The highly anticipated amendments to the take-over bid regime in Canada have now been released by the Canadian Securities Administrators (CSA). The CSA had previously outlined the general nature of these proposed changes in a notice released on September 11, 2014, which we reviewed in a previous bulletin.
The proposed new amendments require that all non-exempt take-over bids meet the following conditions:
- Minimum Tender Condition: There is to be a minimum tender condition of more than 50% of the outstanding securities of the class that are subject to the bid. The more than 50% tender will exclude securities beneficially owned, or over which control or direction is exercised, by the bidder or by any person acting jointly or in concert with the bidder. So, for example, if the bidder wishes to make a bid for all of the issued and outstanding common shares of Company A and the bidder already owns 25% of the common shares of Company A, more than 50% of the remaining 75% of the common shares must be tendered to the bid before the bidder can take up and pay for the shares. The more than 50% minimum tender condition will also apply to partial bids, so that more than 50% of the securities of the class that are subject to the bid will have to be tendered and the offeror will be obliged to take up the deposited securities pro rata to complete the partial bid.
- 120 Day Bid Period: The bid must remain open for a minimum deposit period of 120 days. However, there are two important exceptions to this rule:
- Voluntary Reduction By Target Board: If the target board issues a news release in respect of a proposed or commenced take-over bid which states that the board will accept a specified shorter deposit period for the bid which is not less than 35 days, then the minimum deposit period for that bid only needs to be at least the number of days from the date of the bid as stated in the news release (provided that the bid must not expire before 10 days from the date of variation). However, if there are any other outstanding or subsequent take-over bids, these would also gain the benefit of the stated shorter minimum deposit period. In any event, no bid could stay open for less than 35 days.
- Non-Voluntary Reduction for “Alternative Transaction”: If an issuer issues a news release announcing some type of “alternative transaction”, such as a plan of arrangement to be approved by security holders of the issuer, then the minimum deposit period for any then-outstanding take-over bid or any take-over bid subsequently commenced before the completion of such alternative transaction need only be at least 35 days.
In both of these exceptions to the 120 day rule, the bid would still need to remain open at least 10 days after the date of any notice of variation concerning the reduction of the deposit period.
- 10 Day Automatic Extension: After the expiry of the initial deposit period (the 120 day period or the shorter period, if applicable), the bidder must extend its bid by an additional 10 days if: (a) all terms and conditions of the bid have been complied with or waived; and (b) the minimum tender condition is satisfied (more than 50% of applicable securities have been tendered).
Other proposed changes to the current bid regime include matters relating to varying a bid, changing information for a bid, taking up and paying for tendered securities and withdrawal rights.
Main Purpose of Proposed Changes
The main goal of the proposed amendments is to rebalance the current dynamics between bidders, target boards and target security holders. Indeed, it does appear that the proposed amendments will give significantly more power and flexibility to target boards and their security holders in the face of hostile bids:
- the required 120 day bid period will give boards extra time to consider the bid (and possible alternatives, such as seeking a “white knight” bidder);
- the minimum tender requirement will have a roughly equivalent effect to requiring a shareholder vote; and
- the 10 day automatic extension will reduce the pressure that security holders may feel to tender to the bid.
Impact of Proposed Changes: What About “Poison Pills”?
As we pointed out in our September 16, 2014 bulletin, these changes to Canada’s take-over bid regime are generally viewed as being “pro-target”, in that they will make life somewhat easier for target boards of directors, and somewhat more difficult for bidders (especially hostile bidders and those bidders wishing to pick up shares via partial bids).
We also noted in our previous bulletin that the three most important changes (a minimum tender condition, a 10-day automatic extension feature and a lengthened minimum deposit period) are all common and key features of Canadian shareholder rights plans/poison pills. Therefore, these changes can fairly be characterized as the legislative imposition of certain key features of shareholder rights plans on all Canadian public companies. One can argue that as a result, much of the existing rationale for adopting shareholder rights plans has been weakened. This naturally raises the question: are shareholder rights plans on their way out in Canada?
It is true that the most compelling rationale for Canadian public companies to adopt a rights plan -- i.e., to deter coercive bids and to buy more time for the target board -- will no longer exist. So it is reasonable to expect that this will result in fewer rights plans being adopted in Canada in the future. However, it is important to note that these changes only apply to non-exempt take-over bids. So even with these changes in place, it will still be possible for third parties to acquire control of a target company via exempt purchases such as through the “private agreement” exemption to the take-over bid rules (for example, through a series of small, incremental exempt purchases, often referred to as a “creeping take-over”). Alternatively, a third party can seek to acquire effective control of a public company by acquiring a large amount of the company’s convertible debt. Another consideration for potential targets will be the recent advent in Canada of the so-called “voting pill”, which is essentially a shareholder rights plan modified to cover off hostile proxy solicitations.
In the final analysis, potential targets will benefit from the proposed changes and the number of hostile bids launched in Canada will likely be reduced. We also think there will still be a role for shareholder rights plans, but they certainly will not play the prominent role that they have historically played in contested take-overs in Canada.
The comment period on the proposed amendments will remain open until June 29, 2015.