Canadian securities regulators have adopted new rules and a national policy on takeover bids and issuer bids that harmonize the bid requirements across the country. The changes are expected to be effective on February 1, 2008. Bids commenced before that date will be governed by the old rules. The OSC and Quebec’s regulator have also adopted harmonized requirements for enhanced disclosure, independent valuations and majority-of-minority approval for special transactions affecting minority shareholders.
Changes to the Existing Bid Regime
Ontario’s new takeover bid and issuer bid regime will consist of amended Part XX of the Securities Act, Takeover Bids and Issuer Bids, as well as new OSC Rule 62-504 and related rules and forms. Equivalent changes to the bid regimes of the other jurisdictions have been adopted in Multilateral Instrument 62-104.1 In addition, new National Policy 62-203 outlines how securities regulators will interpret and apply certain parts of the new rules, and provides guidance to the parties involved in a bid. Joint Actors
The new rules include stricter tests to determine when two or more parties are “acting jointly or in concert” in bidding for a target (the significance being that joint actors are generally subject to all the same legal requirements governing bids, and their holdings of target securities must be aggregated for certain purposes, such as the early warning requirements). Under the new rules, a bidder will be deemed to be acting jointly with its affiliates and with any party acquiring securities in concert with the bidder. In contrast, the rules are not being changed with respect to a bidder’s associates or any party exercising voting rights in concert with the bidder: those parties are subject to a rebuttable presumption that they are acting jointly with the bidder.
To reduce bidders’ need to seek discretionary relief from the collateral benefits rules in connection with post-bid employment arrangements with the target’s employees or directors, the new rules explicitly permit these kinds of collateral benefits if certain conditions are met as long as (i) they involve a group plan that generally provides benefits to employees in similar positions; (ii) they involve a securityholder owning less than 1% of the class of target securities; or (iii) an independent committee of the target determines that (a) the securityholder is providing at least equivalent value for the benefits or (b) the value of the benefits is less than 5% of the consideration being paid to the securityholder under the bid. These provisions generally align with the collateral benefits provisions of new MI 61-101, Protection of Minority Shareholders in Special Transactions (see below), but the “equivalent value” exception is not available under MI 61-101 for collateral benefits provided to related parties in a second-step squeeze-out transaction or other business combination.
Purchases of Target Securities During Bids
Both the old and the new rules permit bidders to purchase target securities during a bid if the bidder’s intention to do so was disclosed in the bid circular and certain other conditions are met. The new rules go further by permitting bidders to purchase target securities during a bid even if they originally had no intention of doing so, as long as the bidder discloses its changed intention in a news release filed at least one business day in advance of any purchases.
Bidders and targets will have to file the following bid-related documents with securities regulators: lockup agreements; support and other agreements between the bidder and target; agreements between the bidder and directors or officers of the target; and any material documents that could affect control of the target. Sensitive portions of a filed document may be redacted and replaced with a brief description if disclosure would be seriously prejudicial or would violate confidentiality provisions.
Bids for Foreign Targets
A new exemption from the bid rules is available for Canadian securityholders who own less than 10% of the target’s securities and certain other conditions are met, including that the target’s largest trading market is outside Canada and Canadian securityholders are entitled to participate equally in the bid.
Proposed Rules That Were Not Adopted
When the new bid rules were originally published for comment in 2006, the regulators proposed some changes that have not been adopted. The abandoned proposals include restrictions on the use of the private agreement exemption and prohibitions on varying bids in certain circumstances. With respect to the latter, the regulators intend to rely on their public interest mandate to deal with potential abuses of the bid process.
Harmonized Rules in Ontario and Quebec for Protecting Minority Shareholders in Special Transactions
The OSC and Quebec’s securities regulator have adopted MI 61-101 Protection of Minority Security Holders in Special Transactions, which harmonizes the two provinces’ requirements for enhanced disclosure, independent valuations and majority-of-minority approval for certain transactions affecting minority shareholders. The new rules are substantially similar to Rule 61-501 and Quebec’s Regulation Q-27.