Written by David A. Spencer, Brad D. Markel, Eric Chernin and Ted R. Gotlieb
On March 31, 2015, the Canadian Securities Administrators (CSA) announced the publication of proposed amendments to the Canadian take-over bid rules.
The amendments announced on March 31, 2015 followed an 18-month consultation period by Canadian securities regulators following the original competing proposals to the regulation of defensive tactics and reform of the existing take-over bid regime announced on September 11, 2014, by the CSA and the Authorité des marchés financiers (AMF). The original September 11, 2014, amendments were summarized in our article, The CSA Proposes a New Harmonized Take-Over Bid Approach, published on September 15, 2014.
The proposed amendments released by the CSA on March 31, 2015, represent an attempted compromise between the divergent proposals formerly put forth by the CSA and the AMF, and as a result of the harmonized regulatory approach reflected in the proposed amendments the CSA and the AMF have abandoned the original September 11, 2014, proposals in favour of a coordinated approach for all Canadian jurisdictions.
A New Harmonized Approach
The proposed changes to the Canadian take-over bid regime are consistent with the guidance provided by the CSA in September 2014 and require all non-exempt take-over bids for Canadian public targets to have the following mandatory features:
- Irrevocable Minimum Tender Condition – A minimum of more than 50 percent of all outstanding target securities owned or held by persons other than the bidder and its joint actors must be tendered and not withdrawn before the bidder can take up any securities under the bid.
- 10-Day Bid Extension – Bids must be extended by the bidder for an additional 10 days after the bidder achieves the minimum tender condition and the bidder announces its intention to immediately take up and pay for the securities deposited under the bid.
- 120-Day Bid Period – Bids must remain open for a minimum of 120 days, which represents a significant increase from both the currently mandated 35-day period and the 60-day period typically permitted before a shareholder rights plan or poison pill is cease-traded. This 120-day period is subject to two exceptions: (1) where the target board issues a news release in respect of a proposed or commenced bid in which it prescribes a shorter bid period of at least 35 days, all outstanding or subsequent take-over bids must remain open for at least the stated shorter bid period; and (2) where the target board issues a news release indicating that the board has entered into an alternative change of control transaction (such as a plan of arrangement) all outstanding or subsequent take-over bids must remain open for a period of at least 35 days.
According to the CSA, the proposed amendments are intended to "enhance the quality and integrity of the take-over bid regime" by providing boards of directors of target companies with additional time and discretion to respond to hostile bids and "facilitating the ability of target shareholders to make voluntary, informed and coordinated tender decisions".
The proposed amendments apply to all take-over bids, other than exempt bids which include: (1) bids made through private agreement, wherein a bid is made to five or fewer persons, there are more than five persons holding the securities subject to the bid, and the consideration paid for those securities is no greater than 115 percent of their value; and (2) bids for securities of non-reporting issuers, wherein there is no published market for the targeted securities and the number of holders of targeted securities is 50 or fewer.
The CSA expects that the proposed amendments will mitigate the coercive aspects of the current tender process, support collective majority security holder decision-making, increase leverage for target boards, increase the proportion of higher quality bids and lead to fewer partial take-over bids. The proposed amendments essentially codify the generally accepted requirements for a "permitted bid" under shareholders rights plans.
By requiring that the 50-percent minimum tender condition be met by target securities held only by non-bidding parties in a bid, the CSA is ensuring that minority shareholders are protected from the potential coercion of a controlling bidder by dictating that the "majority of the minority" shall rule the day. Interestingly, the CSA has chosen this approach rather than a regime that would allow a target board to "just say no".
As noted previously, the proposed amendments will allow target boards more time to find alternatives to hostile bids and to communicate with shareholders and may lead to more unsolicited competing bids. The proposed amendments will also impose additional challenges for hostile bidders, for example by impeding the ability of a bidder to acquire a t-hold position through partial bids. Hostile bidders may also be faced with increased financial costs associated with keeping their bids open longer.
Since the purpose of the proposed 120-day minimum bid period is to afford target boards with sufficient time to respond to unsolicited bids, the CSA indicates that target boards will not need the 120-day minimum period where that board has determined to engage in a friendly, alternative transaction. Nevertheless, a potential "white knight" may still insist on having a longer deposit period than that proposed by a target board in negotiations, in which case target boards may be required to covenant they will not reduce the 120-day bid period in arrangement agreements going forward. Conversely, a potential bidder negotiating a standstill provision in a confidentiality agreement may require that if the target company becomes "in play", the standstill provision will be negated so that it is able to bid, and the 120-day bid period will be reduced to the 35-day minimum.
Given that current CSA policy on defensive tactics will not change, it remains to be seen how significantly these amendments will change the take-over bid landscape for target boards. It is unclear from the proposed amendments how shareholder rights plans will be treated in the context of an increased bid period, and whether a rights plan would be allowed to stand beyond a 120-day bid period. Shareholder rights plans may continue to be an effective tool against "creeping" takeovers via private agreement or otherwise, but may continue to be successfully challenged by hostile bidders if used to delay a bid beyond the 120-day bid period. Given that the changes are intended to rebalance the dynamics between bidders and target boards, the CSA may be more likely to agree when hostile bidders argue that "the pill must go".
The CSA will solicit comments in respect of the proposed amendments to the take-over bid rules until June 29, 2015.