Douglas Bryce, Jeremy Fraiberg, Donald Gilchrist, Alex Gorka, Douglas Marshall, Emmanuel Pressman, Clay Horner, Robert M. Yalden
Mar 31, 2015
The Canadian Securities Administrators (CSA) have published for a 90-day comment period significant amendments to the take-over bid regime in Canada (the Proposed Amendments). Collectively, they represent the most important proposed changes to the Canadian take-over bid regime since 2001. If adopted, these amendments will increase the amount of time afforded to a target issuer to respond to a hostile bid, effectively resulting in a 120-day “permitted bid” regime.
Under the Proposed Amendments, all non-exempt take-over bids (including partial bids) will be subject to the following new requirements:
- 50% Minimum Tender Requirement – Bids will be subject to a mandatory 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).
- 10 Day Extension Requirement – Following the satisfaction of the Minimum Tender Requirement and the satisfaction or waiver of all other terms and conditions, bids would be required to be extended for an additional 10-day period (the 10 Day Extension Requirement).
- 120 Day Bid Period – Bids would be required to remain open for a minimum of 120 days, 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 120 days but not less than 35 days. If so, then all other outstanding or subsequent bids would also be entitled to the shorter minimum deposit period counted from the date that other 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, such as an arrangement – then all other outstanding or subsequent bids would be entitled to a minimum 35-day deposit period counted from the date that other bid is made (the 120 Day Requirement).
The Proposed Amendments will give directors of target issuers in Canada more time to respond to a take-over bid and consider alternatives to the bid. Under the current regime, a rights plan is generally cease traded by securities regulators within 45 to 60 days of the commencement of an offer (although there have been notable variations in recent pill decisions). Standard shareholder rights plans provide for a 60-day “permitted bid” that does not trigger the rights plan if the bid remains open for a minimum of 60 days and includes provisions equivalent to the Minimum Tender Requirement and 10 Day Extension Requirement. The Proposed Amendments will ensure that boards of directors have at least 120 days to respond to an initial unsolicited offer.
The Minimum Tender Requirement and 10 Day Extension Requirement are intended to alleviate what the CSA have described as coercive aspects of the current bid regime. The Minimum Tender Requirement will allow for collective action by shareholders and give them comfort that a bid will only succeed with the support of a majority of independent shareholders. This will protect them against the risk that a hostile bidder may reduce or waive its minimum tender condition and thereby pressure shareholders to tender out of concern they may be left holding shares of a controlled company. The 10 Day Extension Requirement will allow shareholders to see whether a bid has been successful before determining whether to tender their shares. In the absence of such a mandatory extension, shareholders might tender to a bid before they are otherwise willing to do so for fear of being unable to tender following expiry of a bid.
The Proposed Amendments will make partial bids more difficult to execute due to the Minimum Tender Requirement and will eliminate the ability to make any-or-all bids. However, they may also limit the ability of a shareholder to have its shares acquired in a bid by making the take up of shares dependent on the tendering decisions of other shareholders.
One consequence of giving target issuers more time to respond to a take-over bid may be to increase the costs and risks for hostile bidders. Higher financing costs, for example, as well as the greater likelihood of an interloper, may add incremental cost and risk from a hostile bidder’s perspective.
Despite these potential increased costs and risks, however, a hostile bid will remain easier to complete in Canada than in the United States. Hostile bidders in Canada will be assured that their offer can be accepted by shareholders after 120 days. By contrast, rights plans in the United States can generally only be removed following a successful proxy contest to replace a majority of the directors of the target issuer board – a process that can take well over a year where a target issuer has a staggered board of directors.
Other Amendments to Take-Over Bid Regime
The Proposed Amendments also deal with certain technical amendments to the take-over bid regime resulting from the Minimum Tender Requirement, 10 Day Extension Requirement and 120 Day Requirement, which affect (i) variations to a bid; (ii) changes in information for a bid; (iii) take up and payment; and (iv) withdrawal rights.
The most noteworthy change is the obligation that bidders immediately take up securities deposited under a bid following satisfaction or waiver of all terms and conditions of the bid, except in the case of partial bids. Under the current bid regime, a bidder has 10 days in which to take up and pay. Bidders will still have to pay for securities taken up as soon as possible, and in any event not later than three business days after they are taken up.
Timing Implications for Contested Transactions
Under the Proposed Amendments, hostile bidders that make an initial bid for a target issuer must keep their bids open for at least 120 days. However, if the target issuer subsequently enters into a white knight transaction, the hostile bidder may shorten its bid period by an amount of time that may vary depending on the structure of the white knight transaction.
If the white knight transaction is structured as a bid, the hostile bidder will be entitled to the same bid period as the white knight bid as set out in the “deposit period news release” for the white knight bid. For example, if the white knight bid has a 35-day deposit period, then the hostile bidder may amend its existing offer by shortening the deposit period from 120 days to at least 35 days, provided at least 10 days’ notice is given of the new expiry date. Alternatively, if the white knight transaction is structured as an “alternative transaction,” such as an arrangement, the hostile bidder may shorten its bid period to a minimum of 35 days, provided at least 10 days’ notice is given of the new expiry date.
In either case, the hostile bidder is able to maintain a timing advantage over the white knight. This is consistent with the CSA’s existing rights plan case law, which does not allow rights plans to be used to equalize timing between a white knight and hostile bidder.
Where a hostile bid is made following the announcement of a friendly transaction, the timing implications for the hostile bidder may also vary depending on the structure of the friendly transaction. If the friendly transaction is structured as a bid, the hostile bidder must keep its bid open for at least the same length of time as the friendly bid as set out in the deposit period news release for that bid. Alternatively, if the friendly transaction is structured as an alternative transaction, such as an arrangement, the hostile bid may be open for a minimum of 35 days.
We note that the Proposed Amendments may create an incentive to structure friendly transactions as bids rather than arrangements (or other “alternative transactions”) in order to avoid the risk that a hostile bidder may have a timing advantage over the initial friendly transaction. For example, if a friendly transaction that requires a regulatory approval that is expected to take 120 days to obtain is structured as an arrangement, a hostile bidder without the same regulatory requirement (or that expects to receive the regulatory approval in a shorter timeframe) could make a 35-day bid (say on day 20), and potentially obtain a timing advantage over the friendly bidder (by being in a position to close on day 55). However, if the friendly transaction were structured as a 120-day bid, then the hostile bidder would also be subject to a 120-day bid period from the date the hostile bid was launched (say on day 20), which would preserve the timing advantage enjoyed by the friendly bidder (120 days as opposed to 140 days).
Implications for Rights Plans
A notable omission from the Proposed Amendments is how rights plans will be treated both pending and following their adoption. This is of particular interest considering that the Proposed Amendments arose out of competing proposals from the CSA and Autorité des marchés financiers of Québec (AMF) on rights plans and defensive tactics more generally, as we discussed in a previous Osler Update. The AMF and the balance of the CSA’s members have previously aired different perspectives on the most appropriate approach to the regulation of defensive tactics, which may account for the Proposed Amendments’ silence on this issue. It is unclear whether and when the CSA will provide guidance to the market on this important issue.
Our expectation is that rights plans will be cease traded after a 120-day formal bid, absent unusual circumstances, and therefore securities regulators will be called upon less frequently to hold hearings as to when “the pill must go.” This will result in greater certainty as to timing of bids than under the current regime.
Since the Proposed Amendments will give a target issuer 120 days to deal with a hostile bid (i.e., a period that is well in excess of what securities regulators have typically provided Canadian issuers), in many cases target issuers may well conclude that they have sufficient time to respond to a hostile bid without needing to adopt a rights plan. Accordingly, we would expect that there will be less of an incentive for issuers to adopt rights plans either “strategically” at their annual meetings or “tactically” in the face of a bid.
As the Proposed Amendments do not apply to exempt bids, there will still be 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. We therefore expect issuers that are concerned about the possibility of creeping bids to continue to adopt rights plans.
One immediate practical issue raised by the Proposed Amendments is what approach issuers should take with rights plans up for renewal at an upcoming annual meeting. Should these issuers amend their plans to provide for 120-day permitted bids? Or should they maintain the status quo, running the risk that a hostile bidder could make a 60-day permitted bid and argue that the issuer should be prevented from having the benefit of more time in those circumstances?
Given that the CSA will need time to digest and respond to comments, and that it remains to be seen how proxy advisory firms such as ISS will react to the Proposed Amendments, we recommend that issuers not rush to implement changes to their rights plans this proxy season. We also note that if a 60-day permitted bid is made by a hostile bidder, an issuer will always have the option to adopt a tactical rights plan providing for at least a 120-day permitted bid.
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The proposed amendments are to Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids and to National Policy 62-203, which govern take-over bids and issuer bids in all jurisdictions of Canada, except Ontario. In Ontario, substantively harmonized requirements for take-over bids and issuer bids are set out in Part XX of the Securities Act (Ontario) and Ontario Securities Commission Rule 62-504 Take-Over Bids and Issuer Bids. The OSC is seeking legislative amendments to the Securities Act (Ontario) to accommodate the adoption of MI 62-104 in Ontario, which would result in a completely harmonized take-over bid regime across Canada.
The comment period for the Proposed Amendments expires on June 29, 2015.