On December 18, 2009, the Canadian Securities Administrators (the “CSA”) published CSA Staff Notice 62-305 setting out the CSA’s view regarding the ability of an offeror to vary the terms of its outstanding take-over bid to make the bid less favourable to the target’s security holders (“Negative Variations”). Negative Variations may include a reduction in the consideration offered under the bid, a change in the form of consideration offered (other than to offer additional consideration to that already offered), a reduction in the number of securities subject to the bid, or the addition of new conditions.
Bid Creates a Legitimate Expectation
The rules governing take-over bids are designed to protect the bona fide interests of security holders while establishing a transparent, even-handed and predictable framework for the conduct of formal bids. An important underpinning of the bid regime is that offerors make offers they are prepared to honour, since the making of a take-over bid may affect the market price of an issuer’s securities, creating a legitimate expectation among the issuer, its security holders and other market participants, that the bid will be completed at the specified price, provided that the conditions of the bid are satisfied.
Unilateral Withdrawal or Variation Where Conditions of Bid Satisfied
The CSA advises that, in its view, the take-over bid rules do not contemplate the unilateral withdrawal by an offeror of a formal take-over bid, or the reduction of the offer price or the introduction of new conditions, where the original terms and conditions of the bid have been satisfied or waived.
Variation where Conditions of Bid Not Satisfied
The CSA notes that where the terms and conditions of a bid have not been satisfied, an offeror is entitled to allow its bid to expire and not take up securities tendered under the bid. The offeror may then make a new bid on different terms. Where the terms and conditions of an offer have not been satisfied, or will not be satisfied by the expiry date of the offer, securities regulators will not object to the offeror varying the bid by reducing the offer price or adding new conditions, provided that such variations are not prejudicial to security holders.
Challenge of Negative Variations by Securities Regulators
In determining whether to challenge a Negative Variation, securities regulators will take into account whether: (i) the Negative Variation is in response to the failure of a bona fide condition of the offer; (ii) the Negative Variation is effected as an alternative to allowing the bid to expire unsuccessfully; (iii) sufficient procedural protections have been provided to security holders and other market participants affected by the Negative Variation; and (iv) whether or not it would be abusive to security holders.
Where a condition is expressed such that the offeror has the sole judgment or discretion as to whether the condition has been satisfied, the CSA notes that securities regulators may intervene to ensure that such judgment is exercised in a reasonable manner.
Pursuant to National Policy 62-203 – Take-Over Bids and Issuer Bids, securities regulators may, depending on the circumstances, exercise their respective public interest mandates to cease-trade a take-over bid, require that the statutory deposit period following a bid variation be extended or require that an offeror commence a new bid with the varied conditions, to ensure that security holders are not prejudiced by the Negative Variation.
Procedural Protections and Disclosure
The procedural protections to be provided should include a period of extension to permit the issuer’s board of directors sufficient time to consider the varied offer and to communicate its view to security holders. This will also have the effect of allowing other potential offerors to assess the revised offer and determine whether to participate in an auction for the issuer.
The CSA expects a notice of variation, which is required to be sent by the offeror to all security holders whose securities have not already been taken up, to fully disclose the events leading up to the Negative Variation. The CSA may request additional evidence and submissions in order for it to determine whether the Negative Variation is in fact being made due to the failure of a bona fide condition of the offer and to determine that the failure and the events giving rise to such failure have been appropriately disclosed to the market in a timely manner.
Lack of Available Financing Not Grounds for Negative Variation
The CSA indicates that a lack of available financing will not constitute valid grounds for a Negative Variation, and securities regulators may request proof that financing was available to the offeror at the time the original bid was made.