Effective February 1, 2008, a new infrastructure to govern take-over bids and issuer bids is now in place across Canada. While substantively the same, the new regime is structured differently in Ontario as compared to all other Canadian jurisdictions (the Other Jurisdictions), and is comprised principally of the following:
- new and/or amended provisions contained in Part XX of the OSA (OSA Amendments);
- OSC Rule 62-504 Take-Over Bids and Issuer Bids (OSC Rule); and
- National Policy 62-203 Take-Over Bids and Issuer Bids (National Policy).
In the Other Jurisdictions,
- Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids (Multilateral Instrument); and
- the National Policy.
The main focus of the new rules was to harmonize and consolidate bid regimes across the country; however, their introduction will also result in the following key changes to the previous bid rules:
Broader and/or more flexible exemptions:
- The new rules contain express exemptions from restrictions against collateral agreements for certain enumerated employment-related arrangements.
- The current exemptions for bids carried out in accordance with the laws of a foreign jurisdiction have been broadened.
- While all holders of the same class of securities must still be offered identical consideration if a formal bid is made, the new rules specifically allow for the offer of an identical choice of consideration.
Consolidation and streamlining:
- The new rules generally consolidate the bid regimes in Ontario and in the Other Jurisdictions by implementing a common set of exemptions and harmonized guidance in the form of the National Policy.
- The National Policy provides guidance on matters such as the impact of varying the terms of a bid, determination of independence, interpretation of the prohibition against collateral agreements (including determination of value for certain exceptions to this prohibition), and on redacting or omitting information in agreements required to be filed.
- Pre-bid integration rules, including those previously found in OSC Rule 62-501 Prohibited Stock Market Purchases of the Offeree's Securities by the Offeror During a Take-Over Bid, have been consolidated into the OSC Rule and the Multilateral Instrument.
- Any person or company who acquires or offers to acquire securities subject to a bid as a result of an agreement, commitment or understanding with the offeror or any joint actor of the offer and any affiliate of the offeror will be deemed to be acting jointly or in concert with the offeror. This amendment alters the burden of proof, as previously such persons or companies would have been subject to a rebuttable presumption only. Contrary to what was earlier proposed, associates and those agreeing to vote shares with the offeror are still subject to a rebuttable presumption only.
- The new rules prescribe new harmonized forms for take-over bid, issuer bid and directors' circulars, as well as a new form for a notice of change or variation.
- The definitions of "take-over bid" and "issuer bid" have been amended to specifically exclude purchases that are a step in certain types of transactions that require the approval of security-holders. The definition of "issuer bid" has also been amended to exclude purchases where no valuable consideration is paid for the securities.
Codification of exemptive relief:
- Codifying existing exemptive relief allowing for employment arrangements that have a legitimate business purpose and that provide mutual exchange of value, the new rules now specifically include several exceptions from the prohibition against collateral agreements, including exceptions for severance arrangements or other employee benefit arrangements that provide:
- an enhancement of employee benefits resulting from participation in a group plan where such benefits are generally provided to other similarly-situated employees of the successor to the business of the target; or
- a benefit received solely in connection with the security-holder's services as an employee, director or consultant, provided that;
- at the time of the announcement of the bid, the security-holder and its associates own less than 1% of the class of target securities; or
- an independent committee of the offeree issuer, acting in good faith, determines that (i) the net value of the benefit received is less than 5% of the consideration paid to such security-holder under the bid, or (ii) the security-holder is providing at least equivalent value for the benefit.
In order to rely on this "equivalent value" exception, certain prescribed conditions must be satisfied, which include providing specified disclosure.
- Also codifying common exemptive relief, two new exceptions are now available from the requirement to take-up and pay for securities proportionately under an issuer bid. The first exception allows formal issuer bids to be conducted pursuant to a modified "Dutch auction" process. The second exception allows an offeror to purchase "odd lots" held by security-holders of the offeree issuer.
New requirements to file relevant agreements:
- The new rules also implement new filing requirements. Specifically, agreements between the offeror and a security-holder of the offeree relating to a bid, any agreements between an offeror and offeree issuer or the directors or officers of the offeree issuer relating to the bid, and any other agreements that could affect control of the offeree issuer must now be filed at the time that the relevant take-over bid circular or directors' circular is filed.
- These new filing requirements permit agreements to be redacted or for provisions to be omitted, however, in order to do so (i) the issuer must have reasonable grounds to believe that the disclosure would be seriously prejudicial or would violate confidentiality restrictions, and (ii) the provisions in question must not be necessary for understanding the document. In addition, the document as filed must include a brief description of the information that has been omitted or redacted.
In response to comments received on earlier proposals, certain important changes were made to the final bid rules. These include removing proposed restrictions on bid variations (in favour of guidance in the National Policy on when the regulators may rely on their public interest jurisdiction to investigate any apparent abuse through a variation); abandoning the requirement for an independent valuation opinion for employment arrangements excluded from the prohibition against collateral benefits (in favour of a "value for value" exception); and abandoning additional requirements applicable to the 5 person / 115% so called "private agreement" exemption.
In conjunction with the implementation of these new bid rules, the Ontario Securities Commission and the Autorité des marchés financiers are also implementing their joint rule MI 61-101 Protection of Minority Shareholders in Special Transactions. MI 61-101 is the result of a combination of OSC Rule 61-501 Insider Bids, Issuer Bids, Business Combinations and Related Party Transactions and Quebec's Regulation Q- 27 and is also intended to be effective as of February 1, 2008.
While MI 61-101 is substantially the same as OSC Rule 61-501, the regulators have made some changes as part of the harmonization process. These include amending the independence provisions of the instrument to explicitly prohibit a member of an independent committee from receiving any payment or benefit that is contingent upon completion of the transaction. The changes also clarify that the valuation exemption for unlisted issuers is available to those listed on the AIM or PLUS markets, and make the valuation exemption for "amalgamations or equivalent transactions with no adverse effect" available for both related party transactions and business combinations. The companion policy to MI 61-101 has also been revised and includes guidance on, among other things, circumstances in which the regulators may consider a related party to be a joint actor of an offeror in the context of a bid.
While all of these changes advance national harmony there will still be some differences among the various Canadian jurisdictions which may require discretionary relief (such as the definition of "reporting issuer"), but these differences are also slowly being reduced.