Completing the transaction

Hostile transactions

What are the special considerations for unsolicited transactions for public companies?

Unlike a negotiated or friendly transaction that can be accomplished by way of plan of arrangement or takeover bid, an unsolicited transaction or hostile bid can generally only be completed by way of a takeover bid. This allows the hostile bidder to appeal directly to the target company’s shareholders, thus avoiding the need to deal specifically with the management and board of directors of the target company and come to agreed terms and conditions with them in advance of launching the transaction.

Canadian takeover bid rules require at least a 105-day minimum deposit period, subject to reduction on consent (possible reduction to a minimum of 35 days), a mandatory minimum (50 per cent) tender condition and a mandatory 10-day extension of the deposit period on satisfaction of the minimum tender condition.

A minimum 105-day deposit period provides target boards with an extended period of time to either negotiate with the bidder or search for other potential bidders. The ability for the target board to shorten the bid period will likely deter hostile bids for those bidders looking to complete the acquisition quickly and avoid being potentially outbid by others.

Issuers subject to a hostile bid may use a variety of means to deter or delay hostile bids. Historically, the most common approach in Canada has been the use of shareholder rights plans (or poison pills), which unless waived or terminated, would dilute a hostile acquirer’s voting rights and economic interest in the target. However, the historic utility of shareholder rights plans (which were more prevalent in the context of historic 35-day deposit periods) has been muted as a result of the extension of the deposit period to 105 days. As a result, shareholder rights plans have become less prevalent, although the treatment of shareholder rights plans by Canadian securities regulators under a 105-day deposit period continues to evolve. Nevertheless, shareholder rights plans may still be useful in specific situations. Exempt bids, such as bids made through the normal course purchase and private agreement exemptions, are not subject to takeover bid rules. As such, shareholder rights plans can still be effective in situations where an exempt bid is launched, or to protect against creeping bids where a substantial share position will be acquired through exemptions to avoid triggering the formal takeover bid rules.

There is recourse to the courts when disputes arise concerning hostile bids. If, for example, an issuer is subject to a hostile bid, they may challenge such bid on the basis of non-compliance with statutory requirements. Conversely, a bidder may seek redress for defensive actions taken by the target board to frustrate a bid, for example, on the basis of breach by the target issuer’s directors of their fiduciary duties.

In recent years, shareholder activism has been on the rise in Canada. The new takeover bid rules may result in acquirers that previously would have sought to acquire control of an issuer through a hostile bid reconsidering this approach and, instead, acquiring control by means of a proxy contest.

Break-up fees – frustration of additional bidders

Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders?

While commonly used and often discussed, deal protection measures, such as break fees, non-solicitation covenants, right to match provisions and asset options, are not specifically regulated under Canadian corporate or securities laws, and can be disputed by reference to the directors’ fiduciary duties. There is little argument that the most commonly utilised deal protection method is the break fee. Break fees are agreed upon payments that a target company will pay to a potential acquirer in the event a business combination is not completed for specified reasons. Break fees are generally included to either protect a potential acquirer from the impact of another contemplated bid, or to compensate them where the proposed acquisition is unsuccessful. Break fees are often set based on the enterprise value of the target issuer. However, the typical break fee percentage in Canada has consistently remained in the range of 2 to 5 per cent for the past several years (with variations to this standard occurring in certain transactions based on the particular facts of that situation). The size of the break fee is always negotiated, and is, therefore, affected by the relative bargaining strength of the parties involved and other considerations specific to the transaction. Where the directors are discharging their fiduciary duties to facilitate a transaction, the limited Canadian jurisprudence suggests that defensive measures will generally be permissible, provided management of the company utilising them can establish a clear rationale and explanation for so doing. However, a balance must always be struck to ensure such measures are not negatively impacting the ability of potential acquirers to ‘come to the table’ and transact.

Reverse break fees, which are payable by the potential acquirer to the target in the event a transaction is not closed for specified reasons (examples have included the rejection of the acquirer shareholders or failure to satisfy certain regulatory conditions), are also not regulated. Theoretically, reverse break fees could be challenged on the basis of the directors’ fiduciary duties, but reverse break fees are not subject to the same potential scrutiny as break fees because the latter may have auction-ending implications.

Government influence

Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security?

The ICA is a federal statute that governs investments in Canadian businesses, including the acquisition of control of Canadian businesses, by non-Canadians. Jurisdiction over investments rests with the Minister of Innovation, Science and Economic Development Canada.

The Minister under the ICA will conduct a net benefit review of transactions that involve an acquisition of control of a Canadian business by a non-Canadian where the value of the Canadian business to be acquired exceeds certain financial thresholds. For example, acquisitions by private investors from World Trade Organization (WTO) countries will be subject to review if, generally, the enterprise value of the Canadian business exceeds C$1.075 billion (an amount that is indexed annually). The financial threshold is lower for acquisitions by state-owned enterprises and non-WTO investors or where the Canadian business carries on a ‘cultural business’, and is higher for acquisitions by private investors from trade agreement countries, such as the United States, Australia, Chile, Colombia, the European Union, Honduras, Japan, Mexico, New Zealand, Panama, Peru, Singapore, South Korea and Vietnam.

If subject to a net benefit review, the parties may not close the transaction until the Minister under the ICA has determined that the transaction would likely be of net benefit to Canada, after having taken into consideration the following factors:

  • the effect of the investment on the level and nature of economic activity in Canada;
  • the degree and significance of (continued) participation by Canadians in the Canadian business (in particular at the director and officer levels);
  • the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
  • the effect of the investment on competition;
  • the compatibility of the investment with national industrial, economic and cultural policies; and
  • the contribution of the investment to Canada’s ability to compete in world markets.

 

The review process often includes negotiating contractual undertakings to satisfy the Minister that the transaction would be of net benefit to Canada. Given the discretionary nature of the ICA review process, the acquiror should consider at the outset potential issues and engage legal and government and public relations advisers to help identify and manage potential concerns. 

If an investment does not trigger a net benefit review, the investor is required to file a notification form with the Canadian government disclosing information regarding the investor, the Canadian business and the transaction.

The Canadian government may also review any direct or indirect investment by a non-Canadian investor on the basis of national security concerns, and to prohibit or impose conditions on the investment if it determines that it may be injurious to national security. On 19 December 2016, the Canadian government released guidelines on national security reviews, which set out the factors considered when assessing national security risk, including, in particular: the effect on Canada’s defence capabilities and interests; transfers of sensitive technology or know-how; the security of critical infrastructure; the supply of critical goods and services to Canadians or the Canadian government; the enabling of foreign surveillance or espionage; the hindering of law enforcement operations; the impact on Canada’s international interests; and the potential involvement of illicit actors, such as terrorists or organised crime syndicates.

A review under the ICA typically lasts from 45 to 75 days, and may be longer where complex issues or national security concerns arise.

Conditional offers

What conditions to a tender offer, exchange offer, merger, plan or scheme of arrangement or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions?

Generally, there are no restrictions on the type of conditions that may be included in a business combination provided they are not coercive or abusive of security holders. One notable exception is that transactions completed by way of a takeover bid with cash consideration cannot be subject to financing and funds must be readily available to the offeror. Sufficient financing to cover the cash component of a bid must be arranged in advance of the bid being launched such that the acquirer reasonably believes financing is available even if some conditions to actually receiving funds are applicable. However, a business combination completed by way of an amalgamation or plan of arrangement does not carry such a prohibition.

Financing

If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing?

Where a business combination involves a financing condition, the transaction agreement typically provides for a covenant of the acquirer that it take all steps necessary to obtain acquisition financing. At the same time, the target company typically covenants to cooperate with the acquirer and the financing sources by: giving access to management, including participation in road shows and due diligence sessions; assisting with the preparation of customary materials for rating agencies, offering and private placement memoranda, prospectuses and similar documents; executing any pledge and security documents; and providing any required financial statements or other information.

Where a financing condition is in place, the target company often has a reverse break fee where it is entitled to a significant payment from the acquirer in the event the financing condition is not satisfied prior to closing and the business combination is unable to be completed as a result.

Minority squeeze-out

May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process?

In the context of a takeover bid, most Canadian corporate statutes provide that where a takeover bid has been accepted by shareholders (other than the acquirer and its affiliates) representing 90 per cent or more of outstanding shares of a class, the remaining shares can be acquired or squeezed out at the same price by operation of law, subject to rights of dissent and appraisal. Upon acquisition of 90 per cent or more of the outstanding shares of a target, the acquirer may send a notice to remaining shareholders that it is exercising its rights to acquire the remaining shares. Each shareholder has the right to dissent in respect of this process and apply to a court to establish a fair market value for the shares. The exercise of dissent rights does not prevent the acquirer from acquiring the shares of the dissenting shareholder; however, the acquirer inherits a court process that is completed following the acquisition, where a court hearing is held to determine the fair value of the dissenting shareholder’s shares. Depending on the outcome of this court process, the acquirer will be required to pay the former shareholder the fair value set by the court, which can be higher or lower than the bid price. The court process requires the former shareholder and the acquirer to adduce evidence as to the fair value of the shares. In some circumstances the fair value process is settled as between the former shareholder and the acquirer prior to the conclusion of the court process.

Alternatively, a second step acquisition transaction is available to acquirers who do not reach 90 per cent ownership but manage to acquire two-thirds of the target’s outstanding shares (or 75 per cent pursuant to some corporate statutes) and any majority of the minority required. In this case, the acquirer can propose an amalgamation, arrangement, share consolidation or other transaction to acquire the remaining shares. In all cases, the shareholder vote required will be carried by the acquirer’s holdings. A minority shareholder often has similar rights of dissent an appraisal in the context of such a second step acquisition transaction.

Waiting or notification periods

Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies?

A takeover bid must remain open for a minimum of 105 days, subject to the ability of the target company consenting to a shorter bid period of not less than 35 days. Furthermore, the bid may be open for longer and may be extended by the purchaser. Thus, hostile takeover bids must comply with at least a 105-day bid period. On successful completion of the bid, the purchaser can squeeze out non-tendering shareholders pursuant to certain procedures.

An amalgamation, plan of arrangement or other transaction structure that requires the approval of the target shareholder at a shareholders’ meeting typically requires 50 to 60 days to comply with applicable laws relating to notice periods for shareholder meetings.

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1 April 2020.