By: Stewart Sutcliffe
In 2016, foreign investors will attempt to navigate uncharted waters in the Canadian investment market as they begin to grapple with the Canadian Securities Administrators’ amendments to the take-over bid regime. These amendments are expected to add a measure of certainty to the take-over bid process, resulting in a better and clearer regime for foreign investors.
Key Features of the Proposed Amendments
There are two key features to the proposed amendments to the take-over bid regime. Firstly, the mandatory minimum deposit period is to be extended to 120 days. Secondly, a minimum tender requirement and a related extended bid period are proposed as a means to address what some have perceived as coercive features of the current rules. These amendments aim to increase shareholders’ ability to make voluntary, informed and co-ordinated tender decisions, while also providing target boards with additional time to respond to bids (and seek out proposals with greater value).
Mandatory Minimum Deposit Period
Under the new regime, take-over bids will be required to remain open for a minimum deposit period of 120 days (the current minimum deposit period is 35 days), subject to two exceptions. These exceptions give boards the flexibility to reduce the 120-day period in appropriate circumstances where a longer bid period is not required (eg in the case of a friendly transaction). The first exception is available when the target issues a press release in respect of the proposed or commenced bid announcing that a shorter deposit period is acceptable to the target board. If the target chooses to issue such a press release, all outstanding or subsequent contemporaneous take-over bids must remain open for, at least, the announced shorter deposit period. Any shorter period announced through a press release cannot be less than 35 days. A second exception to the 120-day minimum allows the target to issue a press release announcing that it has agreed to enter into or has determined to effect a specified “alternative transaction,” in which case all outstanding or subsequent contemporaneous take-over bids will be subject to a shorter 35-day minimum period.
According to the Canadian Securities Administrators, the 120-day requirement is meant to afford target boards sufficient time to respond to an unsolicited bid. The exceptions are designed to ensure that all bidders are treated equally; a target board may only waive the 120-day requirement in respect of a proposed or commenced take-over bid and once “waived for one” it is “waived for all,” as is the case generally under “permitted bid” provisions of shareholder rights plans. To avoid unequal treatment of bidders where the board enters into or determines to effect a board-supported change of control transaction that is not a take-over bid, such as a plan of arrangement, the deposit period for all outstanding or subsequent contemporaneous bids is reduced to 35 days for all bidders.
The proposed amendments address coercion by increasing the minimum tender condition and instituting a mandatory extension to the bid period. With regards to minimum tenders, the amendments propose that more than 50% of the outstanding securities owned by persons other than the bidder and any joint actors must be tendered and not withdrawn before the bidder can take up shares under the bid. Partial take-over bids are also subject to this minimum tender condition. As to the mandatory extension, the new regime extends the bid period by 10 days after the minimum tender condition is achieved and all other conditions of the bid have been complied with or waived.
Currently, bidders are not required to extend their bid after they have taken up shares and no formal mechanism exists which enables shareholders to co-ordinate their actions in the bid context. As a result, shareholders of a target make tender decisions without knowing what other shareholders will do. This uncertainty often leads to shareholders tendering the initial bid for fear of being left in an illiquid position. The combination of the 50% minimum tender condition and the mandatory 10-day extension is expected to reduce this type of fear-driven decision making. In particular, the 50% minimum tender condition is intended to address the current possibility that effective control of a public company can be acquired through a take-over bid without a majority of the independent shareholders of the target supporting the transaction.
One further nuance of the new regime is that the initial deposit period for a bid may not expire less than 10 days after the date of a notice of variation. This includes instances where the deposit period is changed in response to the target reducing the minimum deposit period under the two exceptions outlined above. The reduced deposit period will be calculated as of the date of commencement of each bid such that it will run for an equal period for each bidder and result in staggered finish lines, essentially providing initial bidders with a first-mover advantage.
Under the current regime, shareholders rights plans are often used as a defensive tactic against formal bids. The proposed amendments may decrease the need to rely on shareholder rights plans as a defensive tactic, as the mandatory minimum and anti-coercive features will serve to accomplish the same goals. However, shareholder rights plans will continue to be a defensive tool that is available to target boards albeit in more narrow and specific circumstances, including preventing creeping bids and irrevocable lock-up agreements.