The Canadian Securities Administrators (CSA) have published significant amendments to the Canadian take-over bid regime (the Amendments). The Amendments are an initiative of all CSA members and are intended to strike a fair balance among the interests of bidders, target boards of directors and security holders of target companies. The Amendments will come into force on May 9, 2016, except in Ontario where they will come into force on the later of May 9, 2016, and the date the legislation to allow the Amendments is proclaimed.
While the Amendments do not recognize a target board’s right to “just say no” to and block a hostile bid, they will effectively provide boards of target companies faced with a hostile bid with additional time to respond to the bid and enable shareholders to make “voluntary, informed and coordinated” decisions as to whether to tender their securities to the bid.
The Amendments require that all “non-exempt” take-over bids:
- have a mandatory tender condition that a minimum of more than 50% of all outstanding securities of the class subject to the bid (excluding those beneficially owned or over which control or direction is exercised by the bidder and its joint actors), be tendered and not withdrawn before the bidder can take up any securities under the bid (the New Mandatory Minimum Tender Condition);
- be extended by the bidder for at least 10 days once the New Mandatory Minimum Tender Condition has been satisfied and all other terms and conditions of the bid have been complied with or waived (the New Mandatory 10-day Extension Period); and
- remain open for a minimum deposit period of 105 days (shortened from 120 days as provided in the March 2015 proposals). A target company will be allowed to reduce the deposit period to not less than 35 days in certain circumstances and subject to certain conditions.
New mandatory minimum tender condition
The purpose of the New Mandatory Minimum Tender Condition for all bids, including partial bids, is to prevent a situation (possible under current rules) whereby a bidder can acquire control of, or a controlling interest in, a target company without support for the transaction by independent security holders owning a majority of the securities that are the subject of the bid.
The New Mandatory Minimum Tender Condition allows for a collective response by security holders and mitigates the perceived pressure on security holders to tender to a bid out of concern they will be left holding securities of a controlled corporation with reduced liquidity. Currently there is no mandated requirement for a bidder to include a minimum tender condition in a bid. While, as a practical matter, bidders often include such a condition in a bid, the bidder can establish its own minimum threshold and reserves the right to waive the condition. The Amendments do not preclude a bidder from establishing a higher minimum tender condition or waiving such higher minimum tender condition (but only to the level of the New Mandatory Minimum Tender Condition).
New Mandatory 10-day Extension of Bid
The New Mandatory 10-day Extension Period (of at least 10 days or, in the case of a partial bid, 10 days) has been introduced to allow target security holders additional time to tender once they are aware a majority of securities held by independent security holders have tendered to the bid. The New Mandatory 10-day Extension Period commences on the expiry of the period that securities may be deposited under the bid, including any extension of the bid necessary to meet the New Mandatory Minimum Tender Condition or to satisfy any other condition of the bid (the Initial Deposit Period).
Like the New Mandatory Minimum Tender Condition, this mandatory extension is intended to reduce the perceived pressure on a security holder to tender prior to knowing the collective security holder response to the offer. Where the period of extension has been set at more than 10 days, the offeror will be required to take up securities deposited during the 10-day period.
105-day period for bid to remain open
The new 105-day period for a bid to remain open is intended to provide target boards with additional time to consider and respond to an unsolicited bid (including the possibility of seeking alternatives to the bid). The 105-day requirement may be reduced at the discretion of the target board to an Initial Deposit Period of not less than 35 days by issuing a press release.
When the Amendments were originally published for comment in March 2015, the period proposed for bids to remain open was 120 days. This attracted some public criticism that 120 days was too long a period necessary for the target board to seek out a competitive transaction. Further, there was concern expressed about the potential of the proposed 120-day deposit period on the ability of an offeror to exercise the compulsory acquisition rights provided under applicable Canadian corporations law, which provides for an expedited procedure for acquiring the shares of non-tendering shareholders within 120 days of the date of the bid where a bid has achieved 90% or greater acceptance. The new 105-day period addresses this concern and responds to the CSA’s policy objective that target boards have adequate time to consider and respond to a bid.
The new 105-day requirement is not intended to result in discriminatory treatment among competing offers. If the target’s board reduces the 105-day deposit period for one bid, all other bidders at the date of the press release and subsequent bidders who commence bids prior to the expiry of the bid that was the subject of the shortened deposit period would be entitled to avail themselves of the shorter period.
To provide a level playing field, the Amendments contain provisions that prevent a bidder from being disadvantaged against another potential acquiror on the basis of the structure of the transaction. Therefore, if the target board announces an alternative transaction, such as a plan of arrangement or another change-of-control transaction, then any outstanding or subsequent bid commenced before the completion or abandonment of the transaction need only be open for an Initial Deposit Period of 35 days (subject to the New Mandatory 10-day Extension Period). In the CSA’s view, a target board that has agreed to an alternative transaction does not need additional time to consider a competing bid.
Variation of the bid
A bidder who wishes to vary its bid must send a notice to all security holders and the deposit period for securities must not expire before 10 days after the date of the notice of the variation. The Amendments also provide that where the target board has permitted a reduction to the 105-day minimum bid period as described above and the bidder wishes to take advantage of the shortened period, the reduction in the bid period will constitute a variation of the bid and the deposit period may not expire before 10 days after the date of the bidder’s required notice of variation.
The Amendments expressly prohibit variations of the terms of a bid after the bidder becomes obligated to take up securities. A bidder must immediately take up securities if, at the end of the Initial Deposit Period, the New Mandatory Minimum Tender Condition is satisfied and all other terms and conditions of the bid are satisfied or waived. There are exceptions to this requirement where there is a variation to (i) extend the time for deposit of securities under the bid; or (ii) increase the consideration offered for securities subject to the bid. Withdrawal rights would not apply in the case of an increase in consideration or an extension of no more than 10 days after the date of the notice of variation.
A number of the Amendments relate to partial bids. In response to concerns that the proposals introduced additional complexity to comply with the pro rata take-up provisions applicable to partial bids, the CSA has provided illustrative examples of how these provisions would apply to different partial bid scenarios. As stated above, the New Mandatory Minimum Tender Condition will apply to such bids. As is currently the case, bidders must take up securities tendered in a partial bid on a pro rata basis.
Upon the expiry of the Initial Deposit Period, assuming the bid conditions are met, the bidder will only be required to take up the maximum number of securities it can without contravening the pro rata requirements.
The New Mandatory 10-day Extension Period for partial bids may not exceed 10 days. Upon expiry of the New Mandatory 10-day Extension Period, the bidder will complete the pro rata take up for securities deposited but not taken up and those deposited during the New Mandatory 10-day Extension Period. Holders whose securities are deposited before the expiry of the Initial Deposit Period but not taken up will not have the right to withdraw their securities during the New Mandatory 10-day Extension Period. Partial bids cannot be extended beyond the expiry of the extension period.
While the CSA did not amend National Policy 62-202 Defensive Tactics, the CSA has indicated it is prepared to examine a target board’s actions to determine if they are abusive of security holder’s rights.
It is clear that the Amendments are by far the most important Canadian development in the regulation of take-over bids in recent years and will require target companies, prospective bidders and their respective boards, management and advisors to re-evaluate their strategies in dealing with bids. While there are a number of questions and issues raised by the Amendments, those that boards and management are likely to find pressing include:
- Under what circumstances should a target board consider shortening the 105-day bid period?
- Since target boards will have the ability to shorten the Initial Deposit Period to not less than 35 days, under what circumstances should a target board select a period greater than 35 but less than 105 days?
- Will the Amendments give rise to more proxy battles as an alternative to launching a bid?
- What ability will a hostile bidder have to influence the abridgement of the 105-day period to avoid uncertainty during the longer deposit period: for example, would the Amendments result in higher quality offers being made?
- The Amendments address some of the concerns that shareholders rights plans (poison pills) are designed for by providing directors with more time to consider a bid and relieving pressure on shareholders to tender to a bid. In what circumstances will shareholder rights plans continue to be adopted and what will they look like? As the target will have 105 days to consider alternatives to a bid, are there situations where a longer period would still be justified? There is nothing in the Amendments to protect a target against creeping bids as a rights plan prepared to conform to institutional guidelines is designed to do. Can shareholder rights plans continue to serve an important purpose in respect of creeping acquisitions or activist activities (those done through purchases exempt from the take-over bid rules or “voting pills”)?
- What approach will securities regulators take with respect to shareholder rights plan hearings?
- Cross-listed issuers to which the U.S. tender rules apply will need to comply with the higher or more onerous conditions and will result in bidders having to “comply up” with the Amendments.
In order to ensure that competing bids and transactions are subject to the same set of rules the Amendments provide transitional arrangements. The current rules will apply to (a) all bids commenced before May 9, 2016; (b) a take-over bid for the securities of an issuer that is already subject to a take-over bid referred to in (a) above and the bid commenced before or subsequent to May 9, 2016, and prior to the expiry date of the original bid referred to in (a); and (c) a take-over bid for the securities of an issuer that announces prior to May 9, 2016 that it intends to effect an alternative transaction, if the bid is commenced on or subsequent to May 9, 2016, and prior to the completion or abandonment of the alternative transaction.
The Amendments can be accessed here.