Authors: Jeremy Fraiberg and Alex Gorka
Acquisition structures
While several different methods exist to acquire control of a Canadian public company, public company M&A transactions in Canada are most commonly effected by a “plan of arrangement” and less frequently by a “take-over bid.” These transaction structures are outlined below.
Plan of arrangement
Overview
A statutory arrangement, commonly referred to as a “plan of arrangement,” is a voting transaction governed by the corporate laws of the target company’s jurisdiction of incorporation. It is first negotiated with the target company’s board of directors and remains subject to the approval of the target company’s shareholders at a special meeting held to vote on the proposed transaction. Notably, an arrangement also requires court approval. Due to the ability to effect the acquisition of all of the outstanding securities of a target in a single step and its substantial structuring flexibility, the majority of board-supported transactions are structured as arrangements.
Due to the ability to effect the acquisition of all of the outstanding securities of a target in a single step and its substantial structuring flexibility, the majority of board-supported transactions are structured as arrangements.
Court supervision and approval
Unlike any other transaction structure typically used to effect a change of corporate control, an arrangement is a court-supervised process.
The target company applies to court to begin the process of effecting the arrangement. An initial appearance will be made before the court for an interim order setting the procedural ground rules for the arrangement, which is almost always uncontested. The interim order will specify, among other things: (i) the manner in which a special meeting of the shareholders will be called and held (e.g., form of proxy solicitation materials and disclosure documents to be sent to security holders, record date for establishing security holders entitled to vote on the transaction, applicable notice periods, time and place of meeting); (ii) the persons entitled to vote at the meeting; (iii) whether any class of persons will be entitled to a separate class vote; and (iv) the requisite approval thresholds required to approve the arrangement.
Once the meeting of the target company shareholders is held and the arrangement resolution has been approved by the requisite majorities of security holders, the target company seeks a final court order approving the arrangement. The final order will be granted if the court is satisfied that the arrangement is “fair and reasonable.” While disaffected stakeholders can appear at the final order hearing to challenge the arrangement, the vast majority of arrangements are approved without opposition.
Shareholder approval
Although the shareholder approval threshold for an arrangement is generally subject to the discretion of the court and addressed at the procedural hearing when the interim order is sought and obtained, an acquiror will typically propose that it seek the same approval threshold as would be required under the applicable corporate law statute governing the target company if the arrangement steps were effected outside the arrangement process. In most Canadian jurisdictions this threshold is 66⅔% of the votes cast at the meeting of the target company’s shareholders. The approval of a majority of the minority shares voted at the meeting may also be required in circumstances where the transaction involves participation by a related party of the target company (see “Minority shareholder protections”). Depending on the jurisdiction of incorporation, option holders may be afforded the right to vote as part of the same class as common shareholders. Other convertible securities like warrants and convertible debentures are typically not given the right to vote in an arrangement, unless their rights under the applicable indentures or contracts are being altered as part of the arrangement in a manner that is not fair and reasonable.
Take-over bid
Overview
A take-over bid is a transaction by which the acquiror makes an offer directly to the target company’s shareholders to acquire their shares. Although the board of directors of the target company has a duty to consider the offer and an obligation to make a recommendation to its shareholders as to the adequacy of the offer, the take-over bid is ultimately accepted (or rejected) by the shareholders. As the support of the target board of directors is not legally required, a take-over bid is the only practical means to effect an unsolicited or hostile acquisition. Take-over bids are also used infrequently for friendly transactions. A take-over bid is the substantive equivalent of a tender offer under U.S. securities laws.
Legislation and governing principles
Take-over bids are regulated under a uniform regime adopted by each province and territory.
A take-over bid must be made to all registered holders of the class of voting or equity securities being purchased (and sent to all registered holders of securities convertible into or exercisable for such voting or equity securities), but need not be made for all shares of that class, such that “partial bids” are permitted. The same price per security must be offered to each holder of the class of securities subject to the bid.
There are also minimum standards relating to the conduct of the bid, including disclosure requirements, the timing and delivery of take-over bid materials, and rules designed to ensure the equal treatment of all security holders.
A formal take-over bid is made pursuant to a disclosure document commonly referred to as a take-over bid circular. This document must contain prescribed information about the offer, the offeror and the target company. When the offered consideration consists (in whole or in part) of securities of the offeror, the circular must also include prospectus-level disclosure about the offeror. It is generally not necessary to pre-clear the contents of a take-over bid circular with the securities regulators in Canada and the take-over bid circular is not generally subject to their review once it is filed, absent a complaint being made.
When does a take-over bid occur?
Determining whether a take-over bid exists is based on objective factors and, in particular, on the percentage of voting or equity securities beneficially owned or controlled by the offeror (and any joint actors) plus the number of additional securities subject to the take-over bid. The take-over bid threshold is 20% of any class of voting or equity securities. In determining whether the threshold level of ownership by the offeror will be crossed, the number of securities beneficially owned by the offeror includes securities that the offeror has a right or obligation to acquire within 60 days (e.g., through options, warrants or convertible securities) and securities held by affiliated entities and joint actors. In order to attract the jurisdiction of Canadian take-over bid rules, the offer must be made to a person who is either in Canada or is registered in the books of the target company with a Canadian address.
Equal treatment of shareholders
A cornerstone objective of the take-over bid regime is the equal treatment of all security holders of a target company. To this end, the take-over bid rules: (i) require that all holders of the same class of securities of the target company be offered identical consideration; (ii) prohibit side deals or “collateral benefits” that would have the effect of providing certain holders with consideration of greater value than other holders (subject to certain exceptions for employment compensation arrangements); and (iii) integrate securities purchases made in the 90-day period preceding the take-over bid by requiring the bidder to offer to purchase the same percentage of securities and offer the same amount and form of consideration (or the cash equivalent thereof) as was offered in any pre-bid purchases, other than normal course purchases on a published market.
The take-over bid threshold is 20% of any class of voting or equity securities. In determining whether the threshold level of ownership by the offeror will be crossed, the number of securities beneficially owned by the offeror includes securities that the offeror has a right or obligation to acquire within 60 days (e.g., through options, warrants or convertible securities) and securities held by affiliated entities and joint actors.
Timing and delivery requirements
Take-over bids may be commenced by publishing an advertisement in at least one major daily newspaper in each province (including an advertisement in French in the Province of Québec in circumstances where the target company has shareholders in Québec) provided that the offeror files the bid circular with securities regulators and delivers it to the target company on or before the date of the advertisement and requests a shareholders’ list from the target company. The take-over bid circular must be delivered to the target company’s registered shareholders within two business days of receipt by the offeror of the shareholders’ list.
The target company is, in turn, required to file with securities regulators and deliver to the target company’s registered shareholders a directors’ circular no later than 15 days after the date of the take-over bid. The directors’ circular must: (i) contain a recommendation that shareholders accept or reject the take-over bid; (ii) adopt a neutral position to the effect that the board is unable to make or is not making a recommendation and the reasons why the directors have remained neutral; or (iii) advise shareholders that the directors are considering whether to make a recommendation, provided that the directors ultimately make a recommendation or adopt a neutral position at least seven days before the expiry of the bid.
Take-over bids are required to remain open for a minimum of 105 days (the 105-day requirement), subject to two exceptions. First, the target issuer’s board of directors may issue a “deposit period news release” in respect of a proposed or commenced take-over bid providing for an initial bid period that is shorter than 105 days but not less than 35 days. If so, any other outstanding or subsequent take-over bids will also be entitled to the shorter minimum deposit period counted from the date that other take-over bid is made. Second, if an issuer issues a news release that it has entered into an “alternative transaction” — effectively a friendly change-of-control transaction that is not a take-over bid, such as an arrangement — then any other outstanding or subsequent take-over bids will be entitled to a minimum 35-day deposit period counted from the date that other take-over bid was or is made.
When all the terms and conditions of the take-over bid have been satisfied or waived at the expiry of the initial deposit period (which includes an extension of the deposit period prior to the mandatory 10-day extension requirement), the offeror must immediately take up all deposited securities and then pay for them as soon as possible and in any event not later than three business days after the taking up of the securities.
Shares deposited to a bid may be withdrawn at any time before they have been taken up by the offeror. Moreover, deposited shares that have not been taken up may be withdrawn at any time up to 10 days after the date of any notice of change or any notice of variation in the offer unless the variation consists solely of the waiver of a condition in an all-cash bid, or solely of an increase in consideration and the bid is not extended for more than 10 days.
Bid conditions
A take-over bid may be subject to the satisfaction or waiver of conditions, including conditions relating to regulatory approvals, material adverse changes, market interruptions and other contingencies. However, a take-over bid may not be conditional upon financing. Where the consideration offered pursuant to a take-over bid is cash or has a cash component, the offeror must make adequate arrangements prior to launching the bid to ensure that required funds are available to make full payment for the target company’s securities. Accordingly, it is customary for the offeror to obtain a binding commitment from a financing source prior to the launch of the take-over bid to the extent it does not have sufficient cash resources already available. The financing arrangements required to be put in place may themselves be subject to conditions if the offeror reasonably believes the possibility to be remote that, if the conditions of the take-over bid are satisfied or waived, the offeror will be unable to effect payment due to a condition to the financing not being satisfied. Accordingly, most offerors ensure that, at least substantively, the conditions of the take-over bid include any conditions to the financing. Alignment of the bid conditions and the drawdown conditions is designed to ensure that the offeror is not placed in the impossible position of being obligated to transact under its take-over bid (due to all conditions having been satisfied) but unable to draw down on financing commitments (due to certain conditions not having been satisfied).
Minimum tender condition
Take-over bids are subject to a mandatory, non-waivable minimum tender requirement of more than 50% of the outstanding securities of the class that are subject to the bid, excluding those beneficially owned, or over which control or direction is exercised, by the bidder and its joint actors (the minimum tender requirement). The offeror may also set a higher tender threshold where the offeror’s objective is to acquire all of the outstanding shares of the target company. In that event, there will also be a minimum tender condition, which is typically set at 66⅔% (75% in the case of some B.C. corporations) ownership by the offeror in order for the offeror to be certain that it will acquire sufficient shares to effect a second-stage, going-private transaction.
If an acquiror acquires more than 90% of the securities subject to the offer (which excludes shares held at the date of the take-over bid by the acquiror, its affiliates and associates), Canadian federal and provincial corporate legislation provide a procedure for the compulsory acquisition of the balance of the shares. No shareholder vote is required, although shareholders have the right to dissent and be paid the fair value of their shares.
When less than 90% but more than 66⅔% (or 75% in the case of some B.C. corporations) of the outstanding shares are acquired, the offeror can complete the acquisition of 100% of the target company by means of a subsequent going private transaction. This will require holding a special meeting of the shareholders of the target company to vote on the transaction. In this circumstance, the offeror can vote the shares that were acquired under the offer. Since the voting threshold under applicable corporate law for approval of a going private transaction (such as an arrangement or an amalgamation) is 66⅔% (or 75% in the case of some B.C. corporations) of the votes cast at the meeting of shareholders, the offeror can be assured that the transaction will be approved.
10-day extension requirement
Following the satisfaction of the minimum tender requirement and the satisfaction or waiver of all other terms and conditions, take-over bids are required to be extended for at least an additional 10-day period (the 10-day extension requirement).
The 10-day extension requirement is designed to eliminate coercion of shareholders to tender to the take-over bid, as they will be assured of an opportunity to tender after the take-over bid is already successful.
Partial take-over bids
Partial take-over bids are permitted. However, bids for “any and all shares” tendered or bids for “up to 100%” of the outstanding shares are not permitted as a result of the minimum tender requirement. Although partial bids for less than all of the outstanding shares of a target company are legally permissible, the minimum tender requirement makes it difficult for them to succeed. This is because the minimum tender requirement applies notwithstanding that a bid is being made for less than all of the shares. Accordingly, those shareholders that would be willing to sell to the partial bid may be prevented from doing so because other shareholders who hold more than 50% of the shares of the class choose not to tender to the bid.
Integration of market purchases
A take-over bid must be made for at least the same amount and form of consideration (or the cash equivalent) and for at least the same percentage as any purchases made by the offeror from any target company shareholder within the 90 days preceding the bid, unless those purchases were normal course purchases on a published market.
Once the take-over bid is announced, the offeror is generally prohibited from making any purchases other than through the take-over bid until the take-over bid expires. However, the offeror is permitted to purchase up to 5% of the class of securities subject to the bid (including securities convertible into that class) if, among other things: (i) the intention to make such purchases is disclosed in the take-over bid circular or in a news release issued at least one business day prior to making such purchases; (ii) the purchases are made in the normal course on a published market; and (iii) the offeror files a daily press release disclosing (among other things) the number of securities purchased and the price paid.
After the expiration of a take-over bid, the offeror is prohibited from making any further purchases for 20 business days except for normal course purchases on a published market.
Take-over protection for inferior-voting rights
Many Canadian companies have made use of multiple-voting, non-voting and restricted-voting securities in their financing and capital structures. Under the Toronto Stock Exchange rules, listed companies with such a share structure are generally required to provide take-over “protection” (known as “coat-tail” provisions) to holders of subordinate voting, non-voting or restricted-voting shares. The coat-tail provisions are included in the share capital provisions of the subordinate voting, non-voting or restricted voting shares or are included in a trust agreement between the target company, the holders of the superior voting shares and a trustee for the benefit of the holders of the subordinate voting, non-voting or restricted voting shares. Coat-tail provisions generally permit holders of subordinate voting, non-voting or restricted voting shares to participate on an equivalent basis as a holder of superior voting shares in the event a formal take-over bid is made for those superior voting shares without also being made to holders of subordinate voting shares.
Recent securities regulatory decisions have emphasized certainty of the take-over bid regime, with the result that rights plans have generally not been permitted to remain in effect to prevent acquisitions of shares made in compliance with the formal bid requirements, absent unusual circumstances.
Exempt take-over bids
There are a limited number of exemptions from the formal take-over bid requirements, which are set out below.
- Normal course purchases: There is an exemption from the formal take-over bid requirements that permits the holder of more than 20% of a class of equity or voting shares (or a person acting jointly or in concert with such a person) to purchase up to an additional 5% of the outstanding shares of that class in a 12-month period (when aggregated with all other purchases in that period, other than purchases pursuant to a formal bid). There must be a published market in the shares and the offeror may not pay more than the “market price” of the securities (the last price paid for a standard trading unit of the securities by a person that was not acting jointly or in concert with the offeror) plus reasonable brokerage fees or commissions actually paid.
- Private agreements: Private agreement purchases which result in the purchaser exceeding the take-over bid threshold are permitted in limited circumstances. The agreement must be made with not more than five sellers and the sellers may not receive more than 115% of the “market price” of the securities (generally the average closing price of the securities for the previous 20 trading days). Collateral agreements with selling security holders cannot be used to indirectly provide increased consideration.
- Non-reporting issuer: There is an exemption from the formal take-over bid requirements where (i) the target company is not a reporting issuer, (ii) there is no published market for the securities that are subject to the bid and (iii) the number of holders of the class of securities subject to the bid is not more than 50 (excluding employees and former employees). The non-reporting issuer exemption is frequently relied on for acquisitions of broadly held private companies.
- Foreign take-over bid: A take-over bid is exempt from the formal take-over bid requirements if less than 10% of the outstanding shares of the class are held by Canadian residents and the published market on which the greatest volume of trading in shares of the class occurred in the 12 months prior to the bid was not in Canada. Shareholders in Canada must be entitled to participate in the bid on terms at least as favourable as the terms that apply to the general body of shareholders and any bid materials that are sent to shareholders must be filed with Canadian provincial securities regulators and sent to Canadian resident shareholders at the same time. If the bid materials are not in English, a brief summary of the terms of the bid in English and, if there are Québec resident shareholders, in French, must be filed and sent to shareholders in Canada. If no bid materials are sent to shareholders but the offeror publishes a notice or advertisement in the jurisdiction in which the target company is incorporated or organized, an advertisement in English and, if there are shareholders in Québec, in French, must be published in at least one major daily newspaper in each province of Canada in which there are shareholders.
- Minimal shareholdings in Canada: The take-over bid rules include an exemption from the formal take-over bid requirements in a Canadian province if the number of beneficial holders resident in that jurisdiction is minimal. In order for this exemption to apply, there must be fewer than 50 beneficial holders in the jurisdiction holding less than 2% of the outstanding securities of that class. Shareholders in Canada must be entitled to participate in the bid on terms at least as favourable as the terms that apply to the general body of shareholders and any bid materials being sent to shareholders must be filed with Canadian provincial securities regulators and sent to Canadian resident shareholders at the same time.
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Learn moreShareholder rights plans
Shareholder rights plans or “poison pills” have been a common defensive tactic employed by boards of directors of target companies to prevent anyone from acquiring 20% or more of the target’s shares without board support. Under a shareholder rights plan, if an offeror acquires beneficial ownership of 20% of the target company’s shares, the rights plan is potentially triggered and the offeror may be subject to dilution by virtue of the fact that all shareholders, other than the offeror, may become entitled to exercise rights to acquire additional shares at a discount to the current market price.
Recent securities regulatory decisions have emphasized certainty of the take-over bid regime, with the result that rights plans have generally not been permitted to remain in effect to prevent acquisitions of shares made in compliance with the formal bid requirements, absent unusual circumstances.
There remains a role for rights plans in protecting target issuers against “creeping bids,” such as bids made through the normal course purchase and private agreement exemptions, and to prevent hard lock-up agreements. Issuers may also attempt to adopt tactical rights plans toward the end of the 105-day bid period if they conclude that additional time is needed to respond to a hostile bid (although as noted before, securities regulators are likely to quickly cease trade such rights plans, absent unusual circumstances).
U.S. considerations
If the take-over bid includes shareholders of the Canadian target residing in the U.S., the U.S. tender offer rules will apply unless an exemption is available. If the target class of shares is registered under the U.S. Securities Exchange Act of 1934 (for example, because the shares are listed on the New York Stock Exchange or NASDAQ Stock Market), then the U.S. Securities and Exchange Commission’s (SEC) substantive disclosure, procedural and filing requirements under Regulation 14D and Regulation 14E may require full dual compliance with the Canadian and U.S. regimes. If the target class of shares is not registered with the SEC, the basic anti-fraud procedural protections under the Regulation 14E may still apply, although those requirements largely correspond to the Canadian take-over bid requirements.
If U.S. share ownership of the Canadian target is 10% or less, an exemption from almost all of the U.S. tender offer rules will usually be available under the SEC’s Tier 1 exemption. If U.S. share ownership of the Canadian target is less than 40% and the bid complies with the Canadian rules, an exemption from the application of most of the U.S. tender offer rules, including all of Regulation 14D’s substantive disclosure and procedural requirements, will usually be available under the U.S.-Canada Multijurisdictional Disclosure System, or MJDS. While use of the MJDS exemption requires filing the Canadian bid documents with the SEC, the SEC generally will not review and comment on them. If U.S. ownership of the Canadian target’s shares is less than 40% but the other eligibility criteria for the MJDS exemption are not met, relief from some of the requirements of the U.S. tender offer rules is also usually available under the SEC’s Tier 2 exemption.
If share consideration is offered in a take-over bid for a Canadian target with shareholders residing in the U.S., the registration requirements of the U.S. Securities Act of 1933 will also apply unless an exemption is available. If both the bidder and the target are Canadian companies, MJDS may be available to quickly register the share consideration if, among other requirements, the bidder has been listed on a Canadian stock exchange for at least a one-year period and has a public float of at least US$75 million. To use the MJDS registration exemption, the bidder would file a registration statement with the SEC that primarily consists of the Canadian bid documents. Generally, MJDS registration statements are not reviewed and commented upon by the SEC. If U.S. ownership of the Canadian target’s shares is 10% or less, a separate non-MJDS registration exemption under the SEC’s Rule 802 may be available to the bidder. Use of the Rule 802 exemption would require the bidder to furnish the Canadian bid documents to the SEC, although the SEC would not review and comment on the Canadian bid documents.
Key advantages and disadvantages of arrangements and take-over bids
An arrangement is usually the preferred transaction structure for friendly transactions, due in part to the ability to effect the acquisition of all outstanding securities of a target company in a single step and in part to its substantial structuring flexibility. In particular, arrangements are not circumscribed by the take-over bid rules (e.g., there are no prohibitions against financing conditions, collateral benefits or paying differential consideration to shareholders) and, importantly, can facilitate tax planning objectives by enabling an acquiror (and a target) to set out the precise series of steps that must occur at and following the effective time of an arrangement.
In addition to the flexibility of an arrangement for implementing complex transactions, the directors of the target company may take comfort from the fact that an arrangement has been court-approved and determined to be fair and reasonable, potentially insulating the transaction and directors of the target from criticism or post-closing liability.
An acquisition of a Canadian target with shareholders residing in the U.S. structured as a court-approved plan of arrangement will generally be the optimal approach from a U.S. securities law perspective. The solicitation of proxies to approve a plan of arrangement does not trigger the application of the U.S. tender offer rules and the SEC’s proxy rules usually do not apply to Canadian companies.
In addition, the exemption in section 3(a)(10) under the U.S. Securities Act of 1933 is customarily relied upon to issue share consideration to U.S. holders of a Canadian target company under a court-approved plan of arrangement without the need to file a registration statement with the SEC.
The following charts highlight some of the key advantages and disadvantages of a take-over bid and an arrangement.
| Advantages of an arrangement | Disadvantages of an arrangement |
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| Advantages of a take-over bid | Disadvantages of a take-over bid |
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Other transaction structures
Other forms of acquisition transaction structures include a statutory amalgamation and a capital reorganization involving mandatorily transferable securities. An amalgamation requires the approval of the target’s board of directors and its shareholders while a capital reorganization may only require approval of the shareholders.
An “amalgamation” is a close substantive equivalent to a “merger” under the state corporation laws in the U.S. However, there is no legal concept of a merger under Canadian corporate law (meaning one corporation merges into another, with the former disappearing and ceasing to have any legal identity, and the latter surviving and continuing in existence). Rather, under Canadian corporate law, the amalgamating corporations effectively combine to form a single corporation. The rights, assets and liabilities of each amalgamating corporation continue as the rights, assets and liabilities of the amalgamated corporation. Amalgamations are used infrequently in arm’s length transactions.
A capital reorganization can be used as an acquisition structure through an amendment to the share capital of the charter documents of a target company that results in a mandatory transfer of the target’s shares to the acquiror in exchange for cash and/or shares of the acquiror. Capital reorganizations are used infrequently in arm’s length transactions.
In both an amalgamation and a capital reorganization, the acquiror will generally need approval of 66⅔% of the votes cast at the meeting of the target company’s shareholders.
