Amidst the unprecedented volatility in the capital markets in recent months, there were several takeover bids in Canada where the bidder reduced its offer price subsequent to the commencement of the bid. We are not aware of a price reduction in the course of a takeover bid in Canada prior to these instances. These recent examples include:
- Borealis Acquisition Corporation announced an offer for Teranet Income Fund at a price of $11.00 per unit on September 4, 2008, and commenced its bid on September 12, 2008. On October 28, 2008, Borealis reduced its offer price to $10.25 per unit as a result of deterioration in economic and financial market conditions and increases in the cost of capital. Borealis also extended the expiry time of its offer from October 31, 2008 to November 10, 2008. Teranet’s board of trustees took a neutral stance in respect of the reduced bid and made no recommendation to Teranet’s unitholders. Borealis’s bid was successful. McCarthy Tétrault acted for Borealis.
- Andlauer Management Group Inc. (AMG) announced its intention to make an offer for ATS Andlauer Income Fund on August 11, 2008 at a price of $11.75 per unit. AMG indirectly held 25.3% of ATS Andlauer’s units. An independent valuation of ATS Andlauer indicated that the fair value of the units on October 9, 2008 was between $12.50 and $14.50 per unit. AMG commenced the insider bid through a subsidiary on October 20, 2008. On November 21, 2008, AMG reduced its offer price to $10.75 per unit on the basis that a condition of its offer would not be satisfied as a result of the material deterioration of economic conditions and credit markets in Canada. AMG also extended the expiry time of its offer from November 25, 2008 to December 5, 2008. ATS Andlauer’s board of trustees recommended that unitholders accept the reduced bid. AMG’s bid was successful. McCarthy Tétrault acted for the independent committee of ATS Andlauer’s board of directors.
Variation of a Bid Where Conditions Not Met
In each of the above transactions, the takeover bid circular included broad ‘market out’ and ‘material adverse change’ conditions, capable of being triggered at the sole discretion of the bidder. Between the commencement of each bid and the reduction of the offer price, there had been significant turmoil in the global economy, which included historic declines in share prices on the Toronto Stock Exchange and an unprecedented deterioration in credit markets.
The Securities Act (Ontario) provides that once all the terms and conditions of a takeover bid have been complied with or waived, the bidder is required to take up and pay for the securities deposited. However, if a condition to the offer is not yet satisfied or waived, there is no express prohibition on a bidder varying its offer so as to reduce the offer price, in addition to its ability to simply terminate its offer.
Bidders should be aware, though, that a price reduction may cause Canadian Securities Regulators (CSA) to closely scrutinize the transaction and possibly assert their public interest mandate. The protection of target securityholders is the primary objective of the CSA in enforcing the takeover rules in Canada. National Policy 62-203 Take-Over Bids and Issuer Bids indicates that, depending on the circumstances, securities regulators may intervene in the context of a variation, including a price reduction that is fundamental to a bid and prejudicial to securityholders. The Policy refers to variations where the bidder:
(a) lowers the consideration offered under the bid;
(b) changes the form of consideration offered under the bid, other than to add to the consideration already offered under the bid;
(c) lowers the proportion of outstanding securities for which the bid is made; or
(d) adds new conditions.
The Policy indicates that if it is necessary to ensure target securityholders are not prejudiced by the variation, securities regulators may cease trade the bid, require an extension of the bid’s deposit period, or require that the bidder commence a new bid with the varied conditions.
Although at common law it could be argued that an offer can be withdrawn at any time up to acceptance, in light of the trading that takes place immediately following an announcement of a bid, we expect the CSA would take the position that once an unsolicited bid is made, it may be terminated or varied only if one or more of the conditions are not satisfied and it is reasonably clear they cannot be satisfied by the expiry of the bid.
Furthermore, it has been our experience that if a bidder terminates or varies its offer the CSA will closely scrutinize the condition upon which the bidder relies. The CSA may intervene where the bidder’s reliance upon the condition does not appear to be bona fide, particularly if the relevant condition is not based upon an objective standard and instead is subject to the bidder’s sole discretion.
We understand the CSA to also be concerned with whether a bid includes sufficient procedural safeguards to protect securityholders who have tendered into a bid prior to a price reduction. If these securityholders do not wish to tender at the reduced price, they would need to actively take steps to withdraw their tendered securities. Whether a bid includes safeguards designed to avoid prejudice to such securityholders may be an important factor for the CSA to consider in determining whether they should intervene in order to protect the public interest.
It is expected that regulators will be providing guidance on these issues in light of the concerns they expressed in their review of the bids summarized above.
Other Securities Law Considerations
Under the pre-bid integration rules, if a bidder acquires beneficial ownership of securities of the class subject to the bid within a period of 90 days immediately preceding the bid, the consideration offered under the bid must be at least equal to the highest consideration paid in any transactions (other than certain exempted transactions, such as a normal course purchase on the TSX that meets certain conditions) effected during that 90-day period. As a result, the offer price of a takeover bid could not be reduced below the highest price of any purchase subject to such pre-bid integration rules.
Bidders are also required to offer all holders of the same class of securities identical consideration. If some target securities are tendered at the original offer price and taken up by the bidder, the identical consideration requirement would preclude the bidder from reducing the offer price for any remaining securities that had not yet been tendered and taken up.
Lastly, although open market purchases of up to five per cent are permitted if disclosure of this fact is made by a bidder and any such purchases are reported, a bidder should consider whether those purchases will send a signal to the market that might make it harder to later rely upon a condition.
McCarthy Tétrault Notes:
There is no express prohibition in Canadian securities laws on a bidder reducing its offer price if a condition to its bid is not met. However, bidders can expect that securities regulators will closely scrutinize any price reduction to determine whether there is a legitimate basis for the reduction. If not, the securities regulators have signalled that they are prepared to exercise their public interest mandate in certain circumstances to avoid prejudice to target securityholders.