This is the final article in our mini-tender trilogy. We have previously discussed mini-tender offers from the perspectives of the offeror, and the issuer and shareholders. This article considers how mini-tenders might be strategically used in proxy contests.
As shareholder activism rises, the activists’ toolkit keeps evolving. The strategic use of a mini-tender offer in a recent proxy contest suggests that such offers may increasingly be considered as a means of influencing the outcome of proxy contests.
After taking a break this past proxy season, “golden leash” arrangements are back in the spotlight. A few days ago, Third Point LLC proposed so-called “golden leash” arrangements for their two nominees to the board of Dow Chemical Co.
“Golden leash” arrangements arise when a shareholder activist privately offers to compensate its nominee directors in connection with such nominees’ service as a director of the target corporation. Arrangements vary but include compensating activist directors who are elected based on achieving benchmarks, such as an increase in share price over a fixed term. Shareholder activists only provide such incentives to elected activist directors, not re-elected incumbent directors. See our prior articles for more background, ISS’s position, and the Council of Institutional Investors’ position.
The following Canadian Appeals Monitor blog post by Brandon Kain and Neil Finkelstein may be of interest to readers of this blog:
SCC Delivers Ground-Breaking Decision in Canadian Contract Law
The Supreme Court of Canada has released a precedent-setting judgment in which it recognized, for the first time, that there is a general organizing principle of good faith in the performance of contracts throughout Canada: Bhasin v. Hrynew, 2014 SCC 71. The Bhasin case, which was successfully argued by Neil Finkelstein and Brandon Kain of McCarthy Tétrault’s Toronto litigation group, will be very important for Canadian businesses going forward. As a result of Bhasin, all contracts throughout Canada are now subject to a duty of, at a bare minimum, honest performance, which cannot be excluded by the terms of an agreement. Read More.
In our previous article, we introduced mini-tenders and discussed the factors that should be considered before launching a mini-tender offer. As a refresher, a mini-tender is an offer to purchase securities below the threshold that triggers regulatory rules for take-over bids. Such an offer is not specifically regulated and can be used to acquire small but not insignificant positions in public companies, often at a discount to the prevailing market price.
In this article, we discuss mini-tenders from the perspective of issuers and shareholders.
Mini-tenders have a bad reputation, which may explain why they are used infrequently. This is the first in a trilogy of articles about mini-tender offers from the perspectives of offerors, issuers and shareholders. It reviews factors that an offeror should consider before launching a mini-tender offer.
A mini-tender is simply an offer to purchase securities below the threshold that triggers regulatory rules for take-over bids. Such an offer is not specifically regulated and can be used to acquire small but not insignificant positions in public companies, often at a discount to the prevailing market price.
On October 10, 2014, the Canadian Securities Administrators (CSA) provided an update on the status of proposed amendments to Canada’s early warning reporting (EWR) system first published in March 2013. After extensive public consultation, the CSA announced that they will proceed with the amendments except for two important proposals: to reduce the reporting threshold from 10% to 5% and to include “equity equivalent derivatives” for the purposes of determining the threshold for EWR disclosure. The CSA intends to publish final amendments to the EWR system and related guidance in the second quarter of 2015, subject to the receipt of necessary approvals.
The CSA’s decision to abandon its original proposals regarding the beneficial ownership reporting threshold and equity equivalent derivatives appears to be based on concerns raised by some commentators including the large number of smaller issuers in Canada relative to other jurisdictions and the limited liquidity of those issuers and the Canadian capital markets; the possibility that those proposals would hinder an investor’s ability to rapidly accumulate or reduce a large position and the signalling of investment strategies to the market; and the complexity and difficulty of applying a new early warning trigger in respect of equity equivalent derivatives.
Shareholder activists are increasingly influential in Canada’s M&A landscape, but expect that trend to intensify with a proposal to list Pershing Square Holdings on the Euronext Amsterdam stock exchange. The listing is expected to complete Bill Ackman’s capitalization of the new $5 billion fund associated with Pershing Square Capital Management. The listing, which is likely to be complete by mid-October, will provide Mr. Ackman with the stable pool of capital he has long believed his investment strategy would benefit from.
In his 2014 Q2 letter to investors, Mr. Ackman expressed frustration that the Pershing Square group of funds must keep a substantial portion of its assets in cash. Shareholder activism requires taking a position in a company for at least long enough to exert pressure on management and see the results reflected in the company’s share price – a proposition sometimes measured in years. Operating without a strong capital reserve can ruin an overextended fund if too many investors request their money back at the wrong time, as nearly happened during the financial crisis when investors withdrew 27% of their assets from Pershing Square.
The text of the Canada and European Union (EU) Comprehensive Economic and Trade Agreement (CETA) is due to be released soon, but it remains to be seen if the Canadian government will clarify which countries, in addition to those in the EU, will benefit from the higher $1.5-billion threshold for review under the Investment Canada Act (ICA).
On October 29, 2013, the Canadian government released the Technical Summary of Final Negotiated Outcomes of CETA, in which it indicated that the ICA threshold would be raised to $1.5 billion for EU investors and that investors from Canada’s other free trade agreement (FTA) partners would also benefit as a result of the most-favoured nation (MFN) commitments in those FTAs. Investors from other countries would continue to be subject to the lower threshold (which itself is expected to be increased to $1 billion by 2016 as per previously announced proposed amendments).
There is no denying the increasing popularity and notoriety of the virtual currency Bitcoin. Bitcoin market capitalization currently stands in the billions of dollars, with over 13 million Bitcoins having been mined and made available for circulation. An increasing number of merchants, including Dell, have begun accepting payment by way of Bitcoin. The list of goods and services that have been purchased with Bitcoin now includes university tuition, airline tickets, cars, and pizza delivery. Some companies have started paying employees in Bitcoins. Canada in particular has been a world leader in Bitcoin ATM’s: the first Bitcoin ATM in the world was installed in Vancouver and a number of Bitcoin ATMs have now been installed in other Canadian cities. Canada also stands second, behind the US, in global rankings in the amount of venture capital invested in Bitcoin companies according to a recent study by the Montreal Economic Institute. Will funding M&A transactions by way of Bitcoins in Canada be next?
There is already some precedent outside Canada of purchasers using Bitcoin to fund M&A transactions, although to date, the transactions look to have been limited to those involving players in the Bitcoin space. The acquisition of Bitcoin gambling service SatoshiDice in July 2013 was funded by way of 126,315 Bitcoins (valued at approximately US$11.5 million at the time of the acquisition). Blockchain.info’s purchase in December 2013 of ZeroBlock, a bitcoin mobile app publisher, for an undisclosed amount was also funded entirely by way of Bitcoin.
On September 11, 2014, the Canadian Securities Administrators (CSA) published CSA Notice 62-306 – Update on Proposed National Instrument 62-105 Security Holder Rights Plans (Notice) and the Autorité des marchés financiers (AMF) Consultation Paper An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics. The notice indicates that the CSA intend to publish for comment a new harmonized proposal based on amendments to the takeover bid regime which will aim to facilitate the ability of shareholders to make voluntary, informed and coordinated tender decisions and provide target boards with additional time to respond to hostile bids, with the objective of rebalancing the current dynamics between hostile bidders and target boards.
It appears that the new proposal will draw on elements of the earlier CSA and AMF proposals and can be seen as settling on a middle ground between the two (the earlier CSA and AMF proposals are discussed, respectively, in our publications Shareholder Rights Plans – The CSA Proposal and Defensive Tactics – The AMF Alternative Approach). The new proposal will retain a key premise of the earlier CSA proposal (and the current regime), namely that shareholders should ultimately have the opportunity to determine the outcome of an unsolicited takeover bid (and, as a corollary, that target boards do not have the ability to “just say no”).