On February 1, 2008, Multilateral Instrument 61-101 Protection of Minority Shareholders in Special Transactions became effective, replacing OSC Rule 61-501 and Québec’s Regulation Q-27. Both rules contained requirements for enhanced disclosure, independent valuations and majority of minority security holder approvals for specified types of transactions, specifically insider bids, issuer bids, business combinations and related party transactions. The effective date of MI 61-101 coincided with the effective date of new rules governing take-over bids and issuer bids across Canada, which are discussed in another article. Structured as a multilateral instrument, it is open to other jurisdictions to adopt the new rule but none has indicated any intention of adopting it at this time. While Rule 61-501 and Regulation Q-27 were initially nearly identical, amendments made in 2004 to Rule 61-501 were never formally made to Regulation Q-27. This mismatch resulted in numerous exemptive relief orders for issuers regulated by Regulation Q-27. Additional consequential amendments would be required as a result of the new bid regime. Thus the creation of a multilateral instrument at this juncture allowed for all necessary updates to be incorporated into a single instrument. Only a few substantive changes were made in addition to the consequential amendments. These are highlighted below.
Payments to Special Committee Members of the Board
One substantive change is the addition of a prohibition against independent directors receiving a benefit not generally available to security holders as a consequence of a transaction. This is intended to prohibit, for example, the payment of success fees to independent directors in the context of the completion of a transaction (even if the intention to provide the benefit is not formed until after the transaction has been completed). The regulators have updated the companion policy to the rule, Companion Policy 61-101CP, to include guidance that affirms the value of having adequately compensated members of a special or independent committee. The guidance also affirms that committee members should be, ideally, compensated by fixed sum payments that are set when the committee is created.
Equity Participation by Target Management
The new rule’s updated companion policy also includes substantially expanded guidance on the treatment of directors and senior officers of a target where they are provided an opportunity to participate in the equity of the target issuer following the completion of the transaction. This circumstance has often arisen in the context of M&A transactions where the acquirer was a private equity firm, but very little concrete guidance was available to evaluate the effect of such an equity participation opportunity on the regulation of the transaction overall, including the possible additional requirement of a formal valuation.
While the broad joint actor concept still applies generally, the regulators have now clearly stated a threshold at which, in their view, a related party may be considered to be a joint actor with the offeror — that threshold being where the related party becomes a ‘control person’ upon completion of the transaction or otherwise comes to beneficially own more than 20 per cent of the voting rights.