On March 31, 2015, the Canadian Securities Administrators (CSA) released draft amendments to Canada’s take over bid regulatory regime. As previously announced by the CSA in September 2014, the amendments will increase the minimum period that a take-over bid must remain open from 35 days to 120 days—unless the target board consents to a shorter period of not less than 35 days or the target enters into a board-supported change of control transaction—and make other changes designed to rebalance the current dynamics between bidders, target boards and target securityholders. The proposed amendments are the first significant changes to the take-over bid regime since 2001, when the minimum period that a take-over bid must remain open was increased from 21 days to 35 days.
WHAT IS CHANGING?
The proposed amendments will require that all formal take-over bids:
- Remain open for a minimum of 120 days, subject to a reduction of the minimum deposit period (1) to no less than 35 days with the consent of the target board, provided that when there are multiple contemporaneous bids, each bid shall be permitted to have that same minimum deposit period or (2) if the target enters into or determines to effect a board-supported change of control transaction, such as a plan of arrangement, in which event the minimum deposit period for any contemporaneous take-over bid shall be 35 days (the 120-Day Requirement)
- Be subject to a minimum tender condition of more than 50 per cent of the outstanding securities of the class subject to the bid, excluding target securities held by the bidder and its joint actors (the Minimum Tender Requirement)
- Be extended for 10 days after the bidder first takes up securities under the bid (the 10-Day Extension Requirement).
The proposed amendments provide that the 120-Day Requirement can be abbreviated for a proposed or commenced take-over bid if the target board issues a press release specifying a shorter minimum deposit period for such bid of not less than 35 days that is acceptable to the target board. If such a release is issued by the target board, all other outstanding or subsequent bids (including hostile bids) will be entitled to use the same shorter deposit period (in each case, calculated from the launch date of the applicable competing bid).
For a bid that is already outstanding with a 120-day deposit period, the bidder will have to amend its bid to take advantage of the shorter minimum deposit period; it will not be automatically applied. Such an amendment will be considered a variation of the bid, which will require the bid to be outstanding for at least 10 days from the date of the variation, regardless of whether the bid had already been outstanding for longer than the new abbreviated minimum deposit period.
Similarly, if the target announces that it has agreed to enter into or determined to effect a board-supported change of control transaction other than by way of a take-over bid—such as an arrangement, an amalgamation or a sale of all or substantially all of the target’s assets—then any take-over bid in the market at the time of that announcement, or any bid launched subsequent to the announcement of (but prior to the completion or abandonment of) the change of control transaction, will be permitted to have a minimum deposit period of 35 days. As is the case with a competing abbreviated bid, any bid in the market prior to the announcement of the change of control transaction will be required to vary its terms to take advantage of the reduced minimum deposit period; it will not apply automatically.
The 120-Day Requirement will not apply to issuer bids, which will continue to be subject to the current 35-day minimum tender period.
The proposed amendments also include additional technical changes to other aspects of the take-over bid regime that are related to the three key amendments described above.
WHAT ARE THE IMPLICATIONS?
Requiring bids to be outstanding for at least 120 days (subject to the exceptions described above) is a significant change from the current take-over bid regime, where bids are required to be outstanding for only 35 days. Shareholder rights plans are often employed by target boards to delay a hostile bidder’s ability to take up securities beyond the 35-day period, but Canadian securities commissions have typically cease-traded such plans after approximately 60 days, clearing the way for bidders to complete their bids, provided all other conditions (such as receipt of any required regulatory approvals) are satisfied or waived.
In the transactions reviewed for the Blakes 2014 Canadian Hostile Bid Study, the average number of days to the first take-up, if any, in a hostile take-over bid was 71 days, and in only five per cent of transactions reviewed was the first take-up on or after 120 days. Hostile bidders will therefore be faced with longer time horizons for completing bids than in the past, which should provide a target board with increased leverage. The target board will have more time to attract competing offers and to identify and consider other value-maximizing alternatives, and will have the ability to reduce the minimum deposit period significantly below the 120-day minimum period if it is supportive of a bid. As a result, a hostile bidder may be incentivized to seek a negotiated transaction, rather than face the increased uncertainty that results from the 120-day minimum deposit period.
While the proposed rule is silent on the treatment of shareholder rights plans, given the intended mandatory minimum time period of 120 days, as compared to the historical timing of approximately 60 days for cease-trading shareholder rights plans, we anticipate that Canadian securities regulators generally will not permit shareholder rights plans to remain in place beyond the 120th day of a bid since their primary purpose of giving the target more than 35 days to find alternative transactions will no longer be applicable. However, rights plans will continue to have utility under the new regime for preventing creeping take-overs by way of transactions exempt from the formal take-over bid rules.
Minimum Tender Requirement
By mandating a minimum tender condition of more than 50 per cent of the securities of the class subject to a bid—excluding securities held by the bidder and its joint actors—the proposed amendments will effectively create a referendum on the bid.
This change will not have a significant impact on bids where the bidder wants to acquire 100 per cent of a target’s shares or none at all. In those cases, the bidder will typically set its minimum tender condition at 66⅔ per cent of the outstanding shares, as acquiring that percentage of shares under the bid ensures that the bidder can complete a subsequent “squeeze-out” transaction to acquire the remaining shares, and will not take up under the bid unless such threshold is met. However, a bidder that makes a bid for 100 per cent of the target shares, but that would be willing to purchase less than the 66⅔ per cent required to guarantee the ability to take the target private, will now be prohibited from waiving the minimum tender condition in its bid below the 50 per cent plus one share threshold.
The addition of the Minimum Tender Requirement will also make it more difficult to complete a partial bid. For example, a bid for 25 per cent of the shares of a target will need to be accepted by holders of at least 50 per cent of the shares held by disinterested shareholders in order to be successful (with take-up occurring on a pro ratabasis). As a result, a bidder will need to make its partial bid sufficiently compelling to attract the additional tenders required to satisfy the minimum tender condition, even if the desired number of shares would have been tendered to a less compelling offer.
10-Day Extension Requirement
The goal of the 10-Day Extension Requirement is to reduce the pressure on individual shareholders to tender or sell in the market in the face of a take-over bid that they might otherwise reject were it not for the concern that the bidder may acquire control, but ultimately less than 100 per cent of the target, thereby leaving those shareholders who did not tender with a less liquid investment in a controlled company. The 10-Day Extension Requirement will give shareholders comfort that they can initially reject a bid up front if they would like to do so, knowing that if the Minimum Tender Condition and other bid conditions are satisfied or waived they will have an opportunity to tender during the mandatory extension. This will eliminate the need to tender before the initial expiry date due to a concern of being “left behind,” and will mean that the Minimum Tender Condition will not be satisfied due to such concern.
For transactions where the bidder is seeking to acquire 100 per cent of the target, this amendment will have minimal impact on current practice, as bidders frequently provide for such an extension for tactical purposes. Where a bidder takes up more than 66⅔ per cent of the target shares—but less than the 90 per cent required to complete a compulsory acquisition under corporate law—it will typically extend its bid for 10 days to encourage additional tenders, with the goal of reaching the compulsory acquisition threshold and avoiding a more time-consuming squeeze-out transaction.
The CSA has set June 29, 2015 as the deadline for providing comments on the draft amendments.