Change of control transactions of publicly listed entities in Canada are typically effected by way of a take-over bid or a court-approved plan of arrangement. In 2016, there were developments in each of these areas that will be of interest to foreign investors: (i) a new take-over bid regime was implemented that significantly impacts the timelines and processes in a take-over bid and (ii) there were two court decisions that may be of significance where a change of control proceeds by way of a judicially-sanctioned plan of arrangement.
Take-over Bids: Key Features of the New Regime
The new take-over bid regime has two key features. First, the mandatory minimum deposit period has been extended from 35 to 120 days (with exceptions, as discussed below). Secondly, a minimum tender requirement and a related extended bid period were implemented to address what some have perceived as coercive features of the previous rules. These changes are intended (i) to make it easier for shareholders to make voluntary, informed and co-ordinated tender decisions, and (ii) to give target boards more time to respond to bids and, where appropriate, to seek out proposals with greater value.
Mandatory Minimum Deposit Period
The 120-day minimum deposit period under the new regime is subject to two exceptions. (1) The target may issue a press release in respect of the proposed or commenced bid announcing that a shorter deposit period is acceptable to the target board, although this shorter period cannot be less than the old minimum of 35 days. If such a press release is issued, all outstanding or subsequent contemporaneous take-over bids must remain open for (at least) the announced shorter deposit period. (2) The second exception 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. Together, these exceptions give boards the flexibility to reduce the 120-day period when a longer bid period is not required – as would typically be the case in "friendly" transactions, for example – while ensuring that all bidders are treated equally by maintaining the principle that where the minimum period is "waived for one" it is "waived for all" (as is the case generally under "permitted bid" provisions of shareholder rights plans).
The mandatory minimum tender condition (including for partial take-over bids) has been increased to 50% of the outstanding securities owned by persons other than the bidder and any joint actors. The new regime also 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.
The combination of the 50% minimum tender condition and the mandatory 10-day extension is meant to reduce this sort of fear-driven decision making that may have been fostered under the previous regime. Under that regime, bidders were not required to extend their bid after they had taken up shares. Moreover, no formal mechanism existed that enabled shareholders to co-ordinate their actions in the bid context. As a result, shareholders of a target had to make tender decisions without knowing what other shareholders would do. Some have argued that this uncertainty often led target shareholders to tender to the initial bid for fear of being left in an illiquid position.
The new 50% minimum tender condition is also intended to address what, under the previous regime, was the possibility that effective control of a public company could be acquired through a take-over bid without majority support from the independent shareholders of the target. As well, the new regime is expected to decrease the need to rely on shareholder rights plans as a defensive tactic, as the mandatory minimum and anti-coercive features will generally serve to accomplish the same goals.
Plans of Arrangement: Smoothwater and InterOil
Although relatively few cases in Canada touch on the practical aspects of M&A law (as compared to Delaware, for example), two decisions rendered late in 2016 (i) drew attention to the need to reconsider what some would say had become accepted practice in the discharge of fiduciary duties by target boards and (ii) highlighted potential hurdles that buyers and sellers may face in change of control transactions effected by way of judicially-sanctioned plans of arrangement.
The Smoothwater case was essentially a debate about the discretion of the board of directors to choose how to structure a transaction. Alberta Oilsands (AOS) had entered into a transaction under which Marquee Energy (Marquee) would be "arranged," with the result that AOS would acquire all of the shares of Marquee in exchange for shares of AOS and then, pursuant to a short-form vertical amalgamation, amalgamate with Marquee. Because the transaction was an arrangement of Marquee, it required Marquee shareholder approval, including an appraisal remedy for dissenting shareholders. The governing statute did not, however, require that the transaction be approved by AOS shareholders as AOS was not being arranged. If the transaction had instead proceeded as a long-form amalgamation of AOS and Marquee, it would have required approval from the shareholders of both AOS and Marquee, with the same dissent rights in each case.
Smoothwater, an AOS shareholder that opposed the proposed combination, intervened in the arrangement proceedings involving Marquee, asking the court to order that the shareholders of AOS also be provided with an opportunity to vote on, and dissent from, the transaction. Part of Smoothwater’s argument was based on the fact that the transaction structure that had originally been contemplated would have required an AOS shareholder vote. At first instance Smoothwater was successful. The trial judge concluded that the transaction was, in essence, a merger, and that the primary reason for using an arrangement had been to circumvent the need for approval from AOS shareholders. However, this ruling was reversed by the Alberta Court of Appeal, which affirmed (i) that the choice of transactional structure lies within the discretionary authority of the board of directors and (ii) that, under the relevant business corporations statute, shareholders are not entitled to a shareholder vote unless one is expressly provided to them. In other words, there is no bad faith on the part of a board of directors that chooses, from among a multiplicity of potential transaction structures, a structure that maximises commercial certainty, even if this choice happens to entail that shareholders will not have rights, such as approval or dissent rights, that they would have had if a different transaction structure had been chosen.
The court in InterOil was required to decide whether a proposed arrangement involving the exchange of all of the shares of InterOil Corporation (InterOil) for shares of Exxon Mobil Corporation (Exxon), plus a capped contingent cash payment, was "fair and reasonable." This is one of the three tests that Canadian courts apply when deciding whether to approve of a plan of arrangement under Canadian law, and in practice it is usually the most controversial test. The arrangement had been approved by the InterOil shareholders, with approximately 80% of shareholders who voted at the meeting voting for the transaction. The arrangement was opposed, however, by a former insider of InterOil, who contested the fairness of the arrangement at the final order hearing and introduced his own evidence against the transaction (which included a contrary financial analysis that was not refuted). The chambers judge ultimately approved the arrangement, relying heavily on the fact that a substantial majority of shareholders had supported it. However, he underscored a number of concerns regarding the process followed (including omissions and disclosure issues): (i) the value impact of the cap on the contingent payment, (ii) the conclusory nature of the fairness opinion delivered to the board of InterOil and included with the meeting materials for the shareholder meeting, (iii) the lack of disclosure of the quantum of the success fee payable to the financial adviser that had provided the fairness opinion, (iv) the incentives of management of InterOil in the event of a successful transaction, and (v) the lack of a second fairness opinion from an independent financial adviser paid on a flat fee basis.
The Yukon Court of Appeal allowed the appeal, for many of the procedural and disclosure reasons that the chambers judge had identified. While acknowledging the weight to be given to the shareholder vote, the Court questioned whether the shareholder approval was based on “information and advice that was adequate, objective and not undermined by conflicts of interest.” As a result of the multiple significant concerns raised, the Court decided that it could not simply rely on the decision of the shareholders as a proxy for fairness, and needed to be satisfied that the arrangement was “objectively fair and reasonable in a more general sense.” The Court therefore reversed the ruling of the chambers judge, concluding that in all the circumstances it was not able to approve the arrangement as “fair and reasonable.” As a consequence, the proposed arrangement was not allowed to proceed.
The Smoothwater and InterOil decisions highlight some fundamental aspects of the plan of arrangement process. While every case is fact-specific, at a practical level these rulings suggest certain issues that boards, and their advisers, will have to address as the principles identified by the courts work themselves into market practice.