Canadian Mergers & Acquisitions A Guide for Investment Banks, Bidders and Boards 10th Edition
The information in this publication should not be relied upon as legal advice. We encourage you to contact us directly with any specific questions. © 2023 Davies Ward Phillips & Vineberg LLP. All rights reserved.
i Davies’ Canadian Mergers & Acquisitions draws on our multijurisdictional M&A experience to offer guidance on both the legal framework and the practical aspects of Canadian mergers and acquisitions, including critical tax and regulatory considerations. It is a valuable resource for foreign and domestic acquirers, targets, investment banks, shareholders and directors. The authors of this guide are Patricia Olasker (M&A), Aaron Atkinson (M&A), Charles Tingley (Competition and Foreign Investment) and Christopher Anderson (Tax). The contents of this guide are intended as general information and not as legal advice or opinion. We invite you to contact any Davies lawyer to discuss your legal matters. Visit our website at dwpv.com or contact one of our offices. About This Guide Canadian Mergers & Acquisitions
Contents ii Chapter 01 Takeover Bid Regulation: An Overview Types of M&A Transactions 02 Takeover Bid Regulation: General 02 Equal Treatment Rules 03 Sufficient Time Rules 05 Sufficient Information Rules 06 Securities Commission Intervention 06 Chapter 02 Plans of Arrangement What Is an Arrangement? 08 Advantages of Arrangements 09 Disadvantages of Arrangements 09 Chapter 03 Pre-bid Considerations Pre-acquisition Preparation 11 Share Accumulations 12 Public Disclosure of Accumulations 13 Selecting Transaction Structure: Plan of Arrangement vs. Takeover Bid vs. Amalgamation 15 Structuring the Offer 17 Lock-Up Agreements 18 Chapter 04 Post-bid Cleanup Compulsory Acquisition 20 Second-Step Business Combination/Going-Private Transaction 20 Chapter 05 Acquisitions by Related Party Purpose of MI 61-101 22 Types of Transactions Covered 22 Procedural and Substantive Requirements 22
iii Chapter 06 Directors’ Duties and Defensive Mechanisms Directors’ Duties 26 Structural Defences 28 Defensive Measures 30 Chapter 07 Competition Act, Investment Canada Act and Other Restrictions on Foreign Ownership Competition Act (Canada): Pre-merger Notification 34 Competition Act (Canada): Substantive Provisions 36 Investment Canada Act 39 Other Foreign Ownership Restrictions 46 Chapter 08 Selected Canadian Tax Issues in M&A Transactions Acquirer Considerations 48 Shareholder Considerations 52 Appendix A: Summary Transaction Timelines Takeover Bid Timeline — Unsolicited 56 Takeover Bid Timeline — Friendly 57 Plan of Arrangement Timeline 58 Amalgamation Timeline 59 Key Contacts 60
CHAPTER 01 1 Davies | dwpv.com Takeover Bid Regulation: An Overview
Types of M&A Transactions – Takeover bids (like a U.S. tender offer) – Plans of arrangement – Amalgamations (like a U.S. merger) – Asset sales – Share sales (e.g., private purchase of control block) – Restructurings (e.g., spinoffs) – Going-private transactions Takeover Bid Regulation: General TAKEOVER BID REGULATION – Takeover bids are regulated by each province, but Canadian securities regulators have harmonized the takeover bid regime across Canada under National Instrument 62-104 and National Policy 62-203. – Applicable laws depend on where the target shareholders reside and where the target is incorporated and listed. WHAT IS A TAKEOVER BID? – Rules provide a “bright line” test to determine whether a party is making a takeover bid. – A takeover bid is an offer to acquire voting or equity securities of a class made to persons in a Canadian jurisdiction where the securities subject to the offer plus securities beneficially owned by the bidder and its affiliates and joint actors constitute 20% or more of the outstanding securities of the class (calculated on a partially diluted basis). – Equity securities include non-voting common shares. – A trap for the unwary: calculation of current beneficial ownership includes securities convertible within 60 days into the class of equity or voting securities (e.g., options and warrants). – Indirect offers: > “Anti-avoidance” rule. > Indirect offer rule could apply when an acquirer acquires shares of a holding company that owns more than 20% of the shares of a public company when aggregated with the acquirer’s shares. Canadian Mergers & Acquisitions 02
Davies | dwpv.com 03 > The acquisition of convertible securities, particularly in-the-money convertible securities, could constitute an “indirect” offer for the underlying security. Equal Treatment Rules OFFER TO ALL – The bid must be made to all holders of the class, but may be for less than all securities (i.e., a “partial bid”). – Take-up under partial bids must be pro rata. – The bid circular must be sent to all holders of the class and all holders of convertible securities (e.g., options). IDENTICAL CONSIDERATION – All holders must be offered identical consideration (or an identical choice of consideration). – If the bidder increases the price during a bid, all holders receive the new price, even holders whose shares have already been tendered and taken up. NO “SIDE DEALS” – No collateral agreements are permitted – that is, agreements or understandings between the bidder and a shareholder that have the effect of providing the shareholder with consideration of greater value. – Exceptions permit certain employee compensation and severance arrangements for management and other employees of the target. – Securities commission may provide exemptive relief to permit a collateral agreement when there is a clearly established business or financial purpose relating to the making of the bid or the ongoing operations of the target. PRE-BID INTEGRATION – The bidder cannot acquire securities in the 90 days preceding the bid unless the bidder offers the same consideration (amount and type, or cash equivalent) and acquires the same percentage from each holder under the bid. – Exceptions for normal course purchases on a stock exchange (pre-arranged trades are not normal course) and for purchase of newly issued shares from the issuer. CHAPTER 01 Takeover Bid Regulation: An Overview
– Toehold acquisitions must be carefully planned if the bidder intends to offer share consideration in the subsequent bid. – Securities acquired prior to the bid will not count > toward the 90% compulsory acquisition threshold; > in determining if the 50% mandatory minimum tender condition has been satisfied; and > as part of the minority for purposes of a majority-of-the-minority vote on a second-step going-private transaction. PURCHASES AND SALES DURING A BID – The bidder cannot offer to acquire or enter into an agreement to acquire the securities subject to the bid from the date of announcement of the intention to make a bid until expiry of the bid, except pursuant to the bid. – The bidder can purchase up to 5% of the outstanding securities on a recognized stock exchange if it states its intention to do so either in the takeover bid circular or in a subsequently filed press release. Purchases must be reported daily by press releases disclosing price and number. – Securities purchased during a bid will not count toward the 90% compulsory acquisition threshold or toward the 50% mandatory minimum tender condition, or as part of the minority for purposes of a majority-of-the-minority vote on a second-step going-private transaction. POST-BID INTEGRATION – The bidder cannot acquire securities outside of the bid within 20 business days of the expiry of the bid except by way of a transaction that is generally available to securityholders on identical terms or normal course purchases on a stock exchange. SELLING RESTRICTIONS – The bidder cannot sell or enter into an agreement to sell target securities from the date of announcement of the intention to make a bid until expiry of the bid. – The bidder can agree to sell securities taken up under the bid at a future date, but only if it discloses its intention in the circular. MINIMUM TENDER CONDITION – All bids (including partial bids) are subject to a statutory non-waivable minimum tender condition that more than 50% of securities owned by persons other than the bidder and its joint actors be tendered to the bid before the bidder can acquire any securities tendered. Canadian Mergers & Acquisitions 04
Davies | dwpv.com 05 – Bids typically include a higher minimum tender condition to ensure that the bidder can obtain the remaining shares not deposited through a second-step going-private transaction. The condition would typically require a tender of at least (i) two-thirds of outstanding shares and (ii) a majority-of-the-minority. Sufficient Time Rules – The bid must be open for an initial deposit period of at least 105 days. > The initial deposit period can be waived down to 35 days by the target. > This shorter bid period will apply to any other bid outstanding at the time and to certain other bids commenced thereafter. > If the target enters into an “alternative transaction” (e.g., a merger, amalgamation or other similar shareholder-approved transaction), the minimum deposit period is reduced automatically to 35 days for any bid outstanding at the time or any bid commenced after the announcement of the alternative transaction but before the completion/termination of the transaction alternative. ○ This creates an incentive for a target to structure a “white knight” transaction as a bid rather than as an “alternative transaction.” – The bidder is required to take up and pay for securities within 10 days of expiry of the bid if the bid conditions have been satisfied or waived. – The bidder must extend the bid for an additional 10 days after expiry of the initial deposit period if the bidder satisfies the mandatory minimum tender condition, all other conditions have been satisfied or waived and the bidder announces its intention to immediately take up and pay for securities deposited under the bid. – Withdrawal of a tender is permitted in the following circumstances: > at any time before securities are taken up by the bidder; > for 10 days after a change in the bid; or > if securities have not been paid for within three business days of take-up. – The bid must be kept open for 10 days after an amendment (unless it is solely a waiver of a condition in an all-cash bid). Amendments are prohibited after the bidder becomes obligated to take up and pay for securities (other than an extension of the deposit period or an increase in consideration). CHAPTER 01 Takeover Bid Regulation: An Overview
Sufficient Information Rules – The bid can be commenced by either mailing or advertisement. The bid can be commenced by advertisement if, concurrently with (or before) the advertisement, the bid is filed and delivered to the target, a securityholders list is requested and, within two business days of receipt of the securityholders list, the takeover bid circular is sent to securityholders on the list. – The bidder must prepare and mail a takeover bid circular to all holders of the class of securities sought and holders of convertible securities. – The bidder must make additional mailings if bid terms are changed or important information has changed or arisen (except changes out of the bidder’s control). – The bid may contain any conditions except a financing condition. – If the bid is an “insider bid,” an independent valuation of the target’s securities and of any noncash consideration being offered may be required unless an exemption is available. – Within 15 days of the bid, the target must prepare and mail a directors’ circular containing an acceptance/rejection recommendation by the board. – If the target board is unable to make a recommendation, the circular must disclose the reasons for not doing so. Securities Commission Intervention – In Canada, in contrast to the United States, no securities commission clearance is required for share exchange takeover bids. – Unlike in the United States, most litigation regarding takeover bids takes place before securities regulators rather than courts. – Securities regulators will intervene to halt a takeover bid if it is abusive of the target shareholders or the capital markets, even if it complies with all of the foregoing rules. – Securities regulators also have the power to intervene to prohibit target boards of directors from taking inappropriate defensive measures to block a bid for its securities. Canadian Mergers & Acquisitions 06
7 Davies | dwpv.com CHAPTER 02 Plans of Arrangement
What Is an Arrangement? – Common alternative to takeover bids for negotiated M&A transactions. – Corporate reorganization of the target under applicable corporate law. > Unlike a takeover bid, an arrangement is a one-step transaction approved by target securityholders at a special meeting. > Agreement is negotiated with the target, and voting support agreements are often negotiated with significant securityholders. > Independent committee of the board of directors of the target may be formed when the transaction may give rise to potential conflicts of interest or is otherwise justified. > The target applies to court for an interim order prior to mailing the proxy materials specifying the required securityholder approval. > The target calls a special shareholders’ meeting to approve the arrangement. > Arrangement becomes effective after it is approved by target securityholders and by the court, all other closing conditions are satisfied and articles of arrangement are filed by the target. – Securities of any class of the target may be exchanged for any other securities or property, including cash. In addition, assets, including shares of subsidiaries, can be distributed to shareholders or other parties, and the order of all the steps to be effected by the arrangement can be specified, which assists in tax planning. – Court will consider whether arrangement is “fair and reasonable.” > Court must be satisfied that (i) the arrangement has a valid business purpose; and (ii) the objections of those whose legal rights are being arranged are being resolved in a fair and balanced way. > Determination is focused on securityholders whose legal rights are being arranged rather than securityholders affected only in respect of their economic interests. > In determining whether these tests are met, considerations will include: ○level of approval by the target’s securityholders; ○proportionality of the arrangement’s impact on affected groups; ○ whether the arrangement has been approved by a special committee of independent directors of the target; ○ existence of a fairness opinion from a reputable expert and, depending on circumstances, whether the expert is independent and whether adequate disclosure of analysis underlying the opinion is made; and ○availability to shareholders of dissent and appraisal remedies. Canadian Mergers & Acquisitions 08
Davies | dwpv.com 09 CHAPTER 02 Plans of Arrangement Advantages of Arrangements – Lower acceptance thresholds than a bid: > Generally requires two-thirds of the votes cast at the meeting in person or by proxy. > No prohibition on an acquirer voting securities it holds in the target, provided it is not a “related party” of the target (e.g., a holder of more than 10% of target shares) under business combination rules in Multilateral Instrument 61-101. – One-step acquisition eliminates “bridging” and financing risks. – Tax-planning opportunities: > ability to clearly order transaction steps around the effective time; > allocation of basis to assets to be divested; > distribution of safe income and return of capital. – Greater flexibility in dealing with target’s assets, including possible spinoff of assets. – Implementation of “exchangeable share” structure facilitated. – Flexibility in dealing with stock options and warrants. – No prohibition of collateral benefits and pre-bid purchases. – Possible to offer “unequal” consideration. – Permissibility of financing condition. – Flexibility in dealing with public debt (and other creditors). – Availability of section 3(a)(10) registration exemption in the United States. Disadvantages of Arrangements – More cumbersome and time-consuming than a friendly takeover bid because of proxy solicitation and court proceedings – Fairness hearing may be used as a forum for challenge by securityholders – Ability of complainants to appeal court order may delay closing – Dissent and appraisal remedy generally available – Process is target-driven, rather than acquirer-driven
CHAPTER 03 Pre-bid Considerations 10 Canadian Mergers & Acquisitions
11 Davies | dwpv.com Pre-acquisition Preparation KEY DILIGENCE ISSUES – Change of control consequences – Regulatory requirements (e.g., Investment Canada, including national security review, Competition Bureau, CRTC) – Convertible securities or other rights to acquire shares – Contingent liabilities – Shareholder rights plan (existing or potential) – Location of target’s shareholders (including U.S.) – Coattail provisions for non-voting shares or subordinate voting shares DILIGENCE PROCESS – The target will require a confidentiality agreement with a “use” clause and usually a standstill agreement as a pre-condition to due diligence and may agree to an exclusivity agreement. FINANCING (TAKEOVER BIDS) – In Canada, cash takeover bids must be fully financed (at announcement, commitment letter signed, fee paid). This is in contrast to tender offers in the United States, which can be conditional on financing. – Bidder must make adequate arrangements before the bid to ensure that the required funds are available. – Bidder must reasonably believe the possibility to be remote that it will be unable to pay for securities deposited under the bid due to a financing condition not being satisfied. – As a general rule, the bid financing can be no more conditional than the bid itself. CHAPTER 03 Pre-bid Considerations
Share Accumulations TOEHOLD ACQUISITION – Purchases up to 19.9% (together with securities beneficially owned by purchaser and joint actors) are not a “takeover bid.” – Open market purchases or private agreements are permitted (although market purchases may increase price or tip off target) > Often done to lower cost of acquiring target shares because no premium is paid on shares > May reduce acquirer’s risk by allowing it to recoup at least some of its costs by selling toehold shares to a superior competing offer – Pre-bid integration rules should be considered at this stage because of implications for a later takeover bid. – Securities so acquired will not count toward the 50% mandatory minimum tender condition, the 90% compulsory acquisition threshold or as part of the minority for a majority-of-the-minority vote on a second-step going-private transaction. – Purchases that would result in a holding of 20% or more constitute a takeover bid that requires an offer to all holders of the class unless an exemption is available. PRIVATE AGREEMENT TAKEOVER BID EXEMPTION – The principal exemption from the takeover bid rules is for private agreements: > five sellers or fewer, and consideration not exceeding 115% of 20-day average closing price > critical tool for acquirer proposing a creeping acquisition of control INSIDER TRADING PROHIBITION – Once a person “is considering, evaluating or proposing to make a takeover bid” for a target, or becoming a party to a merger or other business combination with a target, all persons who are insiders, affiliates, associates, professional advisors and officers, directors or employees of any of them are in a “special relationship” with the target and may not trade in securities of the target until the transaction is announced. > This restriction does not apply to the person proposing to make the bid itself. 12 Canadian Mergers & Acquisitions
13 Davies | dwpv.com Public Disclosure of Accumulations EARLY WARNING REPORTING – Similar to U.S. 13D/13G filings, intended to alert the market to the acquisition of significant holdings in a public company. – Acquisition of equity or voting securities representing 10% or more of the class (together with securities beneficially owned by purchaser and its joint actors) requires purchaser to issue a press release no later than opening of trading on the business day following the acquisition, and to file an “early warning” report within two business days. – The purchaser and its joint actors are prohibited from making additional acquisitions of the shares until the expiry of one business day from the date the early warning report is filed, unless the purchaser and its joint actors beneficially own 20% or more of the class of securities (no similar moratorium on purchases under U.S. law). – Applies to acquisition of beneficial ownership of securities and to the acquisition of the power to exercise control or direction over securities. Must count in the 10% any securities that a person has the right or obligation, whether or not on conditions, to acquire within 60 days (e.g., options, warrants, share purchase agreement). – Equity derivatives may constitute beneficial ownership of underlying securities if the investor has the ability, formally or informally, to obtain the securities or to direct the voting of securities held by a counterparty. – No requirement for non-insiders to report economic interest under cash-settled equity swap, although there could be “public interest” considerations which militate in favour of disclosure. – Disclosure must include the terms of any agreement with respect to the acquired securities, the price paid and the purpose of the purchase. Must also disclose any “plans or future intentions” with respect to specific actions enumerated in the rule, including the acquisition or disposition of additional securities, corporate transaction, board change or proxy solicitation. – Disclosure must include the material terms of related financial instruments, any securities lending agreements and any other arrangements involving the securities. – Trap for the unwary: disclosure threshold is reduced to 5% when a takeover bid by another party or an issuer bid is outstanding, but the restriction on acquisitions until after the report is filed does not apply. – For a target whose shares are registered with the SEC in the United States (e.g., targets with a U.S. listing), the disclosure of accumulations on Form 13D is required at the 5% level, but the purchaser is not prohibited from acquiring further securities pending filing of the 13D. – A change in material fact in the report or an increase or decrease in ownership equal to 2% of the outstanding shares requires the purchaser to “promptly” issue a further press release and file a report. In addition, shareholders are required to report when they have fallen below the 10% threshold. CHAPTER 03 Pre-bid Considerations
INSIDER REPORTING – Acquisition of more than 10% of voting securities of a public company, including securities issuable on the exercise of conversion or purchase rights or obligations, within 60 days, requires purchaser to file an initial insider report within 10 days. – Insider report must disclose > ownership of voting securities; > agreement, arrangement or understanding that has the effect of altering, directly or indirectly, the purchaser’s economic interest in a security of the company or economic exposure to the company (a related financial instrument); and > material terms of any agreement, arrangement or understanding that, directly or indirectly, alters the purchaser’s economic exposure to the company and involves a security of the company or a related financial instrument. – An insider must report within five days any change in ownership of securities of the company or a related financial instrument, or any material amendment or termination of an agreement, arrangement or understanding required to be disclosed. – Directors, CEO, CFO and COO and certain other insiders of the purchaser also become reporting insiders of the company and must file insider reports. – Directors, CEO, CFO and COO must include in the initial insider report transactions that occurred during the prior six-month period in which they held such positions. – Exemption available for directors and officers of the purchaser who do not, in the ordinary course, receive or have access to information about material facts and material changes of the company and are not otherwise insiders. 14 Canadian Mergers & Acquisitions
15 Davies | dwpv.com Selecting Transaction Structure: Plan of Arrangement vs. Takeover Bid vs. Amalgamation Plan of Arrangement Takeover Bid Amalgamation What is it? – Merger effected by securityholder vote and court approval – Purchase of shares effected by offer directly to securityholders – Merger effected by securityholder vote How is it accomplished? – Acquirer and target enter into arrangement agreement – Acquirer may enter into voting support agreements with significant securityholders – Target mails proxy circular to securityholders (no regulatory review) – Securityholders approve at meeting (locked-up shares can be voted) – Obtain court approval as to “fairness” – Acquirer and target enter into support agreement (if friendly) – Acquirer may enter into lock-up agreements with significant securityholders – Acquirer mails takeover bid circular to securityholders of target (no regulatory review) – Target mails directors’ circular to securityholders of target (no regulatory review) – Securityholders tender to offer – Acquirer and target enter into merger agreement – Acquirer may enter into voting support agreements with significant securityholders – Target mails proxy materials to securityholders (no regulatory review) – Securityholders approve at meeting (locked-up shares can be voted) Consideration – Cash and/or securities – Discrimination among securityholders permitted, subject to “fairness” and majority-of-the-minority approval – Cash and/or securities – Discrimination among securityholders prohibited, except for certain employment arrangements or with securities commission approval (time requirement: approximately four weeks) – Cash and/or securities – Discrimination among securityholders permitted, subject to majority-of-theminority approval Timing (See Appendix) – Approximately 50 to 65 days from commencement of preparation of circular to consummation of transaction (but faster than takeover bid if bid requires second-step transaction) – Approximately 50 to 65 days from commencement of preparation of circular to consummation of transaction, assuming target board waives minimum bid period of 105 days down to 35 days – Approximately 45 to 60 days from commencement of preparation of circular to consummation of transaction CHAPTER 03 Pre-bid Considerations
Plan of Arrangement Takeover Bid Amalgamation Shareholder approval/ acceptance requirement – typically, 2/3 of votes cast by those voting at meeting (and majority-of-theminority if related party is acquiring the target or receives a collateral benefit) – Non-waivable mandatory condition that more than 50% of shares not owned by bidder be tendered to the bid – 90% tender required in order to force out remainder – If less than 90% acquired, must do second-step squeeze-out, requiring 2/3 vote and majority-ofthe-minority vote (shares acquired under the bid can be counted as part of minority in certain circumstances) – 2/3 of votes cast by those voting at meeting (and majority-of-the-minority if related party is acquiring the target or receives a collateral benefit) Conditions – Unrestricted – Financing condition prohibited – Non-waivable minimum tender condition (more than 50%) required – Unrestricted Dissent rights – Yes – Yes, on exercise of compulsory acquisition right or second-step transaction – Yes Pre-transaction purchases of target stock – Not restricted, subject to insider trading restrictions – Restricted (offer terms must be as favourable as pre-offer transactions) – Not restricted, subject to insider trading restrictions French translation – Depends on connecting factors to Québec (e.g., size of shareholder base, location of head office or majority of target’s business) – Yes – Depends on connecting factors to Québec (e.g., size of shareholder base, location of head office or majority of target’s business) 16 Canadian Mergers & Acquisitions
17 Davies | dwpv.com Structuring the Offer CONSIDERATION: CASH OR SECURITIES? – If securities are offered as consideration, prospectus-level disclosure about the acquirer, including the acquirer’s financial statement disclosure, will be required. – If the acquirer is a mining company offering shares, independent technical reports on material properties may be required. – May also require pro forma combined financial information. – Also requires detailed disclosure of the bidder’s plans and proposals for target post-closing. – The bid circular is not reviewed by the securities commission, so there is no regulatory timing disadvantage when share consideration is offered. – A bidder that offers share consideration may become a “reporting issuer” and subject to Canadian public company disclosure requirements. CONDITIONS – Any conditions (except financing in a takeover bid) are permitted and frequently include the following: > no rights plan or waiver of application of rights plan to bid > Competition, Investment Canada, HSR approvals and any regulatory approvals for change of control > no material adverse change – All bids are subject to a statutory minimum tender condition requiring more than 50% of target securities held by persons other than the bidder and its joint actors to be tendered before the bidder can take up any securities under the bid. > If the bidder is seeking 100%, minimum tender should be the greater of 66⅔% and majorityof-the-minority to have certainty of execution of second-step going-private transaction. COATTAILS – Dual class companies listed on the TSX are required to provide coattails – that is, provisions that effectively entitle holders of non-voting or subordinate voting shares to participate in a bid for voting or multiple voting shares. – Companies with long-standing dual class structures may have avoided coattail requirements so a purchase of control may be made without an offer to non-voting or subordinate voting shares. – Coattails are typically triggered when a takeover bid is made for the voting/multiple voting shares, unless offers are made for other shares on the same basis. – Acquisition made by way of plan of arrangement may not trigger a typical coattail. CHAPTER 03 Pre-bid Considerations
SHAREHOLDERS LIST – Bidder can request a list from the target by following the procedure under the applicable corporate statute. The target must respond to the request within 10 days. – Bidder permitted to commence the bid by advertisement, but must request the shareholders list on or before the date the bid is advertised, and must send the bid circular to shareholders within two business days of receiving list. SHAREHOLDER APPROVAL FOR SHARE EXCHANGE OFFER – A TSX-listed bidder proposing to make a share exchange offer must obtain shareholder approval when number of securities issuable on acquisition exceeds 25% of outstanding securities of issuer (on a non-diluted basis). U.S. SHAREHOLDERS OF CANADIAN TARGET – If U.S. securityholders hold less than 40% of “foreign private issuer” target shares, the multijurisdictional disclosure system (MJDS) generally exempts a bid by a Canadian public company that is a foreign private issuer from U.S. tender offer regulation and from SEC review of the registration statement filed in respect of the share exchange bid (U.S. anti-fraud provisions, Schedule 13D and Schedule 13E-3 still apply). – MJDS can be used by a non-Canadian bidder only in a cash deal; in a share exchange bid, both bidder and target must be Canadian foreign private issuers for the bidder to use the MJDS registration exemption. – If MJDS is unavailable for the share exchange bid (e.g., because the target is not a foreign private issuer), it may be possible to avoid the SEC registration requirement by making “vendor placement” or excluding U.S. shareholders from the bid. Lock-Up Agreements – Securityholder commitment to tender to a takeover bid (or vote in support of arrangement or amalgamation) is permissible and common. – Securityholder may have right to withdraw and tender to a higher offer. – Contributes to certainty of execution; locked-up securities count toward 90% compulsory acquisition threshold and to 50% minimum tender condition. – Multilateral Instrument 61-101 permits securities acquired under a lock-up agreement to be voted as part of the minority in a majority-of-the-minority vote if the locked-up securityholder is treated identically to all other securityholders under offer. – Entering into a lock-up agreement does not generally trigger a typical Canadian “poison pill” if securityholder has the right to withdraw and tender to a higher offer. – Lock-up agreements must be filed publicly. 18 Canadian Mergers & Acquisitions
19 Davies | dwpv.com Post-bid Cleanup CHAPTER 04
Compulsory Acquisition – Generally under corporate law, if within 120 days of the bid, it is accepted by 90% of class of shares subject to bid (other than shares held by the bidder or its affiliates or associates), the bidder can require hold-outs to sell to the bidder for the same price as the bid. > The bid period of 105 days allows a successful bidder that achieves less than 90% to extend its bid for a further 10-day period in an effort to reach 90% and still have five days to commence the compulsory acquisition process. – Once notice is sent, the bidder will be entitled to acquire shares of non-tendering shareholders within 30 days, but each shareholder may apply to court to fix “fair value.” – For targets incorporated in Ontario, the procedure is available only if the bid was for voting securities. – For targets incorporated federally, the procedure is available only if the bid is made to all shareholders (e.g., cannot exclude U.S. holders in share exchange bid) unless an order is obtained. Second-Step Business Combination/ Going-Private Transaction – If the bidder acquires between 66 2/3% and 90%, it can still take the company private by means of a second-step shareholder-approved amalgamation or plan of arrangement. – Under Multilateral Instrument 61-101, shares acquired under the bid can be counted as part of the minority in a second-step amalgamation/plan of arrangement if the intention to do so is disclosed in the bid circular, the second-step transaction provides for the same consideration as the bid, the tendering shareholder did not receive a collateral benefit and certain other statutory requirements are met. 20 Canadian Mergers & Acquisitions
21 Davies | dwpv.com Acquisitions by Related Party CHAPTER 05
Related Party Acquisitions – Management buyout offers, insider bids and other acquisitions by or involving a significant shareholder or other related party of the target are regulated under MI 61-101. Purpose of MI 61-101 – Intended to level the playing field for the minority when transactions are proposed in which a significant shareholder or other insider could have advantage by virtue of voting power, board representation or increased access to information – Affects business combinations, related party transactions, second-step going-private transactions, issuer bids and insider bids Types of Transactions Covered Transaction types caught include: – Insider bids: Takeover bid by holder of shares carrying more than 10% of voting rights or other insider (e.g., directors and officers). – Business combinations: Transaction whereby holder of equity security can be required to sell its shares, regardless of whether equity security is replaced by another security (e.g. plan of arrangement or amalgamation), but only if transaction involves related party of issuer that is acquiring the issuer, or is not treated identically to other holders or receives consideration of greater value than other holders. – Related party transactions: Transaction between issuer and significant shareholder or other related party. > “Related party” includes a director or officer, or a holder that has the ability to materially affect the control of the issuer and a holder of securities carrying more than 10% of the voting rights. Procedural and Substantive Requirements – Independent valuation – Minority shareholder approval 22 Canadian Mergers & Acquisitions
23 Davies | dwpv.com – Enhanced disclosure – Special committee of independent directors INDEPENDENT VALUATION – Valuation Requirements: > Valuations are required for insider bids (unless the bidder is an “outside” insider); business combinations (but only if an “interested party” is acquiring or combining with the issuer); and related party transactions (but only if the subject matter of the related party transaction exceeds 25% of the issuer’s market capitalization). > Valuation must be “en bloc” value, with no liquidity or minority discount. > Bidder loses control in valuation process (e.g., in an insider bid, valuation is done at expense of bidder and included in the takeover bid circular, but is prepared under the supervision of the target’s special committee of independent directors). > Valuation cannot be more than 120 days old. – Independence of Valuator: > Valuator is not independent if it is an associated or affiliated entity or an external auditor (some exceptions), or entitled to success fees. > Other relationships simply require consideration and disclosure (e.g., lead or co-lead underwriter relationship in past 24 months). – Valuation Exemptions: > Previous arm’s-length negotiations: Consideration offered is at least equal in value and is in the same form as agreed to in arm’s-length negotiations not more than 12 months earlier by a 10% securityholder (5% if the bidder already has 80% of target’s securities) holding at least 20% of the outstanding securities not owned by the bidder. > Auction: One or more other transactions or bids are outstanding, and equal access to data room information is provided to all. > Second-step business combination: Within 120 days of a formal bid that disclosed intent to effect a second-step transaction as well as tax consequences of that transaction, and consideration has the same value and is in the same form as paid under a formal bid. > Pro rata related party transaction: Rights offerings, dividends, asset distributions or share reorganizations in which the interested party is treated identically to all holders. > Lack of knowledge of undisclosed material information and no board or management representation (for insider bids). CHAPTER 05 MI 61-101 – Related Party Transactions
– Disclosure of Prior Valuations – Preceding 24 Months: > Includes internal appraisals of securities or material assets > Must be careful characterizing advice to boards and fairness opinion analysis > Does not include a valuation prepared for the purpose of assisting an interested party in determining the price to be offered (unless made available to any of the independent directors of target) MINORITY SHAREHOLDER APPROVAL – In addition to approvals under corporate law, shareholder approval by a majority-of-theminority, that is, more than 50% of the votes cast by disinterested shareholders at a meeting is required. > Although shares held by an acquirer are excluded from the minority, shares acquired under a bid can be counted toward the majority-of-the-minority approval of the second-step transaction. > Shares held by related party that receives a collateral benefit or different consideration are excluded. ENHANCED DISCLOSURE – MI 61-101 requires detailed disclosure, primarily to level the informational playing field between the proponent of the transaction and the minority. – Requires a detailed description of the board’s review and approval process, including any materially contrary view or abstention by a director and any material disagreement between the board and special committee. SPECIAL COMMITTEE – A special committee of directors who are independent of the proponent of the transaction is typically formed for MI 61-101 transactions (only mandatory in case of an insider bid, but recommended for all material conflict of interest transactions). – Reports to the full board, which then makes a recommendation to shareholders on the transaction. – Supervises the valuation process. 24 Canadian Mergers & Acquisitions
25 Davies | dwpv.com Directors’ Duties and Defensive Mechanisms CHAPTER 06
Directors’ Duties FIDUCIARY DUTIES – Directors have (i) a fiduciary duty to the corporation to act in the best interests of the corporation; and (ii) a duty to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances. – Directors must exercise their powers for the benefit of the corporation and not for an improper purpose such as the entrenchment of directors and management. – Directors must consider the best interests of the corporation. Directors may also consider the interests of shareholders or particular groups of stakeholders, including employees, suppliers, creditors, consumers, governments and the environment. – Shareholders, including controlling shareholders, do not owe fiduciary duties to other shareholders. DIRECTORS’ DUTIES IN CHANGE OF CONTROL TRANSACTIONS – The Supreme Court of Canada affirmed in the BCE decision that, in determining what is in the best interests of the corporation, there is no priority rule that requires that shareholders’ interests prevail in all cases. – In Canada, a board is not required to conduct an auction in every change of control transaction. Canadian courts have generally given boards considerable latitude in change of control transactions, deferring to the reasonable and informed business judgment of the directors. Canadian courts have specifically rejected the Revlon line of cases, which requires the maximization of shareholder value when the board decides to sell the company. DIRECTORS’ DUTIES IN RESPONDING TO UNSOLICITED BIDS – U.S. courts have held that if directors of a target company have reasonable grounds for believing that a threat to the company exists (such as the possibility of a coercive or unfair bid), they discharge their duties if they adopt measures that are reasonable in relation to the threat posed, and they act diligently and on the basis of full information. – Canadian courts have held that the conduct of directors is subject to the objective prospective reasonability principle of Paramount Communications (i.e., if the board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board’s determination). 26 Canadian Mergers & Acquisitions
27 Davies | dwpv.com BUSINESS JUDGMENT RULE – The business judgment rule protects business decisions that have been made by the board of directors honestly, prudently, in good faith and on reasonable grounds. In these cases, the board’s decisions will not be subject to judicial review of the merits of the business decision, and a court will generally give deference to the business judgment of directors, so long as the decision lies within a range of reasonable alternatives. – “Honestly, prudently, in good faith and on reasonable grounds” means that directors must exercise their judgment (i) free of any conflict of interest; (ii) on the basis of a full understanding of all relevant facts and with the benefit of expert advice; and (iii) in the best interests of the corporation and not for an improper purpose. – If a board of directors has acted on the advice of a committee composed of persons having no conflict of interest and the committee members have exercised their judgment in compliance with the foregoing principles, the business judgment rule will apply to protect the business decisions of the board of directors. INDEPENDENT COMMITTEE – If circumstances indicate a real threat of an offer or if an offer is made, the board should consider whether to establish an independent committee composed of non-management directors. – The independent committee will assess any offer and develop recommendations for the full board with respect to the offer and any potential alternatives and, depending upon the circumstances, will negotiate or supervise the negotiations with the bidder or others. OPPRESSION REMEDY – Corporate conduct that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, any securityholder, creditor, director or officer can be challenged under the statutory oppression remedy. – The complainant must demonstrate that it had a reasonable expectation that has been violated by the corporate conduct at issue. – Factors that are relevant in determining whether a reasonable expectation exists include general commercial practice, the nature of the corporation, the relationship between the parties, past practice, steps the complainant could have taken to protect itself, representations and agreements and the fair resolution of conflicting interests between corporate stakeholders. CHAPTER 06 Directors’ Duties and Defensive Mechanisms
Structural Defences – Structural defences generally consist of defensive provisions contained in a target company’s articles and bylaws and shareholder rights plans (poison pills). Generally, structural defences do not work as well in Canada as they do in the United States. SHAREHOLDER RIGHTS PLAN – The shareholder rights plan is the primary structural defence used in Canada, and many Canadian companies have shareholder rights plans. – Canadian rights plans adopted otherwise than in response to a specific bid tend to be very uniform and relatively benign compared to some U.S. rights plans as a result of the TSX requirement for shareholder approval of rights plans, the formal review process conducted by ISS on rights plans proposed by Canadian companies and the tendency of Canadian institutional shareholders to follow ISS recommendations. – Rights plans in Canada are not designed, and will not operate, to block an unsolicited bid; rather, they are intended to encourage the fair treatment of shareholders in connection with a bid and to provide sufficient time for the board and shareholders to properly consider and respond to an offer, and for the board to determine whether there are alternatives available to enhance shareholder value. – In a typical Canadian rights plan, the plan would be triggered by the acquisition by any person or group of beneficial ownership of 20% or more of the company’s common shares, calculated on a partially diluted basis. – If the plan is triggered, all shareholders other than the triggering shareholder and certain related parties have the right to acquire additional common shares of the company from treasury at a substantial discount to market price, theoretically resulting in substantial dilution to the hostile bidder. – Canadian rights plans, unlike U.S. rights plans, typically include a “permitted bid” concept. – Prior to 2016, when the bid rules were amended to extend the minimum bid period to 105 days, poison pills were almost always cease-traded by a securities commission after a certain period of time. Poison pills could not be used by a target to shield itself indefinitely from a hostile bid; rather, they could be used only to secure additional time for the target board to evaluate alternatives and attempt to pursue other transactions. – Given the significant extension of the statutory minimum bid period to 105 days under the takeover bid rules, it is likely that the use of a rights plan to further postpone take-up by a hostile bidder will be subject to challenge before a securities commission. 28 Canadian Mergers & Acquisitions
29 Davies | dwpv.com – Rights plans continue to be relevant, though for more limited purposes: in particular, to regulate the ability of shareholders to accumulate a holding of 20% or more in a company through limited private transactions that are exempt from the takeover bid rules (so-called creeping bids); or, potentially, to restrict a bidder’s ability to enter into swaps, even if cash settled, or to use the 5% exemption to effect market purchases during a bid. – I f a company does not have a shareholder rights plan in place, the board could consider refraining from introducing a rights plan until an unsolicited proposal arises and then introducing a U.S.-style “tactical” rights plan with no permitted bid. Tactical plans typically have a duration that is less than the six-month shareholder approval period mandated by the TSX and are not typically put forward for shareholder approval. CHARTER AND BYLAW PROVISIONS – Structural defences commonly contained in the constating documents or bylaws of U.S. companies are rare in Canada because some of the most popular U.S. charter document structural defences are not required or are ineffective under Canadian law. Supermajority Voting Provisions – Supermajority voting provisions can be used to require higher levels of shareholder approval or majority-of-the minority approval of certain corporate transactions involving significant shareholders. – These provisions require an amendment of the company’s articles passed by a special resolution of shareholders. – These provisions do not deter a bidder that is prepared to make an offer to acquire the entire company, although they may increase the minimum tender condition in the bid of an acquiring party whose financing sources require it ultimately to acquire 100% of the company, thereby weakening the strength of the offer. Increased Quorum and Notice Provisions – Bylaws may be amended to impose increased quorum and advance notice provisions in respect of any meeting called to remove directors, elect or appoint new directors not nominated by the continuing directors or vary the qualifications of directors. – Although these bylaw amendments require shareholder ratification at the next meeting, they are valid in the interim. – These provisions are most useful as a structural defence in the context of a proxy contest. Staggered Board Provisions – These provisions are ineffective because under nearly all Canadian corporate statutes, an acquirer that acquires more than 50% in a bid can proceed to replace the existing board. CHAPTER 06 Directors’ Duties and Defensive Mechanisms
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