Fundamental Changes to Canada’s Take-Over Bid Regime and Enhanced Disclosure Requirements under Early Warning System

Authors: Steven Robertson, Andrew Dilts

This post was written prior to our January 2017 merger, under our previous firm name, MacPherson Leslie & Tyerman LLP.

Canada’s take-over bid regime is about to undergo significant changes. A series of previously proposed amendments will be enacted to lengthen the timeline of a typical Canadian take-over bid, thereby affording the target company’s board of directors much more time to respond. The amendments will also impose mandatory terms and conditions on bids that would make the target company’s shareholders less susceptible to potentially coercive aspects of a bid and give the shareholders more time to decide whether to tender their securities to the bid.

The Canadian Securities Administrators (“CSA”) recently published final amendments that will take the form of a new National Instrument 62-104 (replacing the former Multilateral Instrument 62-104) and a revised National Policy 62-203, each titled Take-Over Bids and Issuer Bids. The amendments were originally proposed in 2014 and were re-published for public comment in 2015. The key elements of the Canadian take-over bid regime that the amendments affect are as follows:

  • Minimum tender of 50%. More than 50% of each class of securities subject to a take-over bid — not including securities held by the bidder or by joint actors — must first be deposited before the bidder may take up any of the tendered securities. Previously, there was no such minimum tender requirement. The minimum tender prevents a bidder from acquiring control of the target company without the support of a majority of the independent security holders by preventing the bidder from waiving a minimum tender condition and ending its bid by taking up a smaller number of securities.
  • Minimum 105-day take-over window. While take-over bids were previously required to remain open for a minimum deposit period of only 35 days, the amendments significantly increase the deposit period to 105 days. The change is designed to provide a target company’s board of directors with enough time to respond to an unsolicited take-over bid, to communicate with security holders on the merits of the bid and/or to seek an alternative transaction.
  • Target companies may shorten the minimum deposit period, though the shorter period will apply to all bidders. Despite the new minimum deposit period of 105 days, the minimum deposit period may be shortened to as few as 35 days, either at the discretion of the target’s board or if the target company elects to effect a specific alternative transaction (whether by agreement or otherwise). If a shorter minimum deposit period takes effect, it will automatically apply to any other contemporaneous offers.
  • Mandatory 10-day extension period. If, after the expiry of the initial deposit period, the minimum tender requirement is satisfied and all terms of the bid have been complied with or waived, the bidder must extend the bid an additional 10 days, and must also promptly issue and file a news release indicating that the threshold has been met and stating the number of securities that have been taken up. This change aims to mitigate potentially coercive situations, where security holders are forced to tender to a bid that they might not otherwise support if it was uncertain as to whether the bidder would elect to extend the bid.

The CSA is also implementing enhanced disclosure requirements under the early warning system which are intended to create greater transparency respecting the holdings of significant security holders of reporting issuers. The amendments to the early warning system create the following enhanced disclosure requirements:

  • Disclosure of decreases in ownership. Holders of securities representing 10% or more of a reporting issuer’s outstanding securities will be required to disclose when their ownership or control of those securities decreases by 2% or more, or when such ownership or control falls below the early warning threshold of 10%. Previously, the early warning system did not require security holders to report decreases in their securities holdings.
  • More detailed disclosure required. Security holders must now provide an enhanced level of disclosure in early warning reports, including disclosure of the relevant class of securities, material terms of related financial instruments, and any lending arrangements or similar agreements involving the securities, as well as greater disclosure regarding the intentions of the acquirer and the purpose of the transaction.
  • Exemptions for securities lenders and borrowers. In certain circumstances, the lending or borrowing of securities will not need to be included in calculations that determine when the early warning report threshold has been crossed.
  • Activist institutional investors ineligible to rely upon alternative monthly reporting system. Institutional investors who would otherwise be eligible to report their securities holdings under the alternative monthly reporting system will be ineligible to do so if they solicit proxies from other security holders in support of the election of persons as directors of the reporting issuer other than management’s nominees, in support of certain corporate transactions not supported by management, or in opposition to certain corporate transactions supported by management.
  • News release timing and streamlined disclosure. Early warning news releases may now include streamlined disclosure, but the amendments clarify that these releases must be issued and filed prior to the open of trading on the next business day (where previously the regulatory regime only prescribed that news releases must be filed “promptly”).

While adopting the above amendments, the CSA also declined to adopt other proposed amendments that were under consideration, including a proposal to decrease the minimum reporting threshold for early warning reports from 10% ownership of an issuer to 5%.

The amendments described above will come into force on May 9, 2016, in all jurisdictions in Canada except for Ontario (where the amendments may come into force later, depending on when the relevant legislation is proclaimed in force).