On February 25, 2016 the Canadian Securities Administrators announced changes to the take-over bid regime, to take effect on May 9, 2016. The amendments are intended to re-balance the current dynamic among bidders, target boards and target shareholders, which is thought by many to favour unduly the interests of acquirers. The biggest news is the extension of the current 35-day minimum bid period to 105 days for hostile bids.
Changes to recast the Canadian take-over bid rules in a more target-friendly mould have been under discussion for three years, culminating in the publication of draft rules for comment in early 2015. After considerable back and forth with industry participants, the regulators have settled on amendments that:
- lengthen the minimum bid period to 105 days;
- give the target board discretion to reduce the minimum bid period to as few as 35 days;
- impose a minimum tender condition of 50%, meaning that at least 50% of the outstanding shares, other than those held by the bidder and its joint actors, must be tendered to the bid; and
- require the bidder, once the bid conditions are met, to announce that that is the case and extend the deposit period for another 10 days.
The new rules are intended to give a target board more time to seek value-maximizing alternatives to an unsolicited bid, and to avoid the situation where shareholders must decide whether to tender without knowing what other shareholders will do. Under the existing rules, a shareholder may feel pressured to tender to a less than optimal bid or risk being left with a rump shareholding in an illiquid stock. The amended rules introduce a majority acceptance standard and allow shareholders to make better-informed decisions.
The minimum bid period of 105 days, rather than the 120 days proposed last year, avoids a conflict with the compulsory acquisition provisions in various Canadian corporate statutes, which allow a bidder to squeeze out minority shareholders if it has acquired at least 90% of the target company’s shares not already owned by it within 120 days of the date of the bid.
Other than the length of the bid period, the final rules are largely unchanged from those released in March 2015.
Over the past many years, target boards have adopted shareholder rights plans or “poison pills” in an effort to level the playing field with hostile bidders. Most Canadian rights plans contain a “permitted bid” provision that allows an unsolicited bid to proceed without triggering the rights plan’s dilutive effect if the bid is open for at least 60 days, contains a 50% minimum tender condition and provides for a 10-day extension once the minimum tender condition is met.
While the new rules codify the “permitted bid” concept, we anticipate that target companies will continue to adopt poison pills to prevent bidders from acquiring control through creeping acquisitions and private purchases that are exempt from the formal bid requirements. It’s also conceivable that a rights plan could buy a target board more than the 105 days enshrined in the new rules, although it seems unlikely that the regulators will readily permit that result.
Overall, we anticipate that the new rules will encourage would-be acquirers to negotiate with target boards in an effort to have the minimum deposit period reduced to 35 days, and so to reduce the risk that an interloper will thwart the bid. Whether that has a dampening effect on Canadian public M&A activity remains to be seen.
For further information, please contact any member of our Corporate Finance and Securities Group.
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