On February 25, 2016, the Canadian Securities Administrators (CSA) published a CSA Notice of Amendments to Take-Over Bid Regime confirming the adoption of a harmonized take-over bid and issuer bid regime for all Canadian jurisdictions (New Bid Regime),1 effective May 9, 2016.2
On February 25, 2016, the CSA also published a CSA Notice of Amendments to Early Warning System, which confirms the adoption of changes to Canada’s early warning reporting (EWR) system. These changes to the EWR system are to come into effect at the same time as the New Bid Regime and will be reflected in amendments to NI 62-104 and National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues, and will be largely consistent with the update on changes to early warning rules released by the CSA on October 10, 2014. A separate article on these changes will follow.
The New Bid Regime is largely consistent with the CSA Notice and Request for Comment published by the CSA just shy of a year ago on March 31, 2015 (Prior Proposal), with one significant variation – rather than increasing the minimum bid period to 120 days as described in the Prior Proposal, the CSA has settled on a minimum bid period of 105 days. The driving factor behind changing the minimum bid period to 105 days (rather than 120 days) is the CSA’s desire to preserve the utility of the compulsory acquisition provisions available under Canadian corporate law statutes.
Summary of New Bid Regime
The New Bid Regime represents the culmination of lengthy efforts on the part of the CSA to modernize the rules governing Canadian take-over bids, and to rebalance the dynamics among Canadian targets, target boards, target shareholders and prospective bidders. The three key elements of the New Bid Regime are:
- the extension of the minimum bid period to 105 days;
- the irrevocable minimum tender condition of more than 50%; and
- the requirement to extend the bid period by at least 10 days once the minimum tender condition has been met and all other terms and conditions of the bid have been complied with or waived.
1. Extension of the Minimum Bid Period to 105 Days
All non-exempt take-over bids must remain open for a minimum of 105 days (rather than 35 days under the current regime), subject to a target board’s ability to reduce the bid period. The extension of the minimum bid period to 105 days is aimed at addressing concerns that target boards do not currently have enough time to respond to hostile take-over bids.
Under the New Bid Regime, a target board may reduce the bid period:
- by issuing a news release announcing a shorter bid period for a specific take-over bid (which cannot be less than 35 days), in which case all outstanding or subsequent take-over bids will also become subject to the shorter minimum bid period (a bidder can, of course, elect to keep its bid open for longer); or
- by issuing a news release indicating that it has agreed to enter into or determined to effect a specified alternative transaction (generally, a plan of arrangement or other change of control transaction requiring shareholder approval), in which case all outstanding or subsequent take-over bids must remain open for at least 35 days.
By settling on a minimum bid period of 105 days, successful bidders can continue to utilize the compulsory acquisition provisions available under the corporate law statutes in all Canadian jurisdictions. Those provisions provide an efficient mechanism for a successful bidder to squeeze-out minority shareholders and acquire 100% of a Canadian target, provided at least 90% of the target company shares are tendered to the bid within 120 days of the commencement of the bid. The 105 day minimum bid period (plus the 10 day mandatory extension period) leaves a bidder who wishes to complete a compulsory acquisition with five additional days in which to achieve the 90% threshold, should it fail to do so within the initial 115 days (i.e. 105 day bid period, plus 10 day mandatory extension period). Should the compulsory acquisition procedure be unavailable, a bidder who acquires more than two-thirds of a target company’s shares, would still be able to squeeze out the minority by effecting a second stage amalgamation squeeze out under Canadian corporate law.
2. Irrevocable Minimum Tender Condition
All non-exempt take-over bids must be subject to a mandatory tender condition that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered and not withdrawn before the bidder can take up any securities under the take-over bid. The purpose of this requirement is to ensure that the acquisition of control of a target through a take-over bid will occur only if a majority of independent shareholders support the transaction.
3. Mandatory 10 Day Bid Extension
All non-exempt take-over bids must be extended by the bidder for at least an additional 10 days after the bidder achieves the mandatory minimum tender condition and all other terms and conditions of the bid have been complied with or waived. This requirement is aimed at alleviating the concern that target shareholders will be coerced into tendering their shares before the initial expiry of the bid (for example to avoid the risk of being left behind as a minority shareholder of an issuer with a controlling shareholder).
Anticipated Implications of the New Bid Regime
The New Bid Regime gives rise to a number of important considerations for Canadian targets, target boards, target shareholders and prospective bidders, including considerations related to bid activity, the future use of shareholder rights plans and other defensive tactics, the ability to lock-up blockholders, the role and duties of target boards and proxy battle activity.
The existing take-over bid regime continues to govern:
- every take-over bid commenced before May 9, 2016 (a first bid);
- any take-over bid in respect of the securities of a target subject to a first bid (a subsequent bid) even if the subsequent bid is commenced on or after May 9, 2016, provided it is commenced prior to the date the first bid expires; and
- any take-over bid in respect of the securities of a target that issued a news release before May 9, 2016 announcing that it intends to effect an alternative transaction (whether pursuant to an agreement or otherwise) commenced on or after May 9, 2016 and prior to the alternative transaction being completed or abandoned.
As such, bidders who are contemplating a bid for a Canadian target, but prefer the existing regime with the short 35 day minimum bid period (often extended to 40-60 days by the operation of a rights plan), may, where possible, make the strategic decision to launch a bid prior to May 9, 2016.
Once the New Bid Regime is in place, the new 105 day minimum bid period will shift some of the balance of power from bidders to the target board, allowing the target board and its advisors more time to seek an alternative transaction or negotiate an enhancement to an unsolicited bid. In addition, the ability to reduce the minimum bid period (to as little as 35 days) rests in the hands of the target board and, as a result, hostile bidders face more deal uncertainty. These factors will increase the incentive for bidders to seek a negotiated transaction as opposed to launching an unsolicited bid.
Although partial bids are expressly permitted under the New Bid Regime, a partial bid will nevertheless be subject to the minimum tender condition, and therefore require the support of at least a majority of the shares held by a target’s independent shareholders; as such, we expect that partial bids, which are already very infrequent under the existing regime, will become even less common.
Future Use of Rights Plans and Other Defensive Tactics
Although the CSA has not explicitly banned rights plans, we anticipate that their use as a means of blocking a bid or extending time will be extremely limited under the New Bid Regime in light of the new longer statutory minimum bid period. However, we do expect that rights plans will remain a relevant tool for purposes of deterring creeping take-over bids. Under both the current and new regimes, any purchase in the market that takes a shareholder above 20% ownership of the target company requires the bidder to make a formal take-over bid to all the target’s shareholders on identical terms, subject to two key exceptions to the formal take-over bid rules. The first is the de minimis exemption that permits a shareholder to acquire shares in excess of the 20% threshold through purchases of up to 5% annually at market prices. The second is the private agreement exemption whereby a shareholder may acquire shares in excess of the 20% threshold by way of a private agreement with no more than five sellers, subject to a price limit of 115% of the market price of the shares. Many Canadian public companies have rights plans not only because they want more time to respond to an unsolicited bid, but also to prohibit the use of these two exemptions to acquire control of the company without offering an appropriate premium to all shareholders. Such companies do not want any one shareholder or group of shareholders to acquire negative control by assembling a significant block (e.g. 25% or 30%) of the outstanding shares, which significant block could:
- prevent a bidder from acquiring two-thirds of the outstanding equity of a public company (which would prevent the bidder from squeezing out the remaining one-third at the same price paid in the take-over bid), thus deterring a bid that the target board and other shareholders would find desirable; or
- as a result of the minimum tender condition under the New Bid Regime, block a take-over bid entirely.
Notwithstanding its overhaul of the existing regime through the adoption of the New Bid Regime, the CSA has left its policy on defensive tactics (National Policy 62-202 – Take-Over Bids – Defensive Tactics (NP 62-202)) intact; however, in its notice published on February 26, 2016, the CSA took the opportunity to remind the market of its continued jurisdiction to examine the actions of target boards in specific cases, and in light of the New Bid Regime, to determine whether they are abusive of shareholder rights. While there is debate about whether securities regulators or the courts are best suited to review the conduct of boards in the context of take-over bids, we do not anticipate a revisiting of NP 62-202 in the near future, and certainly not until after the effects of the New Bid Regime are well understood.
Ability to Lock-Up Blockholders
The minimum tender requirement will also make it more difficult to use a take-over bid as a basis for acquiring one or more blocks constituting less than 50% of the shares of a target under a hard lock-up arrangement. Currently, a bidder can guarantee a locked-up shareholder that its shares will be purchased by the bidder even if the bid is not accepted by a majority of the shareholders. This will not be the case under the New Bid Regime.3
The Role and Duties of Target Boards
By extending the minimum bid period beyond the current 35 day period, the New Bid Regime will provide target boards significantly more time to evaluate a take-over bid, communicate with shareholders, seek to generate an enhancement to the take-over bid and attract alternative offers prior to securities being taken up under the bid. The New Bid Regime will not, however, change the responsibilities of a target board to exercise the duty of care and act in good faith and in the best interests of the corporation. While a target board will be assured of a longer period of time to take required action in the best interests of the corporation, the current position of the CSA will continue to limit defensive tactics that would defeat a bid and deny shareholders the opportunity to tender.
It will be interesting to see how willing target boards will be to waive the 105 day minimum bid period at the risk of being criticized for not having taken full advantage of the extended period of time to find value-enhancing alternatives or even simply to allow more time for unsolicited proposals to emerge subject to typical deal protection features. Certainly, the minimum tender period will be one of the negotiated deal protection points in friendly transactions.
Proxy Battle Activity
It can be expected that, in some hostile situations, the bidder may requisition a meeting of the target’s shareholders prior to the expiry of the 105 day bid period to force the board to deal with the tabled hostile bid and waive the 105 day period or face replacement on the target’s board; however, given the significant latitude that Canadian courts have given boards with respect to the timing of requisitioned meetings, it will be difficult to get a meeting called quickly enough to materially shorten the 105 day period.
1 The New Bid Regime is codified in National Instrument 62-104 – Take-Over Bids and Issuer Bids (NI 62-104) and the related National Policy 62-203 – Take-Over Bids and Issuer Bids (NP 62-203). Previously the take-over bid and issuer bid regime in Ontario was codified in Part XX of the Securities Act (Ontario) and OSC Rule 62-504 – Take-Over Bids and Issuer Bids, and in the rest of the Canadian jurisdictions, in Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids (MI 62-104). With the new harmonized bid regime, Ontario will adopt MI 62-104, making it a National Instrument.
2 In Ontario, the New Bid Regime will come into force on the later of May 9, 2016 and the day on which certain sections of Schedule 18 of the Budget Measures Act, 2015 (Ontario) are proclaimed into force.
3 Bidders will, however, continue to be able to accumulate significant positions in reliance on exemptions from the formal take-over bid rules, subject to the discussion regarding rights plans, above.