Canada has an active and vibrant mergers and acquisitions market. The legal processes and procedures reflect this, by establishing relatively clear and straightforward rules by which M&A transactions can be completed. At the same time, the law continues to develop and evolve as it relates to directors' duties and responsibilities, so that hostile acquisitions and responses to shareholder activism can be the subject of creative strategies and structures.
The summary is intended to provide a high level outline of the principal legal considerations pertaining to public company M&A in Canada. The question and answer format is designed to provide answers to some of the most commonly asked questions by potential buyers who are contemplating an M&A transaction. The summary is based on the law as it stands as of January 2019, almost three years after significant changes were made to take-over rules in Canada. These rules were designed, among other reasons, to give directors of target boards more time, if needed, to respond to a hostile take-over bid. If you have questions that are not answered here, please contact us and we would be glad to answer you in person.
1. How does a buyer acquire control of a public company?
The two most common methods of acquiring control of a public company are: (i) a two-step take-over bid, and (ii) a court approved plan of arrangement, with the vast majority of acquisitions being done by way of a plan of arrangement.1
- Take-over bid. A formal offer is made to all shareholders, which is open for acceptance (or tenders of shares) by the target's shareholders. A take-over bid can be friendly or hostile. Shares not tendered to a take-over bid can generally be acquired in a second-step transaction if at least 66 2/3% of the shares are tendered to the bid.
- Plan of arrangement. A statutory plan
of arrangement that requires both shareholder and court approval
and, if successful, results in the acquisition of 100% of the
target in a single step. As these transactions require the
cooperation of the target, they are almost always negotiated. A
plan of arrangement may provide for almost any type of transaction
or combination of transactions, including: share purchases;
- redemptions of shares;
- transfers of assets; and/or
- issues of new shares.
It is this flexibility, the ability to acquire 100% of the target in a single step and the ability to accommodate various transaction objectives and tax-planning requirements, which makes plans of arrangement so widely used. In addition, if the purchaser issues securities as consideration and the target has U.S. shareholders, a plan of arrangement enables the purchaser to issues its shares without having to register them under the U.S. Securities Act of 1933 under the exemption from registration provided by Section 3(a)(10).
Appendix A contains a table showing the principal differences between a take-over bid and a plan of arrangement.
A third, far less common method to acquire a company is by way of a statutory amalgamation under corporate law which allows two Canadian companies to amalgamate directly into one combined company. Subject to certain tax considerations, an amalgamation may be the more desirable method in a straightforward consensual merger, since it avoids the necessity of court proceedings required under a plan of arrangement.
2. How long does the process take to acquire a public company?
The amount of time to complete an acquisition can vary significantly depending on a number of factors, including how long the purchaser spends on due diligence, how long the definitive agreement takes to complete (in a friendly deal), whether there are regulatory or other conditions that will extend closing, whether any competing bids are made and, in the case of a take-over bid, if the bid is successful on its initial expiry date or whether it needs to be extended before it is successful. For more details on timing see Question 16.
Take-over bid. Assuming no regulatory or other issues arise that could delay closing, once a friendly take-over bid is publicly announced, the parties will generally agree to shorten the required 105-day bid period to 35 days such that the purchaser could acquire shares under the take-over bid approximately 35 days following the announcement. In a hostile bid, the purchaser must leave the bid open for at least 105 days. In either case, if the take-over bid is successful, in order to acquire 100% of the shares of the target, the purchaser will need to conduct a second-step transaction to acquire the shares not tendered to the take-over bid which could take anywhere from a few days to a couple of months depending on how many shares were tendered to the bid – see Question 22 for more details.
Plan of arrangement. Following announcement of an acquisition by a plan of arrangement, the target must prepare a management information circular to send to its shareholders for use at a special meeting called to consider the acquisition. The preparation of the circular typically takes 2 to 4 weeks with the shareholder meeting to follow approximately 30 days later. Final court approval and closing usually take place within a few days of the shareholder meeting, such that the total timing from announcement to closing is usually in the range of 50 to 75 days.
3. Does a Target need to conduct an auction or a market check?
While there is no requirement under Canadian law to do so, the board of directors of a target typically will want to conduct an auction or some form of market check prior to entering into a definitive acquisition agreement to be comfortable that they have met their fiduciary duties. Less often, as an alternative to an auction or market check, a target may enter into an acquisition agreement that contains a "go-shop" clause that enables the target to solicit offers for a limited period of time after entering into the agreement. For more information on go-shop clauses, see Question 13.
4. How common are hostile bids?
Hostile bids are relatively common, although they are the exception rather than the rule. The reasons for this include:
- The mixed success rate for bidders initiating hostile bids, with a relatively high percentage of first movers being outbid by subsequent bidders.
- The large number of Canadian issuers with significant security holders in a position to block a hostile bid for all securities.
- The lack of access to carry out due diligence.
See Question 24 for a discussion of defensive tactics available to a target in response to a hostile bid.
ACQUISITIONS BY CONTROL PERSONS OR OTHER INSIDERS
5. Is the acquisition process different if the purchaser is an insider of the target?
Yes, special rules (Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions) were created with a view to protecting the interests of minority shareholders in transactions involving insiders, including various types of acquisitions by insiders. The rules attempt to ensure that minority shareholders are treated fairly by requiring that, subject to limited exceptions, insiders (i) obtain (and disclose to the shareholders) a valuation of the target company prepared by an independent valuator, and (ii) include enhanced disclosure in the relevant disclosure document regarding the process followed by the board of directors of the target in approving the transaction and any past valuations obtained. As well, in the case of a merger-type transaction, approval of a majority of the minority shareholders is required in addition to the regular shareholder approval that is required under corporate law.
6. Is a Target required to obtain a fairness opinion?
While there is no requirement under Canadian law to do so, the board of directors of a target typically will obtain a fairness opinion from their financial advisor, and any fairness opinion so obtained will be described in, and attached to, the directors' circular or management information circular sent to shareholders. In transactions where a target creates a special committee of the board of directors, the special committee will sometimes obtain a separate, independent fairness opinion. This is most commonly seen where the special committee is struck as a result of an actual or potential conflict of interest among board members or other related parties.
In a recent case2, a court rejected an application for a plan of arrangement, in part because it found that the fairness opinion obtained by the board of directors of the target was deficient in its substantive analysis. The court also took issue with the opinion having been provided by the board's financial advisor whose fee was, in large part, based on the success of the transaction. Whether these concerns will be picked up by other Canadian courts is still an open question, as is the effect of the case on the practice of receiving fairness opinions going forward.
REGULATION AND REGULATORY BODIES
7. What regulatory bodies have jurisdiction over M&A?
Securities regulation in Canada, including the take-over bid rules, is conducted primarily by the provinces, since there is no federal or national securities commission. However, the federal government regulates matters such as competition and foreign ownership (see Questions 26 and 27).Corporations may be incorporated federally or in a province, and the relevant corporate law will affect the process and substantive requirements for mergers, plan of arrangements, shareholder meetings and back-end squeeze-outs while securities law will govern related disclosure requirements.
Provincial securities regulators have implemented regulatory initiatives to harmonize and consolidate the rules governing take-over bids, so there is effectively one set of procedural rules across Canada.
Formal take-over bids, and the bidder's offer documents (whether the offer price is payable in cash, securities or a mixture of both) are not required to be reviewed, receipted or cleared by securities regulators before the take-over bid can be made or delivered to, or accepted by, the target's shareholders. Securities regulators, however, can selectively review take-over bids for compliance with applicable rules. Most often they do so when asked by competing bidders and/or targets alleging deficiencies in a competitor's offer.
Similarly, plans of arrangement (or other merger documents) are not required to be reviewed or cleared by securities regulators before being delivered to the target's shareholders, however plans of arrangement do require:
- Preliminary court approval, which deals with the transaction's procedural aspects, such as calling the shareholder meeting and sending proxy materials; and
- Final court approval, which is a hearing on the fairness and reasonableness of the transaction after it has been approved by shareholders.
As with take-over bids, securities regulators can (and selectively do) review plan of arrangement materials, particularly in relation to compliance with applicable disclosure laws. Government officials responsible for administration of corporate statutes only rarely become involved in plans of arrangement.
Canada's principal stock exchanges, the Toronto Stock Exchange and the TSX Venture Exchange, both of which are self-regulating organizations, can also impose requirements on take-over bids and plans of arrangement, particularly if shares of the purchaser will be issued as consideration and listed on the TSX following closing. The stock exchanges will often review proxy circulars sent in connection with plans of arrangement before delivery to the target's shareholders.
1 According to a 2016 study of key deal points in Canadian public M&A transactions by the M&A Market Trends Subcommittee of the M&A Committee of the ABA, 81 of 88 public M&A transactions involving Canadian targets in 2013 and 2014 were structured as plans of arrangement and the remaining 7 were completed by take-over bid.
2 InterOil Corporation v. Mulacek, 2016 YKCA 14 (Yukon Court of Appeal).
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.