Finalized amendments to the Canadian take-over bid rules mean that target boards and shareholders will have more time to respond to take-over bids. Among other things, take-over bids will now have to be open for at least 105 days (except in certain circumstances) and they will be subject to a minimum 50% tender requirement.
The amendments will provide target boards and shareholders with additional time and discretion when responding to take-over bids in Canada, rebalancing the dynamics between target boards, shareholders and bidders. The amendments are expected to come into force on May 9, 2016.1
Gowling WLG Focus
In recent years, Canada’s take-over bid regime has come under scrutiny for being “bidder-friendly”. One of the key critiques has been that the regime does not give target boards enough time to maximize shareholder value, including seeking other offers. The old rules, for example, require that non-exempt take-over bids must remain open for 35 days and non-exempt bids are not subject to any minimum tender requirements or an extension requirement once the bidder has taken up the deposited securities.
In our view, the amendments address these concerns and give target boards in Canada and their shareholders both the time to seek other alternatives and better visibility on the dynamics of the bid.
The Amendments – The Short Answer
Under the bid amendments, all non-exempt take-over bids must:
- meet a minimum tender requirement of more than 50% of the outstanding securities of the class that are subject to the bid;
- be extended for at least an additional 10 days after the minimum tender requirement is met; and
- remain open for a minimum deposite period of 105 days, unless:
- the target board states in a news release a shorter deposit period (not less than 35 days), in which case all concurrent bids must remain open for at least the stated shorter deposit period; or
- the target issues a news release that it intends to enter into a specified alternative transaction, in which case all concurrent bids must remain open for a deposit period of at least 35 days.
Despite these amendments, the CSA have not amended their policy on defensive tactics (NP 62-202). Securities regulators will still be prepared to examine the actions of target boards in specific cases, and in light of the amended bid regime, to determine whether those actions are abusive of security holder rights.
The Amendments – The Longer Answer
Minimum Tender Requirement – The Majority Rules
Under the amendments, bidders must receive tenders of more than 50% of the outstanding securities that are subject to the bid (excluding securities beneficially owned, or over which control or direction is exercised, by the bidder itself or by the bidder’s joint actors).
The introduction of this “majority standard” is intended to:
- address the fact that the regime has previously permitted a bidder to obtain control of a target without a majority of the independent shareholders supporting the transaction if the bidder elects to waive the minimum tender condition; and
- mitigate the “pressure to tender” to permit collective action by shareholders in a manner comparable to a vote on the bid.
Partial take-over bids are also subject to this 50% minimum tender requirement, although the bidder is only required to take up the number of securities in respect of which the partial bid is made.
Extension Requirement – No Shareholder Left Behind
Under the old take-over bid rules, the bidder is not required to extend the bid once it has taken up any securities under the bid. This means that shareholders have been making tender decisions without knowing what other shareholders will do. The CSA have previously indicated that they believe this creates additional pressure to tender since shareholders may tender to the bid, not because they support the bid but because they don’t want to get left behind.
The amendments require that the bid be extended for at least an additional 10 days after the minimum tender requirement is met and all other terms and conditions of the bid have been complied with or waived in order to permit shareholders to participate in a bid that it is clear will succeed.
If a bidder chooses to extend its bid after the expiry of the initial deposit period for a period of more than 10 days (as opposed to just 10 days), the bid rules still require that the bidder take up securities deposited during the extension period not later than 10 days after deposit of the securities.
In the case of a partial take-over bid, the mandatory 10 day extension period must not exceed 10 days, nor can a bidder extend its partial take-over bid after the expiry of the mandatory 10 day extension period.
Minimum Deposit Period – Go Long
Under the amendments, the minimum deposit period has been increased to 105 days from the old minimum 35 day deposit period, subject to two exceptions. Commentators have critiqued the 35 day period as too short a period for a board to seek alternatives. Even if a target has adopted a “poison pill” or shareholder rights plan, to prevent a bid from being completed after 35 days, securities regulators have typically cease-traded the rights plan between 45 and 60 days after the commencement of the bid. The CSA have previously indicated that they believe that increasing the minimum bid period from 35 days will permit target boards to respond to unsolicited take-over bids with appropriate action, such as seeking value-maximizing alternatives or developing and articulating their views on the merits of the bid. The CSA have also indicated that increasing the deposit period will give shareholders more time to make voluntary, informed and co-ordinated tender decisions.
The CSA’s earlier proposal required bids to remain open for a minimum deposit period of 120 days, but the CSA have adjusted this period to 105 days in light of the potential impact of the 120 day requirement on a bidder’s ability to conduct a compulsory acquisition under business corporation statutes in Canada. The CSA believe that the 105 day requirement will generally allow sufficient time for a bidder to conclude its bid and satisfy the subsequent 10 day extension requirement before the 120th day from the date of its bid, while taking into account holidays and the like.
There are two exceptions to the 105 day requirement:
- the target board can issue a news release shortening the time period (as long as it is not less than 35 days) to accommodate a shorter deposit period in cases where the target board believes a longer deposit period is not necessary, in which case all concurrent bids would be subject to the same shorter period; and
- if a target issues a news release that it intends to effect, pursuant to an agreement or otherwise, a specified alternative transaction, then all concurrent bids must remain open for a deposit period of at least 35 days.
The CSA have also clarified the definition of an “alternative transaction” and indicated that it is intended to encompass transactions agreed to or initiated by the target that could result in the acquisition of the target or the business of the target as an alternative to doing so by means of a take-over bid.
Transition to the New Regime
The old bid rules will continue to apply in respect of:
- every take-over bid commenced before May 9, 2016 (an original bid);
- every subsequent take-over bid for securities of a target subject to an original bid, that is commenced on or after May 9, 2016 but prior to the expiry date of the original bid; and
- any take-over bid for 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 subsequent to May 9, 2016 and prior to the date of completion or abandonment of the alternative transaction.
1The bid amendments will come into force across Canada on May 9, 2016, except in Ontario where they will come into force on the later of May 9, 2016 and the day on which the related provisions in the Ontario budget come into force.