New rules governing take-over bids and issuer bids became effective across Canada on February 1, 2008. The new rules are designed to create a harmonized set of rules applicable in all Canadian jurisdictions. Bids made in Canada on or after February 1, 2008 are governed by a single instrument (Multilateral Instrument 62-104 Take-over Bids and Issuer Bids) in all Canadian jurisdictions except Ontario. That province has instead adopted extensive amendments to Part XX of its Securities Act and a local rule (OSC Rule 62-504 Take-over Bids and Issuer Bids), which together are intended to have the same effect as MI 62-104. A new national policy (National Policy 62-203 Take-over Bids and Issuer Bids) will also be universally adopted in Canada to provide guidance on certain parts of the new rules. We reported on a proposed national version of MI 62-104 and the subsequent different approach taken by Ontario in earlier issues.
Despite the launch of a new regulatory instrument for bids in Canada, regulators have clearly avoided attempting to make any dramatic changes to the regulation of bids in Canada. The mechanics of conducting take-over bids and issuer bids under the new rules remain largely unchanged. There are few substantive changes, and most of those changes generally reflect current practices already undertaken by way of exemptive relief or the extension of regulatory initiatives found in other securities rules.
What was widely regarded as the most controversial change proposed in the initial version of the rule first published for comment in April 2006 — the restriction of the availability of the take-over bid exemption known as the private agreement exemption — has not been included in the final rules now in force. The private agreement exemption remains in place with no substantive changes.
The key substantive changes to the Canadian regulatory regime for take-over bids and issuer bids are discussed below.
Determination of Joint Actor
The determination of whether two or more parties are acting jointly or in concert in their acquisition of an issuer's securities has always been an explicit question of fact. Beyond that foundation, a number of relationships between parties have also been subject to a presumption, generally rebuttable, that such parties were acting jointly or in concert. The new rules will now instead deem the parties to two of those relationships to be acting jointly or in concert, namely (i) parties that are affiliates, and (ii) parties that acquire or offer to acquire the same securities as a result of any agreement, commitment or understanding. The regulators have also added a clear statement, in accordance with recent court and Ontario Securities Commission decisions, that a person is not acting jointly or in concert with a bidder solely because that person is party to a lock-up agreement with the bidder.
Requirement to File of Certain Documents
Similar to rules introduced in 2004 requiring the filing of material documents as part of the continuous disclosure obligations of reporting issuers, filing obligations will now be imposed on both bidders and targets with respect to certain documents under the new rules. Bidders will be required to file copies of (i) lock-up agreements, (ii) support agreements, and (iii) any agreement between the bidder and any director or officer of the target that relates to the bid. Both the target and the bidder will also be required to file any agreement of which they are aware and to which they have access that could affect control of the target and would be material to a security holder in deciding whether to tender to the bid. Documents required to be filed may be redacted if disclosure of the provision redacted would be seriously prejudicial to the filer or would violate confidentiality provisions, and the provision redacted is not necessary to understand the document. A brief description of the information redacted must be included.
Allowance for Modified Dutch Auction Issuer Bids
Issuer bids are often conducted by way of a modified Dutch auction process whereby security holders are given the ability to elect how many securities they are willing to tender at varying prices within a price range established by the issuer. Modified Dutch auction issuer bids technically breach the proportionate take-up and payment rules, but exemptive relief is routinely granted where certain additional disclosure is included and certain take-up procedures are followed. The new rules contain provisions that will enable issuers to conduct modified Dutch auction issuer bids without the cost and potential delay associated with first obtaining exemptive relief.
Introduction of a Foreign Bid Exemption
Foreign take-over bids will benefit from an automatic exemption under the new regime provided that (i) less than 10 per cent of the securities subject to the bid are reasonably believed to be held by holders in Canada, (ii) the securities were primarily traded on a market outside of Canada during the last 12 months, and (iii) Canadian holders are entitled to participate on terms at least as favourable as other holders. Where bid materials are not in English, a brief summary of the key terms of the bid prepared in English, or in French or French and English in Québec, must be filed and sent to holders. Certain public notice requirements apply where bid materials are not sent to the holders.
Collateral Benefit Exemptions for Certain Employment Arrangements
The new bid rules introduce a new carve-out from the prohibition against collateral benefits being provided to a holder of target securities by a bidder where the benefits are in the form of certain employment arrangements. The employment benefits permitted under this new exception are restricted to (i) an enhancement of benefits under a group plan if the benefits provided by the plan are generally available to employees who hold positions of a similar nature, (ii) another benefit received solely in connection with being an employee where the employee receiving the benefit owns less than one per cent of the outstanding securities subject to the bid, or (iii) another benefit received solely in connection with being an employee where an independent committee of directors of the target determines that the value of the benefit being provided is less than five per cent of the consideration payable under the terms of the bid to the employee or that the employee is providing at least equivalent value in exchange for the benefit. This exemption is largely modelled on an existing collateral benefits exemption in OSC Rule 61-501 in Ontario and Regulation Q-27 in Québec under related party rules, and was previously the subject of relatively routine exemptive relief orders.
New Forms
The new bid rules include updated forms for all bid circulars. The new forms emphasize plain language drafting. The forms closely resemble prior forms, but some minor variations were made as part of the harmonization exercise. Mandated forms have now been created for the rare circumstance where a director or officer elects to prepare his or her own circular in response to a bid instead of joining in a circular prepared on behalf of the board and for the more common notice of change or notice of variation.
As discussed in another article, OSC Rule 61-501 and Québec Regulation Q-27 will be replaced effective February 1, 2008 with Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.