On March 31, 2015, the Canadian Securities Administrators (CSA) published a CSA Notice and Request for Comment with respect to proposed amendments to Multilateral Instrument 62-104 – Take-Over Bids and Issuer Bids (MI 62-104) and changes to National Policy 62-203 – Take-Over Bids and Issuer Bids.
The proposed amendments codify and in some cases clarify the concepts previously announced by the CSA in September 2014.
What are the key proposed changes to the take-over bid regime?
- Extension of the Minimum Bid Period
The CSA proposes that all non-exempt take-over bids remain open for a minimum of 120 days (rather than the 35 days under the current regime).
The proposed amendments articulate two circumstances in which the 120 day minimum bid period may be shortened:
- the target board may issue a news release announcing a shorter deposit period for a take-over bid (which cannot be less than 35 days), in which case all outstanding or subsequent take-over bids will also become subject to the shorter minimum deposit period of at least 35 days (a bidder of course may elect to keep its bid open longer); and
- the issuer may issue a news release indicating that it has agreed to enter into or determined to effect a specified alternative transaction (generally, a plan of arrangement or other change of control transaction requiring shareholder approval), in which case all outstanding or subsequent take-over bids must remain open for at least 35 days.
The proposal, by extending the minimum bid period beyond the current 35 day period, will provide target boards more time to evaluate a take-over bid, communicate with shareholders, seek to generate an enhancement to the take-over bid and attract alternative offers prior to securities being taken up under the take-over bid.
- Irrevocable Minimum Tender Condition and Mandatory Bid Extension
The proposed amendments require that all non-exempt take-over bids be (i) subject to a mandatory tender condition that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered and not withdrawn before the bidder can take up any securities under the take-over bid, and (ii) extended by the bidder for an additional 10 days after the bidder achieves the mandatory minimum tender condition and the bidder announces its intention to immediately take up and pay for the securities deposited under the take-over bid.
These changes preclude the possibility that control of an issuer will be acquired through a take-over bid without a majority of independent shareholders supporting the transaction. Additionally, the proposed amendments will reduce the potential for coercive take-over bids by ensuring that shareholders are not required to act individually in deciding whether to tender and do not feel pressured to tender for fear of being left with an illiquid position. With this change, all take-over bids will effectively be required to obtain collective independent shareholder support.
Although the proposed rules allow for offerors to make bids for less than all of an issuer’s class of securities, such offerors will not be afforded the ability to further extend a partial bid after the expiry of the mandatory 10 day extension period following the initial expiry date of the partial bid in the same way that an offeror for all outstanding securities of a class may further extend an offer.
In addition, under these rules, it will be difficult to use the take-over bid rules to acquire one or more blocks constituting less than 50% of the shares of an issuer under a hard-lock up arrangement unless a take-over bid exemption exists, such as the private agreement exemption that limits the premium to 15% among other conditions. Currently a bidder can guarantee to a locked-up shareholder that its shares will be purchased by the bidder even if the bid is not accepted by a majority of the shareholders. Hard lock-ups will remain strategically useful to the first bidder as they still make it more difficult for a subsequent bidder to meet the 50% minimum tender condition.
- Variations to a Take-Over Bid and Take-Up and Payment Logistics
The proposed amendments also introduce two more restrictive changes to the current offer variation provisions under the take-over bid regime.
Under the amended regime, a reduction in the deposit period will also be considered a variation to the bid and will require the issuance and filing of a news release and the sending of a notice of variation.
The proposed rules also provide that variations to a bid will be prohibited after the bidder becomes obligated to take up the securities. Going forward, bidders will generally be required to take-up securities deposited to a take-over bid at the expiry of the required initial deposit period provided the 50% minimum tender condition is met and all terms and conditions of the bid have been complied with or waived. However, this prohibition will not apply to variations to a bid which extend the time to deposit securities under the bid or increase the consideration offered for securities under the bid. Additionally, partial bids will be subject to a modified requirement to take up and pay which recognizes the requirement to take-up securities on a pro-rata basis, including following the mandatory 10 day extension of the partial bid.
- Changes in Information for a Take-Over Bid
The proposed amendments will introduce a new provision related to changes of information. The initial deposit period must not expire before 10 days after the date of the notice of change that is sent to securityholders in respect of such change. In some instances, the deposit period will need to be extended in conjunction with the notice of change.
- Withdrawal Rights
The proposed amendments include new restrictions on withdrawal rights in respect of partial take-over bids and certain types of variations to a take-over bid.
In certain circumstances, including where securities are deposited before the expiry of the initial deposit period but not taken up at such time due to the pro-ration exception for partial bids, it is proposed that the ability to withdraw securities from a partial bid will be suspended or removed to accommodate the bidder’s compliance with taking up shares pro-rata following the mandatory 10 day extension of any bid, including a partial bid.
Furthermore, the proposed amendments exclude withdrawal rights in circumstances where the take-over bid is varied due to an increase of consideration offered for the securities or an extension of the time to deposit subsequent to the expiry of the initial deposit period.
How will the proposed amendments change the landscape for take-over bids in Canada?
- The role and duties of target boards in the context of a take-over bid do not change.
The proposal will not change the responsibilities of a target board in the context of a take-over bid to exercise the duty of care and act in good faith and in the best interests of the corporation. While a target board will be assured of a longer period of time to take required action in the best interests of the corporation, the proposed changes do not permit it to “just say no” to a bid.
It will be interesting to see how willing target boards will be to waive the 120 day minimum period at the risk of being criticised for not having taken full advantage of the extended period of time to find value-enhancing alternatives or even simply to allow more time for unsolicited proposals to emerge subject to typical deal protection features. We expect the minimum tender period will be one of the negotiated deal protection points in most friendly transactions.
- The new rules may encourage more friendly transactions.
The new 120 day minimum bid period shifts some of the balance of power from bidders to the target board, allowing more time to seek an alternative transaction or negotiate an enhancement to the bid. The ability to reduce the minimum bid period rests in the hands of the target board. As a result, hostile bidders may face more deal uncertainty that will lead them to more seriously consider a negotiated transaction in lieu of a hostile take-over bid.
- The new rules may encourage more proxy battles.
It can be expected that in some hostile situations, the bidder may seek to call a shareholder meeting prior to the expiry of the 120 period to force the board to deal with the tabled hostile bid and waive the 120 day period or face replacement on board. However, given the significant latitude that courts have given boards to call meetings, it will be difficult to get a meeting called quickly enough to materially shorten the 120 day period.
- The utility of rights plans will be reduced but we expect they will remain a relevant defensive tactic for narrow purposes.
The proposed amendments do not indicate that rights plans will be prohibited. It appears, however, that by putting more time in the hands of the target board, applications to the regulators to cease trade rights plans will be a much less common practice and that the uncertainty as to the duration of a bid when a rights plan is in play will be nearly eliminated. The new proposal will make rights plans, as currently constructed and regulated, of more limited practical use. However, we expect they will continue to be used to deter creeping acquisitions and irrevocable lock-up agreements involving significant blocks of securities
- Partial Bids
Partial bids are expressly permitted under the new regime so long as 50% minimum tender condition is met and there is one automatic 10-day extension (no further extensions may be offered). However, given the minimum tender requirement, we expect there will be fewer partial bids.
The CSA is inviting written comments on the proposed amendments and its specific requests for comment until June 29, 2015.
The Notice and Request for Comment contains the full text of all amendments necessary in the various jurisdictions to implement the new regime. We anticipate that it will take some time following the expiry of the comment period to assess comments, make further technical changes if desirable and implement the changes. The new regime could be in place toward the end of 2015 or early in 2016.