Canadian securities legislation provides that a take-over bid may be triggered when an offer to acquire outstanding voting or equity securities of a class of a public company is made to a person in a Canadian jurisdiction, where the securities subject to the offer, together with the offeror’s own securities, constitute in the aggregate 20% or more of the outstanding securities of that class. The take-over bid rules may apply in the context of the grant of put and call options. It is therefore essential to structure the terms of these options to ensure the availability of take-over bid exemptions where necessary.

Private Agreement Exemption

The so-called private agreement exemption provides for a statutory exemption from the take-over bid rules subject to certain conditions, including when purchases are made from not more than five persons and the value of the consideration paid for the securities is not greater than 115% of the “market price” (as determined by regulation) of the securities on the date of the bid (i.e. when an “offer to purchase” is made).

Put/Call Options and Date of the Offer

In determining when an “offer to purchase” is made for purposes of take-over bid legislation in the context of the grant of put and call options, it has been determined that:

  • In the case of a call option, a take-over bid may generally be triggered by the holder of the call option when such holder exercises the option, and not when the call option is granted. Therefore, since a take-over bid may be triggered as a result of the exercise of a call option, when structuring the option it is essential to ensure that the exercise price of the option will not be greater than 115% of the market price of the securities subject to the option on the date of exercise of the call option and that the other conditions to the availability of the private agreement exemption are complied with on such date.
  • In the case of a put option, a take-over bid may generally be triggered by the grantor of the put option when the option is granted (i.e. the grantor becomes bound to purchase the securities subject to the put option from and after such date), and not when the put option is exercised. Therefore, since a take-over bid may be triggered as a result of the grant of a put option, when structuring the option it is essential to ensure that the exercise price of the option is not greater than 115% of the market price of the securities subject to the option on the date of grant of the put option and that the other conditions to the availability of the private agreement exemption are complied with on such date.

Discretionary exemptions

Canadian securities regulators have granted discretionary relief from take-over bid requirements in the context of the grant of a put option where the formula used to establish the exercise price of the option was based on the market price of the securities subject to the option on the date of exercise of the option, and therefore may not have complied with the 115% limitation on the date of grant of the put option. The conditions and circumstances surrounding the grant of these discretionary exemptions included:

  • there was a business purpose to the grant of the put option (i.e. it was an essential element to the commercial deal);
  • in no circumstances would the premium payable upon the exercise of the put option exceed 115% of the market price of the securities subject to the option on the date of exercise;
  • the holder of the put option was prohibited from exercising the option where such person was aware of any undisclosed material information regarding the public company; and
  • there was no abusive aspect to the transaction.

Although these discretionary exemptions provide for greater flexibility in structuring the terms of put options, parties wishing to use put and call options should always ensure that the terms of such options comply with applicable take-over bid legislation.