As a result of ongoing consolidations in a number of industries where issuers are selling off assets or as a result of successful operations, some issuers are facing the challenge of having excess cash sitting on their balance sheets with no reasonably priced alternatives for deployment. In those circumstances, an issuer might consider a normal course issuer bid or, where there is sufficient cash to be distributed, a substantial issuer bid.

Gowling WLG Focus

A substantial issuer bid (SIB) is a fair and efficient mechanism for issuers to distribute excess cash to securityholders. A SIB allows issuers to purchase outstanding securities for cancellation in amounts above the levels otherwise permitted under the normal course issuer bid rules.

Board Approval and Other Matters

Once an issuer has determined that it may want to make a SIB, management must obtain authorization and approval from the board of directors.

The approval process should include documentation explaining the purpose of the SIB and confirmation that the board has determined that the repurchase program is in the best interest of the issuer.  At this time, the board should also consider any applicable solvency tests, restrictions contained under its governing statute, any additional regulatory approvals or capital requirements and any restrictive covenants contained in its debt facilities.

Why a SIB?

The following are characteristics of a SIB:

  • Each securityholder in the class has the opportunity to participate in the SIB, and is free to accept or reject the SIB.
  • The SIB is not subject to volume and other restrictions applicable to normal course issuer bids and, as such, provides a liquidity event for securityholders by allowing them to realize on all or part of their investment at a price that is typically at a premium to the recent trading price.
  • The SIB provides securityholders who are considering disposal of their holdings an opportunity to sell without the usual transaction costs.
  • Where an issuer believes the market has undervalued its ongoing business, the SIB represents an opportunity to take out the discount.
  • Securityholders who do not tender to the SIB will increase their proportionate interest in the issuer following completion of the SIB.
  • The purchase and cancellation of securities under the SIB will positively impact an issuer's earnings and cash flow calculated on a per security basis.
  • The SIB will not typically result in a market that is materially less liquid than the market that existed at the time of making the SIB.
  • After completing the SIB, the issuer will continue to have sufficient financial resources to carry on its business and operations (including the pursuit, as applicable, of growth and other foreseeable opportunities).

Securities Law Requirements

A SIB must comply with the rules relating to issuer bids1, including:

  • The SIB must be made to all holders of the class of securities subject to the bid.
  • Identical consideration must be offered to all holders of the securities subject to the bid.
  • The SIB must be open for at least 35 days from the date of the bid.
  • Securityholders may withdraw securities deposited under the bid at any time before the securities have been taken up and in certain other prescribed circumstances.
  • An issuer bid circular must be prepared in accordance with the prescribed form and mailed to all securityholders subject to the bid.  To the extent that there are securities outstanding that are convertible into the class of securities subject to the bid, holders of convertible securities must also receive a copy of the circular.

If more securities are tendered to a SIB than the issuer is willing to buy, it must generally purchase the securities on a pro rata basis from all securityholders that tendered during the offer period. There are exceptions to facilitate Dutch Auction SIBs (discussed below) and purchases of securities prior to any proration from securityholders who hold less than a standard trading unit.

Rules relating to the protection of minority securityholders2 may require an issuer making a SIB to obtain a formal valuation of the securities that are subject to the SIB. However, most SIBs will be exempt from that requirement in circumstances where:

  • a liquid market exists; and
  • it is reasonable to conclude that following completion of the SIB, there will remain a market for non-tendering securityholders that is not materially less liquid than the market that existed at the time of the making of the SIB.

It is customary for an issuer making a SIB to obtain a liquidity opinion from an investment bank or other financial advisor to support its reliance on this exemption.

In addition to the rules that apply to all issuers, listed issuers will also need to comply with any specific rules that may apply based on the exchange that they are listed on.

Pricing Mechanics

The offer price for a SIB may be fixed by the issuer or determined by a Dutch Auction process.

Under a Dutch Auction process, an issuer specifies the maximum aggregate purchase price that it will pay for securities under the terms of the SIB and establishes a range of prices at which it will purchase the securities. Each securityholder can choose the number of securities it wishes to tender and the lowest price, within the range, at which it is willing to sell.  Based on the choices made by tendering securityholders, the issuer determines the lowest clearing price within the established range that will result in it paying the maximum aggregate purchase price under the terms of the SIB. All securities tendered at or below the clearing price are purchased at the clearing price. Those securities tendered at prices above the clearing price are returned to securityholders. If a tendering securityholder does not wish to choose a selling price, the securityholder is generally entitled under a Dutch Auction to make a purchase price tender election, which results in the securities tendered by that securityholder being purchased at the clearing price. The purchase price tender election allows a securityholder to maximize the chance that its securities will be purchased. A securityholder participating in the Dutch Auction process is typically permitted to make multiple auction tenders, but cannot tender the same securities at different prices. In addition, securityholders who make an auction tender may not make a proportionate tender.

Instead of a purchase price tender, securityholders may be provided with the opportunity of making a proportionate tender, which allows securityholders to sell some of their securities at the clearing price while maintaining their proportionate ownership following completion of the SIB. The proportionate tender is typically used in circumstances where an issuer has one or more controlling securityholders who wish to participate in the SIB but also wish to maintain their ownership percentage following completion of the SIB.

By allowing the ultimate purchase price to be determined within a range by tendering securityholders, Dutch Auction SIBs help to avoid potential overvaluation and undervaluation problems that may arise when establishing a fixed price.

[1] National Instrument 62-104 – Take-Over Bids and Issuer Bids.

[2] Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions.