On April 5, 2007, the Ontario Securities Commission (the "OSC") released for comment proposed OSC Rule 62-504 - Take-Over Bids and Issuer Bids (the "Proposed Rule").  The Proposed Rule relates to announced amendments to Part XX - Take-Over Bids and Issuer Bids of the Securities Act (Ontario) (the "OSA") introduced by the Government of Ontario on March 22, 2007 in connection with Bill 187 - Budget Measures and Interim Appropriation Act (Ontario) (the "Proposed Amendments").

The Proposed Amendments and the Proposed Rule are intended to implement in Ontario some of the changes to take-over bid and issuer bid rules previously proposed by the Canadian Securities Administrators in April 2006 by way of a National Instrument designed to harmonize, streamline and update the requirements and restrictions governing take-over bids and issuer bids across all Canadian jurisdictions.  It is expected that similar changes will be implemented as a Multilateral Instrument in jurisdictions other than Ontario.

The principal changes, currently expected to come into force in November 2007, are intended to:

• reduce the burden of proof in certain circumstances where it is alleged that an offeror has acted jointly or in concert with another person or company;
   
• formalize an exception to the prohibition against collateral benefits;
   
• create a new exemption to the formal bid requirements for bids where 90% of the securities subject to the bid are held outside of Canada; and
   
• impose new filing requirements in respect of agreements affecting the control of a target.
   

Deemed Joint Actors

Section 91 of the OSA governs the circumstances in which a person or company is considered to be acting jointly or in concert with an offeror.  The determination of whether a person or company is a joint actor is a question of fact, and the provision outlines a number of circumstances in which a person or company is presumed to be acting jointly or concert.  The Proposed Amendments do not alter the circumstances outlined in the OSA in which a person or company is considered to be acting jointly or in concert with an offeror; however, they are intended to reduce the burden of proof in two of the circumstances described in section 91 by deeming, as opposed to presuming, a person or company to be acting jointly or in concert with an offeror.  Under the Proposed Amendments, (i) a person or company who, as a result of any agreement, commitment or understanding with an offeror or with any other person or company acting jointly or in concert with an offeror, acquires or offers to acquire securities of the same class as those subject to the offer to acquire, or (ii) any affiliate of an offeror, would be deemed to be acting jointly or in concert with the offeror.

Permitted Collateral Agreements for Employment Arrangements

The current take-over bid rules generally prohibit an offeror from entering into any collateral agreement that has the effect of providing a securityholder with consideration of greater value than that offered to other securityholders.  Employment contracts designed to encourage key personnel of the target to remain in place should the bid be successful are a form of collateral agreement for which the OSC and other Canadian securities regulators customarily grant discretionary relief.  The Proposed Rule would reduce the need for an offeror to seek discretionary relief in respect of such employment contracts by providing several exceptions to the collateral agreement prohibition.  Under the Proposed Rule, employment compensation arrangements, severance arrangements or other employee benefit arrangements may be entered into, as an exception to the prohibition on collateral agreements, if the benefits consist of an enhancement of employee benefits resulting from participation in a group plan and such benefits are generally provided to other similarly situated employees.  The Proposed Rule would also provide an exception for employment arrangements that involve securityholders of the target that own less than 1% of the class of the securities subject to the bid.  Finally, if the value of the benefit received by the employee is less than 5% of the consideration paid to that employee under the bid as determined by an independent committee of the target, the agreement would also be exempted.

In addition, an employment arrangement in which a securityholder is providing at least equivalent value in exchange for the benefit will be exempt from the prohibition against collateral agreements where a determination of what is "equivalent value" is made by an independent committee of the target and confirmed by an independent, qualified person.

Exempt Foreign Bids

The Proposed Amendments re-enact the current take-over bid exemptions in the OSA, but also create a new exemption for issuers with minimal share ownership presence in Canada.  Under the Proposed Amendments, a take-over bid would be exempt from the formal bid requirements where more than 90% of the securities subject to the bid are held by securityholders outside of Canada and the published market on which the greatest dollar value of trading in the securities subject to the bid during the 12 months immediately prior to commencement of the bid is not in Canada.  In order for an offeror to rely on this exemption, securityholders in Ontario must be able to participate in the bid on terms at least as favourable as the terms that apply to the general body of securityholders.

Filing of Certain Agreements Affecting Control of Target

The Proposed Rule would require the public filing by the offeror of any support agreement with the target, any lock-up agreement with shareholders of the target, any agreement between the offeror and directors or officers of the target that relate to the bid, as well as any other agreement of which the offeror is aware that could affect control of the target, including an agreement with change of control provisions, a securityholder agreement or a voting trust agreement, that the offeror has access to and can reasonably be regarded as material to a securityholder in deciding whether to deposit securities under the bid.  The target would also be subject to a positive requirement to file any agreements of which it is aware that could affect control of the target, including contracts that contain change of control provisions. 

Agreements would be required to be filed by an offeror or a target on the date on which a take-over bid circular or directors' circular is filed by the offeror or the target, respectively. However, where an agreement required to be filed under the Proposed Rule is entered into after the filing of a take-over bid or directors' circular, the agreement would be required to be filed promptly and no later than two business days from the date on which the agreement is entered into.  Generally, under National Instrument 51-102 – Continuous Disclosure Obligations, material agreements must be filed by a reporting issuer within ten days of the date on which the agreement is entered into.  By imposing a positive duty on the target to file such agreements in connection with a bid in a more timely fashion, the Proposed Rule would, in certain circumstances, advance the timing of the target's obligations to file such documents under the existing continuous disclosure regime.

Effective Date

Subject to the Proposed Amendments being enacted by the Legislative Assembly of Ontario and proclaimed into force, and the receipt of necessary regulatory and ministerial approvals, it is intended that the Proposed Rule, together with a Multilateral Instrument seeking to harmonize the take-over bid and issuer bid requirements in other Canadian jurisdictions, would come into force in November 2007.

 

Please do not hesitate to contact Patricia L. Olasker, Kevin J. Thomson or Philippe C. Rousseau in our Toronto office (416-863-0900) if you would like further information.

Davies Ward Phillips & Vineberg LLP, with over 235 lawyers, practises nationally and internationally from offices in Toronto, Montréal, New York and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.