identical consideration; (ii) prohibit side deals or "collateral benefits" that would have the effect of providing certain holders with consideration of greater value than other holders (subject to certain exceptions for employment compensation arrangements); and (iii) integrate securities purchases made in the 90-day period preceding the take-over bid by requiring the bidder to offer to purchase the same percentage of securities and offer the same amount and form of consideration (or the cash equivalent thereof) as was offered in any pre-bid purchases, other than normal course purchases on a published market.
Timing and delivery requirements
Take-over bids may be commenced by publishing an advertisement in at least one major daily newspaper in each province (including an advertisement in French in the Province of Québec in circumstances where the target company has shareholders in Québec) provided that the offeror files the bid circular with securities regulators and delivers it to the target company on or before the date of the advertisement and requests a shareholders' list from the target company. The take-over bid circular must be delivered to the target company's registered shareholders within two business days of receipt by the offeror of the shareholders' list.
The target company is, in turn, required to file with securities regulators and deliver to the target company's registered shareholders a directors' circular no later than 15 days after the date of the take-over bid. The directors' circular must: (i) contain a recommendation that shareholders accept or reject the take-over bid; (ii) adopt a neutral position to the effect that the board is unable to make or is not making a recommendation and the reasons why the directors have remained neutral; or (iii) advise shareholders that the directors are considering whether to make a recommendation, provided that the directors ultimately make a recommendation or adopt a neutral position at least seven days before the expiry of the bid.
Take-over bids are required to remain open for a minimum of 105 days (the 105-day requirement), subject to two exceptions. First, the target issuer's board of directors may issue a "deposit period news release" in respect of a proposed or commenced take-over bid providing for an initial bid period that is shorter than 105 days but not less than 35 days. If so, any other outstanding or subsequent take-over bids will also be entitled to the shorter minimum deposit period counted from the date that other take-over bid is made. Second, if an issuer issues a news release that it has entered into an "alternative transaction" — effectively a friendly change-of-control transaction that is not a take-over bid, such as an arrangement — then any other outstanding or subsequent take-over bids will be entitled to a minimum 35-day deposit period counted from the date that other take-over bid was or is made.
The take-over bid threshold is 20% of any class of voting or equity securities. In determining whether the threshold level of ownership by the offeror will be crossed, the number of securities beneficially owned by the offeror includes securities that the offeror has a right or obligation to acquire within 60 days (e.g., through options, warrants or convertible securities) and securities held by affiliated entities and joint actors.
When all the terms and conditions of the take-over bid have been satisfied or waived at the expiry of the initial deposit period (which includes an extension of the deposit period prior to the mandatory 10-day extension requirement), the offeror must immediately take up all deposited securities and then pay for them as soon as possible and in any event not later than three business days after the taking up of the securities.
Shares deposited to a bid may be withdrawn at any time before they have been taken up by the offeror. Moreover, deposited shares that have not been taken up may be withdrawn at any time up to 10 days after the date of any notice of change or any notice of variation in the offer unless the variation consists solely of the waiver of a condition in an all-cash bid, or solely of an increase in consideration and the bid is not extended for more than 10 days.
Bid conditions
A take-over bid may be subject to the satisfaction or waiver of conditions, including conditions relating to regulatory approvals, material adverse changes, market interruptions and other contingencies. However, a take-over bid may not be conditional upon financing. Where the consideration offered pursuant to a take-over bid is cash or has a cash component, the offeror must make adequate arrangements prior to launching the bid to ensure that required funds are available to make full payment for the target company's securities. Accordingly, it is customary for the offeror to obtain a binding commitment from a financing source prior to the launch of the take-over bid to the extent it does not have sufficient cash resources already available. The financing arrangements required to be put in place may themselves be subject to conditions if the offeror reasonably believes the possibility to be remote that, if the conditions of the take-over bid are satisfied or waived, the offeror will be unable to effect payment due to a condition to the financing not being satisfied. Accordingly, most offerors ensure that, at least substantively, the conditions of the take-over bid include any conditions to the financing. Alignment of the bid conditions and the drawdown conditions is designed to ensure that the offeror is not placed in the impossible position of being obligated to transact under its take-over bid (due to all conditions having been satisfied) but unable to draw down on financing commitments (due to certain conditions not having been satisfied).
Minimum tender condition
Take-over bids are subject to a mandatory, non-waivable minimum tender requirement of more than 50% of the outstanding securities of the class that are subject to the bid, excluding those beneficially owned, or over which control or direction is exercised, by the bidder and its joint actors (the minimum tender requirement). The offeror may also set a higher tender threshold where the offeror's objective is to acquire all of the outstanding shares of the target company. In that event, there will also be a minimum tender condition, which is typically set at 66⅔% (75% in the case of some B.C. corporations) ownership by the offeror in order for the offeror to be certain that it will acquire sufficient shares to effect a second-stage, going-private transaction.
If an acquiror acquires more than 90% of the securities subject to the offer (which excludes shares held at the date of the take-over bid by the acquiror, its affiliates and associates), Canadian federal and provincial corporate legislation provide a procedure for the compulsory acquisition of the balance of the shares. No shareholder vote is required, although shareholders have the right to dissent and be paid the fair value of their shares.
When less than 90% but more than 66⅔% (or 75% in the case of some B.C. corporations) of the outstanding shares are acquired, the offeror can complete the acquisition of 100% of the target company by means of a subsequent going private transaction. This will require holding a special meeting of the shareholders of the target company to vote on the transaction. In this circumstance, the offeror can vote the shares that were acquired under the offer. Since the voting threshold under applicable corporate law for approval of a going private transaction (such as an arrangement or an amalgamation) is 66⅔% (or 75% in the case of some B.C. corporations) of the votes cast at the meeting of shareholders, the offeror can be assured that the transaction will be approved.
10-day extension requirement
Following the satisfaction of the minimum tender requirement and the satisfaction or waiver of all other terms and conditions, take-over bids are required to be extended for at least an additional 10-day period (the 10-day extension requirement).
The 10-day extension requirement is designed to eliminate coercion of shareholders to tender to the take-over bid, as they will be assured of an opportunity to tender after the take-over bid is already successful.
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