We have recently seen a number of take-over bids in Canada where the bidder has varied the bid after commencement to reduce the price offered for the securities, including the following transactions:
- Borealis Acquisition Corporation reduced the price of its bid for Teranet Income Fund from $11.00 per unit to $10.25 per unit. The reason provided was the deterioration in economic and financial market conditions and increases in the cost of capital. The reduced bid was successful.
- Jaguar Financial Corporation reduced the price of its partial bid for Royal Laser Corp. from $0.80 per share to $0.63 per share. The reason provided was a major decline in markets generally and the share price of Royal Laser. The offer expired without the bidder taking up any shares.
- A subsidiary of Andlauer Management Group Inc. reduced the price of its bid for ATS Andlauer Income Fund from $11.75 per unit to $10.75 per unit. The reason provided was a material deterioration of economic conditions and credit markets that resulted in the failure of a condition to the take-over bid regarding the state of the markets to be satisfied. The reduced bid was successful.
This kind of variation is unusual in Canada and may raise a number of potential issues that bidders should consider. These issues are particularly relevant where the bid is not supported and may be actively resisted by the target.
Bidders should expect a reduction in price to raise questions from the securities regulators and other interested parties. Depending on the circumstances, a price reduction could lead to allegations that either the bid or the variation fails to comply with the Canadian take-over bid regime. A price reduction may also give rise to policy concerns that could cause the regulators to intervene or be used to the target’s advantage in justifying defensive tactics.
Policy implications of price reductions
The primary objective of the take-over bid provisions of Canadian securities legislation is the protection of the bona fide interests of the shareholders of the target company. A secondary objective is to provide a regulatory framework within which take-over bids may proceed in an open and even-handed environment. The take-over bid provisions should favour neither the offeror nor management of the target company, and should leave the shareholders of the target company free to make a fully formed decision.
National Policy 62-202 – Take-over Bids – Defensive Tactics, s. 1.1(2)
A significant reduction in price following the commencement of a formal take-over bid arguably has the potential to undercut these objectives.
The price at which a bid is initially launched is a primary factor that determines the field of potential competing bids. Although the minimum deposit period of a take-over bid is 35 days, a bid can expire in as little as 10 days following a variation that reduces the price of the bid. The target may not have enough time to engage other potential bidders that may be willing to compete at the reduced price. A substantial price reduction could frustrate the ability of the target to conduct an orderly auction and could potentially reduce the value ultimately received by target security holders.
If a price reduction occurs after target security holders have deposited securities under the bid, the variation puts the onus on the depositing security holders to take active steps to withdraw their securities. This could be seen as coercive and detrimental to the interests of the target security holders.
A material reduction in the price of a take-over bid may also adversely affect security holders who purchased in the secondary market following the commencement of the bid. Typically, these purchasers include sophisticated investors that may be more likely to actively assert their rights.
Potential conflict with requirements under the Canadian bid regime
There is no explicit prohibition on varying a take-over bid to reduce the price offered. However, depending on the circumstances under which the variation is made, it could conflict with requirements of the Canadian take-over bid regime.
The pre-bid integration rules
If the bidder acquired beneficial ownership of any securities of the same class as those subject to the take-over bid within the preceding 90 days, the pre-bid integration rules require the bidder to offer consideration at least equal to the highest consideration paid on a per security basis in any such prior transaction. Trades effected in the normal course on a published market, acquisitions of previously unissued securities or securities previously redeemed or repurchased by the issuer and acquisitions made during the bid are, subject to conditions, excepted from the pre-bid integration rules. The highest price at which securities were acquired in any transaction subject to the pre-bid integration rules effectively sets a lower limit for any subsequent variation of the price under a take-over bid.
The identical consideration requirement and the obligation to pay for securities taken up
Once a bidder has taken up securities under a bid, the requirement to offer identical consideration to all holders of the same class of securities would effectively prohibit reducing the price offered under the bid. The Canadian regime contemplates price increases after securities are taken up and requires the payment of the increased consideration for all securities taken up under the bid, whether before or after the variation. However, there is no similar mechanism for variations to reduce the price. Once securities have been taken up, the bidder is required to pay for those securities at the offered price. Since all security holders who tender to the offer must receive the same consideration, there is no way to satisfy the obligation to pay for the securities taken up at the original price while offering a reduced price for the securities that have not been tendered without the consent of the affected security holders.
The obligation to take up and pay for deposited securities
If all the terms and conditions of the bid have been complied with or waived, a bidder is required to take up and pay for all securities deposited under the bid and not withdrawn. Once a bid becomes unconditional, the obligation to take-up securities at the original price, coupled with the identical consideration requirement, could effectively preclude a reduction in the price of the bid.
Given these obligations, a price reduction is likely to trigger increased scrutiny on the conditions of a bid. The validity of the variation could potentially be challenged if it appears that the conditions to the bid were satisfied at the time of the variation.
Potential questions regarding compliance with the take-over bid regime
Price reductions may raise questions as to whether the take-over bid, as originally launched, complied with the financing requirement or violated the prohibition on misleading or untrue statements.
The financing requirement
For bids with a cash component, bidders are required to make adequate arrangements before the bid to ensure that the required funds are available to make full payment for the securities subject to the bid. By reducing the price payable for securities, the bidder is reducing the amount of funds required. Depending on the circumstances, the price reduction may raise questions about whether the financing requirement was satisfied at the time the take-over bid was originally launched.
Misleading or untrue statements
Securities legislation prohibits making a statement that a person knows or reasonably ought to know is materially misleading, untrue or contains an omission and would reasonably be expected to have a significant effect on the market price or value of a security. Launching a take-over bid can clearly be expected to have a significant effect on the market price of the securities subject to the bid. Depending on the circumstances, a significant reduction in the bid price could create the appearance that the bidder had no intention to acquire securities at the original price and could call its motives into question.
The public interest mandate of the securities regulators
The securities regulators may consider asserting their public interest mandate if there is a substantial price reduction under a bid. National Policy 62-203 Take-Over Bids and Issuer Bids signals that the regulators may intervene if a bidder varies a bid to make it less favourable to target security holders and the variation is considered to be fundamental to the bid. The policy specifically refers to variations where the bidder:
- lowers the consideration;
- changes the form of consideration offered, other than to add to the consideration;
- lowers the proportion of outstanding securities subject to the bid; or
- adds new conditions.
Cease trading the bid, extending the deposit period under the bid or requiring the bidder to commence a new bid with different conditions are described as potential responses from the regulators.
This policy had its genesis in a proposal to prohibit such variations. Although the regulators chose to deal with these variations on a case-by-case basis under the public interest mandate, they are likely to receive close scrutiny.
The policy rationale for the original proposal was a concern that the time and the disclosure provided in connection with a variation of a take-over bid may not be sufficient for the market to consider the impact of such fundamental changes to a bid. Accordingly, it is reasonable to assume that time and disclosure will be key considerations in the regulators’ public interest analysis of a price reduction. If this analysis is undertaken in the context of a request by the bidder to cease trade the target’s rights plan, where the central issue is whether the target has had sufficient time to solicit superior alternatives, a price reduction could weigh heavily in favour of the target.
Any potential intervention would depend on the extent of the price reduction and would be considered in light of the circumstances in which the bid and the variation were made. A bidder may be able to reduce the likelihood of the regulators taking action by extending the period of the bid beyond the 10-day minimum and providing detailed and meaningful disclosure supporting the variation. A price reduction may be viewed as appropriate if there is an objectively supportable rationale for the reduction, such as a material adverse change in the target, and the amount of the reduction is in proportion to that rationale.
A guiding principle underlying the take-over bid regime is that target security holders should have the right to decide whether to sell their securities. Accordingly, clear indications of prejudice to target security holders or the public interest would likely be required for the regulators to intervene to deny the target security holders the ability to consider an offer.
Price reductions in take-over bids are not prohibited under the Canadian regime. However, given the enhanced scrutiny that a price reduction will attract and the potential for conflict with other obligations under the regime, a reduction in price will potentially lead to increased transactional risk. A bidder should consider providing disclosure that anticipates and addresses such issues by indicating how its take-over bid and the variation are consistent with the requirements and policies of the take-over bid regime.