Introduction

Boards and shareholders may now have additional time to respond to take-over bids in Canada if proposed amendments to the take-over bid rules are approved. On March 31, 2015, following a previous round of consultation, the Canadian Securities Administrators (CSA) published for comment proposed amendments to the take-over bid regime in Canada which the CSA has indicated will provide target boards with sufficient time to respond to a bid while at the same time enabling shareholders to make voluntary, informed and co-ordinated decisions in the face of the proposed bid. The 90-day comment period on the proposed bid amendments ends on June 29, 2015.

Background

In recent years, Canada’s take-over bid regime has come under scrutiny for being “bidder-friendly”. One of the key critiques has been that the current regime does not give boards of target companies the time to maximize shareholder value, including seeking other offers. The current regime, for example, requires that non-exempt take-over bids must remain open for 35 days and are not subject to any minimum tender requirements or an extension requirement once the bidder has taken up the deposited securities.

Proposed Amendments

Under the proposed bid amendments, referred to as the 50-10-120 amendments, all non-exempt take-over bids would have to:

  • Meet a minimum tender requirement of 50% of the outstanding securities of the class that are subject to the bid;
  • Be extended for an additional 10 days after the minimum tender requirement is met; and
  • Remain open for a minimum deposit period of 120 days, unless:
    •  The target board states in a news release that a shorter deposit period (not less than 35 days) is acceptable, in which case all other concurrent unsolicited bids would be subject to the shorter deposit period; or
    • The target issues a news release that it is entering into a specified alternative transaction.

Minimum Tender Requirement

Under the current take-over bid regime, non-exempt take-over bids are not subject to any minimum tender requirement. The proposed amendments require that bidders must receive tenders of more than 50% of the outstanding securities that are subject to the bid (excluding securities owned by the bidder itself or its joint actors). 

Partial take-over bids are also subject to this 50% minimum tender requirement, although the bidder is only required to take up, on a pro rata basis, securities tendered during the initial deposit period and the required 10 day extension period where a greater number of securities are deposited under the bid than the bidder is bound or willing to acquire.

The CSA has indicated that the purpose of the majority standard is to:

  • Address the fact that the current regime permits an acquiror to obtain control of the issuer without a majority of the independent shareholders supporting the transaction if the acquiror elects to waive the minimum tender condition; and
  • Mitigate the “pressure to tender” to permit collective action by shareholders in a manner comparable to a vote on the bid.

Extension Requirement

Under the current take-over bid rules, the bidder is not required to extend the bid once it has taken up any securities under the bid. This means that shareholders are making tender decisions without knowing what other shareholders will do. The CSA believes this creates additional pressure to tender since shareholders may tender to the bid, not because they support the bid but because they don’t want to get left behind.

The proposed amendments require that the bid be extended for an additional 10 days after the minimum tender requirement is met and all other terms and conditions of the bid have been complied with or waived in order to permit shareholders to participate in a bid that it is clear will succeed.

Minimum Deposit Period

Under the proposed amendments, the minimum deposit period has been increased to 120 days from the current minimum 35 day deposit period, subject to two exceptions. Commentators have critiqued the 35 day period as too short a period for a board to seek alternatives. Even if a target has adopted a “poison pill” or shareholder rights plan, to prevent a bid from being completed after 35 days, securities regulators have typically cease-traded the rights plan between 45 and 60 days after the commencement of the bid. In the accompanying commentary to the proposed amendments, the CSA believes that increasing the minimum bid period from 35 days to 120 days will permit target boards to respond to unsolicited take-over bids with appropriate action, such as seeking value-maximizing alternatives or developing and articulating their views on the merits of the bid.

There are two exceptions to the proposed 120 day requirement:

  • The target board can issue a news release shortening the time period (as long as it is not less than 35 days) to accommodate a shorter deposit period in cases where the target board believes a longer deposit period is not necessary, in which case all other concurrent unsolicited bids would be subject to the same shorter period; and
  • If a target issues a news release indicating that it has entered into an alternative change of control transaction, then the minimum deposit period must be at least 35 days from the date of the bid.

Has the Pendulum Swung Too Far?

The proposed amendments represent a harmonized Canadian approach to revising the take-over bid regime in order to address some of the concerns that Canada had an overly “bidder-friendly” take-over bid regime and that, as a result, target boards could be disadvantaged in their ability to seek other value-maximizing transactions within the timeframes established by the current regime. While the 35 day requirement and the brief length of time that shareholder rights plans are typically cease traded are two elements of the regime that have been criticized for not giving boards enough time to respond to an unsolicited bid, it will be interesting to see whether commentators believe that increasing the time for boards to respond from approximately two months to four months will result in a chill on M&A activity in Canada. The proposed amendments also leave the decision to shorten the minimum deposit period in the hands of the target board. One open question here is how the 120 days will affect the bidder’s ability to finance the bid, which in Canada must be in place in order to launch a bid. In light of this, has the pendulum swung too far the other way?