New rules governing take-over bids and issuer bids in Canada will come into force on February 1, 2008. The new bid regime does not represent a wholesale reconstruction of the existing rules governing the conduct of take-over bids and issuer bids in Canada. Rather, the new rules largely consolidate and attempt to harmonize the existing rules currently in place in each of the provinces and territories in Canada. To that end, the rules relating to the method and timing of making a take-over bid or issuer bid, and issuing a directors’ circular, are substantially similar to the existing requirements in Canada. Nevertheless, there are certain new significant developments.
Significant developments under the new bid regime are set out below:
Collateral Benefits Safe Harbour
The new regime introduces a safe harbour in take-over bids and issuer bids from the prohibition against “collateral benefits” for benefits that are more properly characterized as compensation for employment.
Filing of Agreements
The new rules provide a new requirement to file agreements such as lock-up agreements, acquisition agreements, any agreements between a bidder and directors or officers of a target company relating to the bid and, significantly, agreements that could affect control of the target company, including agreements with change of control provisions. Such a filing requirement is likely to put considerable incremental pressure on a target board confronting a hostile take-over bid and, more generally, raises questions about the types of change of control provisions that ought to be disclosed, depending on the terms and circumstances of the bid and whether such information would ultimately be material to a security holder’s decision to tender to the bid.
The new rules include a new deeming provision in which certain categories of relationships are deemed to be ones in which a person will be considered a “joint actor” with the bidder – in particular, affiliates of the bidder and entities having an agreement with the bidder to acquire securities that are the subject of a bid.
Foreign Take-Over Bids
A new and broader foreign take-over bid exemption is provided under the new regime for bids in which, among other things, less than 10% of the securities subject to the bid are held by holders in Canada, and the published market on which the greatest volume of trading in such securities occurred during the last 12 months was not in Canada.
Modified Dutch Auctions
New exemptions from certain issuer bid rules designed to facilitate bids that are structured as “modified Dutch auctions” are included in the new rules.
Variations of Bids
The new regime provides new guidance with regard to certain variations of a bid which may prompt regulators to exercise their public interest mandate to ensure that security holders are not prejudiced – in particular: lowering the bid consideration; changing the form of consideration offered, other than by offering additional consideration; lowering the proportion of outstanding securities for which the bid is made; or adding new bid conditions.
The bid regime will be governed by a new national instrument which will be in force in all provinces and territories except Ontario. In Ontario, the bid regime will be governed by an amended Part XX of the Securities Act (Ontario) and a new local rule.
At the same time as the coming into force of the new bid regime, measures to harmonize and consolidate rules in Ontario and Québec requiring enhanced disclosure, independent valuations and minority security holder approval for certain types of related party transactions are expected to come into effect. Specifically, Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions will replace Rule 61-501 in Ontario and Regulation Q-27 in Québec and will govern the conduct of insider bids, issuer bids, business combinations and related party transactions. A number of the changes proposed in MI 61-101 are consequential changes resulting from the new bid regime. However, the new instrument also introduces certain substantive changes. The most significant changes are as follows.
Payments to Members of Special Committees
The new instrument introduces a new prohibition against members of special committees of independent directors receiving payments or benefits that are contingent upon completion of a transaction. This prohibition reflects the concern of regulators that, while compensation for serving on a committee is not improper, directors should ensure that compensation does not compromise independence. In its guidance, the regulators have also advised that the compensation of committee members should ideally be set when the committee is created and be based on fixed sum payments or the work involved.
Equity Interests Granted to Directors and Senior Officers
The new instrument also introduces new interpretive guidance in circumstances where related parties, such as directors and senior officers, are provided with an opportunity to maintain or acquire an equity interest in an issuer upon completion of a transaction. The legal implications of equity participation by related parties in target companies following completion of a transaction are particularly relevant in the context of private equity-sponsored buy-outs, which often involve incentives for members of management whom a private equity firm wishes to keep in place. In these types of circumstances, parties need to be mindful of whether a related party, such as a director or senior officer, may become a “joint actor.” This could cause a bid to be regarded as an insider bid, or an otherwise arm’s length transaction to be regarded as a business combination that requires a formal valuation and that excludes the related party’s shares from being counted in determining whether minority shareholder approval has been obtained.
In contrast to previous guidance, the regulators have provided some greater clarity as to whether and when this type of equity participation could have the effect of characterizing transactions as insider bids or business combinations, thereby attracting incremental regulation including enhanced disclosure and a formal valuation. In particular, the regulators may, without limitation, consider a related party to be a “joint actor” with a bidder in a take-over bid, or with an acquiror in an acquisition transaction, if the related party becomes a control person of the target company upon completion of the transaction or if the related party beneficially owns securities with more than 20% of the voting rights.
Detailed Review of New Bid Regime
A more detailed review of the new bid regime can be accessed here.