Yesterday, the Canadian Securities Administrators published their eagerly anticipated proposed amendments to the Canadian take-over bid regime (the Proposed Amendments). Specifically, the Proposed Amendments will result in changes to the current rules governing take-over bids by extending the mandatory minimum deposit period and adding mechanisms to address the perceived coercive features of the current rules. The rules surrounding issuer bids will remain unchanged.
The stated objectives of the Proposed Amendments include the facilitation of shareholders’ ability to make voluntary, informed, and coordinated tender decisions while providing target boards with additional time to respond and seek out value-maximizing alternatives. The Proposed Amendments aim to achieve these objectives primarily through the following changes:
Three key features
- 120-day minimum deposit period subject to exceptions. Take-over bids will be required to remain open for a longer minimum deposit period of 120 days (as opposed to the current 35-day minimum deposit period), subject to two exceptions where:
- the target issues a press release in respect of a proposed or commenced bid announcing that a shorter deposit period is acceptable to the target board for the bid (which cannot be less than 35 days), in which case, all outstanding or subsequent contemporaneous take-over bids must remain open for, at least, the announced shorter deposit period; or
- the target issues a press release announcing that it has agreed to enter into or has determined to effect a specified “alternative transaction”, in which case all outstanding or subsequent contemporaneous take-over bids will be subject to a shorter 35-day minimum period.
- 50% minimum tender condition. More than 50% of the outstanding securities owned by persons other than the bidder and any joint actors must be tendered and not withdrawn before the bidder can take up shares under the bid.
- Mandatory 10-day extension. The bid period must be extended by 10 days after the minimum tender condition is achieved and all other conditions of the bid have been complied with or waived.
According to the CSA, the 120-day requirement is meant to afford target boards sufficient time to respond to an unsolicited bid. The 120-day period represents a significant increase from the minimum 35 days under the current rules. However, the Proposed Amendments give boards the flexibility to reduce the period in appropriate circumstances where a longer bid period is not required (e.g. in the case of a friendly transaction). However, a target board may only waive the 120-day requirement in respect of a proposed or commenced take-over bid and once “waived for one” it is “waived for all,” as is the case generally under “permitted bid” provisions of shareholder rights plans. Similarly, to avoid unequal treatment of bidders where the board enters into or determines to effect a board-supported change of control transaction that is not a take-over bid, such as a plan of arrangement, the deposit period for all outstanding or subsequent contemporaneous bids is reduced to 35 days for all bidders.
The 50% minimum tender condition and the mandatory 10-day extension, in combination, are aimed at reducing the coercive pressure on shareholders and allowing for increased collective shareholder action. In particular, the 50% minimum tender condition is intended to address the current possibility that effective control of a public company can be acquired through a take-over bid without a majority of the independent shareholders of the target supporting the transaction when the bidder elects to waive its minimum tender condition and take up a smaller percentage of shares which, while not technically amounting to control, may amount to a blocking position.
Currently, bidders are not required to extend their bids after they have taken up shares and there is no formal mechanism for shareholders to coordinate their actions in the bid context. As a result, shareholders of a target make tender decisions without necessarily knowing what other shareholders will do. Combined with the 50% minimum tender condition, the mandatory 10-day extension is expected to reduce the pressure to tender to the initial bid in fear of being left with an illiquid position.
Further, the initial deposit period for a bid may not expire less than 10 days after the date of a notice of variation, including where the deposit period is changed in response to the target reducing the minimum deposit period under the two exceptions outlined above. The reduced deposit period will be calculated as of the date of commencement of each bid such that it will run for an equal period for each bidder and result in staggered finish lines, essentially providing initial bidders with a first-mover advantage. Under the Proposed Amendments, partial take-over bids (i.e. bids for less than 100% of the securities subject to the bid) are also subject to the 50% minimum tender condition which would likely mitigate any perceived coercive effect of partial bids.
While the Proposed Amendments address some of the comments made in response to earlier proposals, they do not expressly address issues associated with the current exemptions from formal bid requirements, including creeping takeovers or private agreement purchases. The Proposed Amendment also do not specifically make any changes to the CSA’s approach to shareholder rights plans and other defensive tactics under National Policy 62-202 Take-Over Bids – Defensive Tactics. Given the likely impact of the three key features proposed for formal bids, shareholder rights plans will continue to be a tool that is available to target boards albeit in more narrow and specific circumstances, including to address irrevocable lock-up agreements.
Our readers will recall that this initiative began in March 2013 as bifurcated proposals from the Autorité des marché financiers in Quebec and the other CSA jurisdictions. The CSA proposal would have implemented a stand-alone rule to permit a rights plan to remain in place where it was approved by a majority of the target shareholders within prescribed time frames. The CSA proposal would not have involved any changes to the bid regime itself, or directly addressed the issue of defensive tactics. The AMF proposal, on the other hand, suggested replacing National Policy 62-202 with a new policy that would recognize the fiduciary duty of the board of directors of the target when responding to a hostile bid and limit the intervention of securities regulators to circumstances where security holders are deprived from considering a bona fide offer because the target’s board failed to take measures to address its conflicts of interest and risk of entrenchment. The AMF also proposed a mandatory minimum tender condition and a 10-day extension, two features which were ultimately reflected in the Proposed Amendments.
In September 2014, the CSA announced an update to its review of the take-over bid regime. The CSA and the AMF both announced that they would not proceed with their proposals. Instead, they announced, the Proposed Amendments would amount to a harmonized regulatory proposal based on amendments to MI 62-104 Take-Over Bids and Issuer Bids, the Securities Act (Ontario) and Ontario Securities Commission Rule 62-504 Take-Over Bids and Issuer Bids. In this announcement, the CSA made three key proposals, which form the basis of the Proposed Amendments. Aspects of these proposals can be traced back to a comment letter submitted by the Ad Hoc Senior Securities Practitioners Group, which also suggested addressing the private agreement exemption and the normal course purchase exemption.
Request for comments
In connection with the Proposed Amendments, the Ontario Securities Commission will seek legislative amendments to Part XX of the Securities Act (Ontario), which, together with OSC Rule 62-104, currently contains the rules pertaining to take-over bids in Ontario. The Proposed Amendments will have the effect of repealing OSC Rule 62-104 and replacing MI 62-104 with National Instrument 62-104 Take-Over Bids and Issuer Bids. The result is the harmonization of take-over bid regulation across all Canadian jurisdictions in a single instrument.
The CSA is accepting comments on the Proposed Amendments until June 29, 2015 and invite comments on certain specific issues, including the impact on “alternative transactions” and partial bids. We do not expect the Proposed Amendment to come into force for at least another year.