In this Update
how unsolicited take-over bids were impacted by the overhaul of the Canadian take-over bid regime
how the financed bid landscape will be affected
impact of the new bid regime on financing
As noted in our earlier Osler Updates, 2016 saw significant changes to the Canadian take-over bid regime that substantially impacted unsolicited take-over bids. As take-over bids, unlike plans of arrangement or other corporate transactions, cannot be subject to a financing condition, the overhaul of the take-over bid regime has meaningful implications for financed transactions.
Overhaul of the take-over bid regime
Under the amended take-over bid regime, all non-exempt take-over bids (including partial bids) are subject to the following requirements:
a 50% minimum tender requirement;
a 10-day extension requirement following satisfaction of all conditions; and
a minimum 105-day tender period, subject to acceleration in certain circumstances to no less than 35 days.
The main impact of the changes to the take-over bid regime is to significantly extend the time required for unsolicited take-over bids to be outstanding. Whereas under the old regime, a bid could be outstanding for as little as 35 days, absent support from the target company’s board of directors, under the new regime: 1) a bidder can’t take-up under the bid until at least 105 days after launch of the bid, and 2) a bidder is required to effect a second take-up no earlier than 115 days after the launch of the bid.
Financing a bid
Under applicable Canadian securities laws, a bidder seeking to effect a take-over bid (whether unsolicited or board-supported) must make adequate arrangements before launching the bid to ensure that the required funds will be available to make full payment for the securities that are the subject of the bid. The financing arrangements may only be subject to conditions that the bidder reasonably believes the possibility to be remote that, if the conditions of the bid are satisfied or waived, the offeror will be unable to pay for the securities deposited under the bid due to a financing condition not being satisfied. In effect, the take-over bid can’t be subject to a financing condition.
In practice this has meant that bidders making a financed cash take-over bid must secure binding commitment letters from the bidder’s financing sources that are subject only to limited conditionality (consisting generally of conditions that mirror those that are part of the terms of the bid, as well as conditions that are within the bidder’s control).
While financing commitment papers provide generally firm commitments from a lender to ensure that the bidder has sufficient financing available to satisfy the bidder’s obligations, financing commitment papers impose obligations on the bidder and can limit its strategic options.
In particular, commitment letters:
have outside dates for, among other things, the entering into of full credit documents (i.e. a credit agreement), the initial draw under the credit agreement and the obligations of the lender or lenders under the commitment letter;
require the payment of significant fees to lenders – commitment fees, duration or ticking fees, bridge financing fees and other fees; these fees depend on, among other things, the size of the loan, the duration of the commitment and the leverage of the bidder; and
impose covenants on the bidder with respect to the completion of the acquisition, including with respect to the bidder’s ability to waive any condition that adversely affects the lenders.
It is also typical for lenders to require that the take-over bid will result in the bidder acquiring at least 66 2/3% of the outstanding shares of the target and complete a subsequent going private transaction so that there is a path (under a corporate law second-step acquisition transaction) to acquiring all of the outstanding shares of the target. Once a bidder holds at least 66 2/3% of the outstanding shares, there is generally certainty that the bidder will end up owning all of the target’s outstanding shares. It is at that point simply a question of time to implement the subsequent acquisition transaction. Lenders need visibility on how the bidder intends to achieve 100% ownership of the target, as this allows the lenders to obtain security over the target’s assets.
Impact of the new bid regime on financing
The new take-over bid regime can be expected to have implications for financing commitments. Among other things:
with a minimum period for an unsolicited take-over bid of 105 days, bidders and lenders need to resolve a competing tension between bidders wanting a financing commitment for a sufficient period of time that will allow them to complete the take-over bid (minimum of 115 days, assuming it remains unsupported throughout the tender period) and any subsequent acquisition transaction. Lenders generally want to limit the commitment period to limit their exposure to changing rate environments, and a longer commitment period exposes lenders to fluctuations and instability. In light of a 115-day minimum bid period and the need to provide for a second-step transaction and some additional flexibility in the transaction timetable, the required commitment period under the new bid regime for an unsolicited bid is likely to be around six months, given the need for certainty of funding through the time period necessary to complete a second-step transaction;
this increase of the minimum tender period by at least 80 days (as compared to the prior bid regime) significantly increases the costs of financing in an unsupported/unsolicited take-over bid. In addition to having commitment fees being potentially at a higher rate (due to the longer commitment period), ticking fees which are payable to compensate lenders for their commitment from the date the commitment letter is signed to the earlier of the closing date and expiration of the commitment will likely be payable for a longer period;
with the longer commitment period, it is also likely that lenders will insist on broad “flex” language in the commitment papers to permit them to change the amount, pricing, structure, yield, tenor, conditions and other terms of the financing if necessary to complete a successful syndication; and
as detailed further below, the timeline for negotiating and finalizing credit documents may change and bidders will need to keep their lenders up to speed on the status of the take-over bid and likely timing to ensure the financing documents are finalized when needed (on expiry of the bid or if the bid becomes supported by the target board).
As a practical matter, a longer bid period also creates the potential for uncertainties around documenting credit arrangements. Under a take-over bid subject to a 35-day bid period, financing lawyers would generally begin preparing and negotiating definitive credit documents immediately following the launch of the take-over bid. However, under a take-over bid with a 105-day minimum bid period (i.e., one that remains unsupported throughout the pendency of the bid), funding would not be required until at least 105 days after launch. If the conditions were not all satisfied or waived at that date, the initial funding date could be significantly longer. Given the cost of preparing credit documentation and related security, the longer bid period could result in delayed preparation of the credit documents as bidders may not want to incur the costs of negotiating the credit documents prior to the end of the bid period.
However, if at any time the unsolicited take-over bid turns friendly as a result of a favourable recommendation of the target board, the 105-day bid period can be accelerated to as little as 35 days (including the time period already passed). As such, if the bidder, the lender and their respective financing legal teams are not prepared for the transaction to become supported or are not “kept up to speed,” there could be significant pressure on the financing teams to generate the necessary documents to permit an initial funding.