Effective February 1, 2008, Canadian securities regulators have adopted similar rules and policies in an effort to harmonize the fragmented regulatory regime governing take-over and issuer bids in Canada. Rather than constituting a complete overhaul of the current rules, the changes are better viewed as a re-codification of the existing requirements to improve user-friendliness and regulatory integration. The new regime is rooted in a 2006 proposal by all members of the Canadian Securities Administrators, though since that time there has been a divergence. Indeed, while the bulk of the 2006 proposal will be implemented by Canadian securities regulators in the form of Multilateral Instrument 62-104, the Ontario Securities Commission (the "OSC") has chosen its own path. The OSC has opted to move towards harmonization through an amendment to its Securities Act and the adoption of OSC Rule 62-504. In spite of the different platforms, both bid regimes are fundamentally equivalent and are to be applied in accordance with the same instrument: National Policy 62-203. This National Policy is being created to provide a common framework for interpreting and applying the new bid provisions across the country.
Concurrently with the new rules coming into force, Québec's Autorité des marchés financiers (the "AMF") and the OSC will adopt Multilateral Instrument 61-101. The purpose of the Instrument is to harmonize the rules in those two provinces relating to minority security holder protections (such as formal valuation requirements) in special transactions, such as insider bids, related party transactions and business combinations. Many of the changes under the Multilateral Instrument can be seen as responses to the new rules governing take-over and issuer bids in Ontario and the rest of Canada, although the instrument will introduce some original requirements not now found in OSC Rule 61-501 and Regulation Q-27 of the AMF. For example, independent directors serving on special committees in Ontario and Quebec will now be prohibited from receiving compensation which is contingent upon the successful completion of a transaction.
In this article, we will review some of the more significant developments under the new rules. Little has changed in terms of the mechanics (and time periods) of take-over bids and issuer bids. It is worth noting that bids underway before February 1, 2008 will still be subject to the old rules in each jurisdiction.
Deemed beneficial ownership
The determination of a bidder's beneficial ownership of securities is central to the application of the takeover bid rules. While the new rules adopt the language that is found in the existing rules whereby the holder of a right to acquire beneficial ownership of the subject securities within 60 days is considered to be their beneficial owner, the new rules also provide that the mere fact that there is an agreement in place to the effect that a securityholder will tender the securities if a formal bid is made by the bidder does not make the bidder the beneficial holder of these securities.
New definitions of issuer bid and take-over bids
The definition of "issuer bid" has been modified to exempt acquisitions (including offers to acquire) or redemptions (including offers to redeem) made by an issuer of its own securities, where no valuable consideration is offered or paid by the issuer. The definition for both "issuer bids" and "take-over bids" exclude acquisitions (including offers to acquire) or redemptions (including offers to redeem) which are a step in a multi-step amalgamation, reorganization or arrangement that requires security holder approval. In this case, compliance with bid rules is viewed as unnecessary given that the issuer will be required to prepare a detailed information circular in connection with the shareholder meeting.
Historically, take-over bid rules prevented bidders from entering into agreements which provided some security holders with greater consideration than that being offered to other holders of the same class of securities. As a result, in an effort to retain key personnel upon completion of a successful bid, for example, bidders often had to obtain discretionary relief from the so-called collateral benefits rule or structure their transactions around the rule. The new rules provide for exceptions to the general prohibition, allowing directors and other employees to receive employment or severance benefits from the bidder under prescribed circumstances. For instance, compensation arrangements are permitted if they involve a group plan which provides benefits to employees holding similar positions subject to each recipient of the collateral benefit owning, together with his or her associates, less than 1 percent of the securities subject to the bid or, if the target issuer has set up an independent committee of directors, such committee determining that the benefit does not exceed 5 percent of the value given by the recipient of the benefit. The exceptions are based on the so-called "safe harbour" provisions created by the U.S. Securities Exchange & Commission to address similar post-bid employment arrangements.
The new rules clarify that the requirement to provide identical consideration does not preclude a bidder from offering to all holders of the target securities an identical choice of consideration.
In an effort to improve the transparency of the bid process, bidders and target issuers must now file any agreements that could affect the control of the target issuer. These agreements include lockup agreements, agreements between the bidder and the directors and officers of the target, as well as other agreements relating to control of the target that were not filed under continuous disclosure rules. The new rules allow portions of filed documents to be redacted to protect sensitive and confidential information. A final point to note regarding disclosure is that the new rules require more press releases than is now the case to be issued in various circumstances throughout the bidding process, such as where the bidder knows, following the expiry of its bid, that it will not take up all securities deposited under the bid.
Acting Jointly or In Concert
Under the previous Ontario rules, certain persons were presumed to be acting jointly or in concert, subject to rebuttal. The new rules are more strict and draw a distinction between those who have essentially agreed with the bidder or with any person acting jointly or in concert with the bidder to acquire or offer to acquire the target securities and the affiliates of the bidder (all of whom are deemed to be acting jointly or in concert with the bidder) and those who have agreed with the bidder or with any person acting jointly or in concert with the bidder to vote their securities in favour of the offer as well as associates of the bidder, who are merely presumed, subject to rebuttal, to be acting jointly or in concert with the bidder.
In Multilateral Instrument 61-101, securities commission staff have clarified their position regarding situations where a related party of an issuer (such as a director, officer or controlling shareholder) is presented with an opportunity to maintain or acquire an equity interest in an issuer (or successor to the issuer) upon completion of an arm's length take-over bid or business combination (such as a plan of arrangement). In these circumstances, securities commission staff reserves the right to re-characterize a related party as a "joint actor" with the arm's length purchaser of the issuer if, upon completion of the transaction, a related party continues to hold an equity interest in the issuer (or successor issuer). A "joint actor" characterization may cause a transaction to be regarded as an "insider bid" or a "business combination". As a result, an otherwise arm's length transaction could require a formal valuation to be prepared. \
Foreign Take-Over Bids
The new rules will provide for the creation of new foreign take-over and issuer bid exemptions, providing bidders with a much broader exemption than under the pre-existing de minimus exemptions under provincial and territorial securities acts. Among the conditions for the foreign take-over bid exemption, the bidder must reasonably believe that less than 10 percent of the securities forming the subject of the bid are owned by Canadian residents. Moreover, the published market on which the greatest trading volume of the subject securities occurred cannot have been within Canada in the 12 months prior to the bid. Lastly, securityholders within a province must be entitled to participate in the bid on terms at least as favourable as those generally available to security holders of the same class.
Variations of Terms
Should a bidder vary the terms of its formal bid after the bid has commenced, securities regulators may exercise discretion, in the public interest, to ensure that security holders of the target are not prejudiced by the variations. Examples of variations that could trigger an intervention include lowering the bid price, changing the form of consideration or adding new conditions. In any of these cases, securities regulators could intervene to cease-trade the bid, or require that the deposit period be extended or that a bidder commence a new bid with different conditions.