June 11 2008
Public M&A market
In 2007, overall M&A market activity was extremely robust and featured some of the largest M&A deals in Canadian history. In total, 2,237 transactions were announced with a combined value of C$244.3 billion. Resource transactions were at the forefront of the M&A market. Nearly half of the value of all deals were foreign takeovers of Canadian companies.
Some of the high-profile deals announced in 2007 included:
Means of obtaining control of a public company
The two most common methods of acquiring control of a public company are the takeover bid and the plan of arrangement.
In a takeover bid a formal offer is made to all shareholders, which is consummated by acceptance (or tenders of shares) by the target’s shareholders. These transactions can be recommended or hostile.
A statutory plan of arrangement is usually implemented by agreement between the bidder and the target. However, a plan of arrangement may provide for almost any type of transaction or combination of transactions, such as:
It is this flexibility and the ability to accommodate various transaction objectives and tax-planning requirements which make plans of arrangement so widely used. A plan of arrangement requires both shareholder and court approval. These transactions require cooperation by the target and are almost always negotiated.
Mergers or acquisitions through legal mergers (amalgamations) are not as common, although in a straightforward consensual merger an amalgamation may be the more desirable method, since it avoids the need for court proceedings.
Hostile bids are permitted and well established, but are the exception rather than the rule. Two reasons for this may be: (i) the mixed success rate for bidders initiating hostile bids, with a relatively high percentage of first movers being outbid by subsequent bidders; and (ii) the large number of issuers with significant security holders in a position to block a hostile bid for all securities.
Jurisdiction is exercised at the federal (national) level, the provincial level or, in some instances, at both levels. Securities regulation is conducted primarily by the provinces and there is no federal or national securities commission. However, the federal government regulates matters such as competition and foreign ownership.
The securities regulators have implemented regulatory initiatives to harmonize and consolidate rules governing takeover bids.
Formal takeover bids and the bidder’s offer documents (whether the offer price is payable in cash, securities or a mixture of both) need not be reviewed, received or cleared by securities regulators before the takeover bid can be made or delivered to, or accepted by, the target’s shareholders. Securities regulators can selectively review takeover bids for compliance with applicable rules and are sometimes asked to do so by competing bidders and/or targets alleging deficiencies in a competitor’s offer.
Generally, plans of arrangement (or other merger documents) are not required to be reviewed or cleared by securities regulators before being delivered to the target’s shareholders. However, plans of arrangement require: (i) preliminary court approval, which deals with the transaction’s procedural aspects, such as calling the shareholders’ meeting and sending proxy materials; and (ii) final court approval, which is a hearing on the fairness and reasonableness of the transaction after it has been approved by shareholders.
As with takeover bids, securities regulators can (and selectively do) review plan of arrangement materials, particularly in relation to compliance with applicable disclosure laws. Government officials responsible for administration of corporation statutes only rarely become involved in plans of arrangement.
In recommended transactions the target usually responds to the bidder’s due diligence request by providing prescribed access to a data room containing confidential information. The extent of the information provided is often subject to negotiation and can vary depending on how competitive bidding is for the target. Generally, access is given under the terms of a confidentiality agreement that typically contains standstill provisions prohibiting the bidder from subsequently launching a hostile bid.
A hostile bidder generally has only information that is publicly available. Access to non-public information is usually precluded, as the target is unlikely to cooperate with the bidder or is likely to impose terms of access which are unacceptable to the bidder.
Extensive current material information (including financial statements) concerning every public issuer is available through the System for Electronic Document Analysis and Retrieval (SEDAR) website maintained on behalf of provincial securities regulators (www.sedar.com), which includes:
Information regarding trades and holdings by insiders of public issuers is available at www.sedi.ca. The bidder may also obtain information by searching public records relating to:
The bidder’s intention to make a bid and the target’s expectation that a bid may be made must be kept confidential and cannot be disclosed (except for limited exceptions) before a public announcement. Neither the takeover bid nor the plan of arrangement need be delivered to shareholders before a public announcement can be made, provided that, in the case of a recommended transaction, the bidder and target agree that they have reached a stage where such an announcement is appropriate. A hostile bid can be announced and started when the bidder is ready to follow it by delivering the formal bid.
Memorandum of understanding or undertaking
Bidders commonly obtain commitments from key shareholders to tender their shares to a takeover bid or to vote their shares in favour of a plan of arrangement. The nature of, and parties to, such an agreement must be publicly disclosed.
These agreements must be drafted to avoid unintended consequences in relation to their validity or the ability of the bidder to vote the locked-up shares in subsequent steps of multi-step transactions. Similar consequences can result if the shareholders entering into these types of agreement receive consideration of greater value than is offered to other shareholders.
A bidder can generally acquire a voting or equity interest that is less than 10% of any class of voting or equity securities of a public issuer without any disclosure of its holdings. Once it acquires 10% or more of a class, the bidder must issue a press release and file an early warning report. It may also become an insider and be required both (i) to file insider reports of all its purchases and sales of shares in the target, and (ii) to issue press releases and file reports of incremental purchases of 2% of the outstanding shares.
A bidder cannot offer to acquire 20% or more unless it makes a formal takeover bid to all shareholders or meets the requirements for certain exempt takeover bids.
In calculating these thresholds, the shares owned and being sought by the bidder must be aggregated with the shares held by any party with which it is acting jointly or in concert. The determination of whether a party is acting jointly or in concert is based on the facts of each situation.
There are also pre-bid integration rules under which the price and percentage of shares acquired from any particular party in a transaction not generally available during the 90 days before a formal takeover bid must constitute the minimum price and percentage of shares sought under the takeover bid. For example, if a bidder acquired in a private transaction all of a person’s shares of the target at a specific price two months before making a bid, it must make a general offer at least equal to that price for all of the target’s outstanding shares. This does not apply to acquisitions made normally through a stock exchange.
A support agreement or merger agreement is common in transactions in which the target’s board of directors recommends the transaction to shareholders. Although these agreements vary in scope depending on the nature of the transaction, they usually contain provisions relating to:
The target’s board must prepare a directors’ circular when a formal takeover bid has been made. The directors’ circular must contain a recommendation to the shareholders; if the directors are unable to make a recommendation, they must specifiy the reason in the directors’ circular.
Target companies commonly agree to pay a break fee in certain circumstances. The most common triggers for payment of a break fee include:
It is less common for break fees to be payable by a target issuer if security holders do not provide the required level of acceptance or approval of the transaction.
There is no statutory or regulatory limit on the size of break fees, but courts and securities commissions in contentious proceedings sometimes make findings as to whether the break fee arrangements are reasonable and enforceable, and shareholders may object if a break fee is viewed as too high or as discouraging competing offers.
There are generally accepted ranges of commercially reasonable break fees that depend, in part, on the size of the transaction.
Statutory takeover bid rules require the bidder to make adequate arrangements before the bid to ensure that funds required for the cash component of the bid are available to make full payment for all securities that the bidder has offered to acquire. These arrangements must be disclosed in the formal bid documentation.
The financing arrangements may be subject to conditions if, at the time the bid is commenced, the bidder believes the possibility is remote that if the bid conditions are satisfied or waived, it will be unable to pay for the deposited securities due to any unsatisfied financing conditions.
There are no comparable financing rules applicable to plans of arrangement, so the target’s board must ensure that the bidder has adequate funding in place.
Making a bid public
A formal takeover bid is made by delivering a takeover bid circular to shareholders that contains information prescribed by securities regulations. The takeover bid circular must also be delivered to the target company and filed through SEDAR, which constitutes filing with applicable securities regulatory authorities. The bid can also be launched by publishing a brief summary of the bid in a newspaper advertisement, if both (i) the takeover bid circular and a request for the target’s shareholders' list are delivered to the target at the same time, and (ii) the circular is immediately filed through SEDAR and sent to the target’s shareholders within two business days of receiving the shareholders' list.
For plans of arrangement, a press release is issued by the target announcing the proposed transaction and an information circular and related proxy materials that contain the information prescribed by both corporate and securities regulations are delivered to shareholders. This material must also be filed through SEDAR.
For transactions involving cash-only consideration, both the takeover bid circular and an information circular are relatively straightforward documents with limited information about the bidder and its plans for the target.
Where the bidder’s securities are being offered in exchange for the target’s shares, both a takeover bid circular and a plan of arrangement require prospectus-level disclosure concerning the bidder and its securities, including financial statements (including, in some cases, pro forma consolidated financial statements of the combined entity) and the bidder’s plans for the target.
A formal takeover bid must be outstanding for at least 35 days before the bidder can take up shares. Where there is a variation in the terms of a takeover bid, including an increase in the bid price or any extension of the period during which securities may be tendered, a notice of variation must be sent to the target’s shareholders and the period during which shares may be tendered cannot expire before 10 days after the notice of variation has been sent. The only exception to this extension of time is in the context of the waiver of a condition in a cash bid.
Where a takeover bid has been made, the target’s board must send a directors’ circular to the bidder and target’s shareholders within 15 days of the date of the bid. In a recommended transaction it is common for this directors’ circular to be sent at the same time as the bidder sends the takeover bid circular. Any change in the information contained in the directors’ circular that can reasonably be expected to affect the decision of the target’s shareholders to accept or reject a takeover bid must also be sent to the bidder and the target’s shareholders.
If a bid for a target company produces competing bids, the competing bidder is subject to the same timing requirements as the original bidder. Strategic decisions designed to maintain or obtain timing advantages over other bidders generally determine when notices of variation of a takeover bid are issued.
Plan of arrangement
For a plan of arrangement there are two distinct stages in the timetable: agreement and court approval.
The negotiation and execution of a merger or arrangement agreement generally occur before any public announcement of the transaction. The time to achieve an agreement depends on many factors, including the length of the due diligence process and the speed of negotiations. Once an agreement has been reached and announced, the target company must prepare an information circular and proxy materials for a shareholders’ meeting, which can be achieved quickly or take several weeks, depending on the nature of the disclosure required in the information circular. The nature of the disclosure depends on whether the transaction is a cash transaction or involves the bidder’s securities, in which case prospectus-level information must be prepared and included in the information circular.
Once the information circular is prepared, an application to court is made for a preliminary order approving the process for calling and voting at the shareholders’ meeting. When the preliminary order is obtained, the documents are commercially printed and mailed to shareholders. The documents generally must be mailed to shareholders at least 25 days before the shareholders’ meeting. The final court application follows soon after that meeting and the closing normally occurs shortly after the final court order.
There is no regulatory requirement beyond the overall 20% threshold as to the percentage of the target’s shares that must be offered or bid for in a takeover offer.
The conditions attached to a takeover offer vary according to:
Common conditions include the following:
Generally, a hostile bid contains additional conditions relating to the occurrence of events beyond the control of the bidder, but within the control of the target. These include matters such as:
In a plan of arrangement conditions are negotiated and generally contained in the merger or supporting agreement. These conditions are broadly similar to those contained in a recommended takeover bid.
A target’s shareholders receive two primary documents under a takeover bid: a takeover bid circular and a directors’ circular.
The takeover bid circular is prepared and issued by the bidder. The purpose of this document is to provide sufficient information to the target’s shareholders to allow them to decide whether to accept the offer. The takeover circular must contain:
The directors’ circular is prepared by the target’s board, which provides additional information relating to the bid. The directors’ circular commonly contains:
The documentation does not vary significantly between a recommended bid and a hostile bid. In a recommended bid, however, the timing of sending the documents is coordinated between the parties and each party generally has the opportunity to review the other's document before it is sent. There is a prescribed form for both documents and the scope of the document depends primarily on whether the bid is an all-cash bid or involves securities of the bidder.
Plan of arrangement
In a plan of arrangement the principal document delivered to shareholders is a management information circular which includes:
The information circular generally includes copies of:
The target and its board are responsible for the preparation and accuracy of the information circular.
Informing and consulting with employees
There are generally no requirements to inform or consult employees about the offer, subject to any business considerations or particular terms of any collective agreement.
In the rare case where an acquisition transaction is effected by transferring assets, non-union employees whom the acquirer wants to transfer with the business must be made offers of employment by the acquiring company. Where there is a collective agreement, the acquirer is automatically subject to that agreement and the unionized employees become the acquirer’s employees.
There is generally no requirement to make a mandatory offer unless both: (i) the bidder, and the parties with which it is acting jointly and in concert, offer to acquire outstanding voting or equity securities of any class of a target; and (ii) the securities subject to the offer, together with the bidder’s securities (and those of its joint actors) constitute in the aggregate 20% or more of the outstanding securities of that class at the date of the offer to acquire.
There are limited exemptions to triggering a mandatory takeover bid, the two most common being: (i) the acquisition of no more than 5% of the target’s voting or equity securities during a rolling 12-month period (whether through a stock exchange or otherwise); and (ii) the acquisition of securities from no more than five persons or companies in private transactions, where the value of the consideration paid for those securities is no greater than 115% of their market price at the date of the transaction as determined in accordance with the securities regulations.
The use and timing of these exemptions are complex and require careful advance legal analysis to ensure that an obligation to make a takeover bid to all shareholders is not triggered inadvertently.
The forms of consideration most commonly offered in public takeovers are cash, the bidder’s equity securities or a combination of the two.
In recommended acquisitions of Canadian targets by US public companies, a common technique is to offer securities called 'exchangeable shares' to Canadian shareholders. These are basically synthetic securities that mirror and are exchangeable for the bidder’s foreign-listed securities, but are Canadian securities for the purposes of Canadian income tax treatment (thereby permitting deferred taxation on the sale of the target’s shares by the target’s shareholders).
There are no statutory or securities regulatory limitations on the type of consideration that can be offered, but there are practical limitations arising from investor needs, particularly in respect of the liquidity of any securities they receive. In addition, generally all shareholders must be offered identical consideration.
There are no regulations that provide for a minimum level of consideration other than in the context of the pre-bid integration rules.
A foreign bidder proposing to issue consideration other than cash to shareholders in Canada must be capable of providing prospectus-level disclosure concerning the issuer of the securities and the offered consideration. A target shareholder may also need to be able to resell freely those securities either on a foreign market or, in some cases, to other Canadians. Whether this is possible depends upon the nature of the consideration being offered, the jurisdiction of the bidder and other factors. One technique often used by foreign bidders is to offer exchangeable securities so that the Canadian shareholders will receive favourable tax treatment on exchanging their target shares.
Compulsory purchase of minority shares
Most corporate legislation permits a bidder compulsorily to acquire the target’s shares that have not been tendered in a takeover bid made for all shares of the class to which the bid relates if, within a prescribed period (usually 120 days) of the date of a takeover bid, the bid is accepted by the holders of at least 90% of the shares of that class, other than shares held at the date of the takeover bid by the offeror and its affiliates and associates.
A compulsory acquisition is typically effected by delivery of a notice containing prescribed information, including the mechanism for a shareholder to exercise any dissent rights to be paid the fair value for its shares as determined by a court.
Where the 90% threshold is not achieved, it may be possible to implement a second-step going private transaction or business combination that has the effect of squeezing out minority shareholders. This requires a meeting of the remaining shareholders of the newly acquired target company and triggers statutory rights of dissent for shareholders that do not vote in favour of the transaction to claim fair value for their shares.
Plan of arrangement
In a plan of arrangement, once the transaction is approved by the requisite vote of shareholders and by the court, all shareholders, including the minority, are bound by the transaction, although dissenting shareholders can apply to court to be paid fair value for their shares.
Failure to obtain control
If a bidder fails in its initial bid for a target, there are no rules precluding that bidder from commencing another bid, either on a recommended or hostile basis. However, the bidder is prohibited from acquiring, by way of a transaction that is not generally available, the target’s shares for 20 business days after the expiry of the bid, except for normal purchases through a stock exchange. If the bidder acquires 20% or more, any additional purchases are subject to the takeover bid rules as well.
The procedure for de-listing the target’s shares from a stock exchange can be undertaken immediately after successful completion of a plan of arrangement or after compulsory acquisition of all remaining shares following successful completion of a takeover bid. The process involves filing certain de-listing notifications and related certifications with the stock exchange, and filing applications with applicable securities regulators to cease being a reporting issuer.
The law prevents directors from taking steps that make it impossible for a properly documented formal takeover bid to be delivered to the target’s shareholders or for shareholders to respond to a properly delivered formal takeover bid. The law also limits the extent to which directors can take steps to encumber or dispose of a target’s assets, or issue dilutive shares to discourage an unsolicited bidder. The target’s directors can:
To obtain some control over the bidding process, if only for a limited period, some targets - subject to stock exchange requirements, including a requirement for shareholder approval, - adopt a shareholders’ rights plan (commonly referred to as a 'poison pill'), which seeks to establish certain parameters for some of the non-pricing terms of hostile bids either before any bid is launched or against a bid that has been made.
Shareholders’ rights plans are typically terminated either voluntarily or by securities commissions at some stage after they have been invoked in a takeover bid battle. The 'just say no' defence coupled with a poison pill plan has not been upheld by the courts or securities regulators in the typical takeover case.
The directors’ actions must be able to withstand scrutiny by courts and securities regulators as being motivated by the best interests of the target company and its shareholders.
There are no domestic transfer duties payable on the sale of shares in a company that is incorporated and/or listed in Canada.
In addition to restrictions relating to the level of foreign ownership of shares in some industries, the Investment Canada Act provides for the review of significant investments in Canada involving acquisitions of control by non-Canadians to ensure that they are of net benefit to Canada.
Non-Canadians must file either a notification or an application for review, depending on the value of the Canadian assets being acquired and the industry involved.
A 'non-Canadian' includes any entity that is not controlled or beneficially owned by Canadians. Notification must be filed by non-Canadians each time they start a new business activity in Canada or acquire control of an existing Canadian business where the establishment or acquisition of control is not a reviewable transaction.
Notification must be given by the non-Canadian making the investment at any time before or within 30 days of implementation of the investment.
An investment involving an acquisition of control by a non-Canadian is reviewable (as opposed to merely notifiable) if the asset value of the Canadian business being acquired exceeds one of the following thresholds:
The minister of industry has 45 days from when a complete review application is filed to determine whether the proposed investment will be of net benefit to Canada. The minister can extend this review period by a further 30 days. Further extensions are permitted only with the applicant’s consent, although this consent is typically given. The investor cannot generally complete the proposed investment until the minister has made a positive determination that the transaction will be of net benefit to Canada.
The factors that must be considered by the minister in determining whether a proposed investment will be of net benefit to Canada are:
Although it is necessary to comply fully with the notification and informational requirements of the Investment Canada Act, significant investment in Canada is rarely blocked following a review under the act. However, negotiated undertakings relating to the investor’s operation of the Canadian business going forward are frequently given by the investor as a condition of the minster’s approval of a reviewable transaction.
Sector-specific foreign share ownership restrictions
In addition to the Investment Canada Act, there are sector-specific share ownership restrictions in certain federal statutes of a regulatory nature, including:
Most of these sector-specific ownership restrictions are mandatory and absolute, and therefore are subject to no waiver or application procedure.
Repatriation of profits and exchange control
There are no exchange controls or restrictions on repatriation of profits earned in Canada by foreign entities, with the exception of:
Persons dealing in securities of parties to bid
In addition to general restrictions on insider trading, specific requirements apply in the context of takeover bids.
Restrictions on acquisitions and sales during formal takeover bid
A bidder must not acquire or enter into an agreement to acquire beneficial ownership of any securities of the target class once the bid has been announced until its expiry. This restriction is subject to an exemption for acquisitions of up to 5% of the outstanding securities of the target class in normal open market purchases on a published market.
Similarly, during a formal bid a bidder cannot sell any securities subject to the bid, except that an agreement may be entered into to sell any securities taken up under the bid following expiry of the bid, provided that the intention to sell is disclosed in the bid circular.
Restrictions on acquisitions after expiry of takeover bid
A bidder must not acquire any shares of the target class for 20 working days after the takeover bid has expired, except through a transaction that is generally available to all holders of such shares or by normal purchases on a published market.
Disclosure upon variation of terms of bid or change of information
A bidder must file a news release and send a notice to shareholders when a change occurs in the information contained in the bid circular if it could reasonably affect the decision of the shareholders or if there is a variation in the terms of the offer.
If, after a bidder makes a formal takeover bid, any other party acquires 5% or more of the class of securities subject to the bid, that party must issue a press release disclosing, among other things, the acquisition and the purpose behind it.
A national harmonized takeover bid regime was implemented on February 1 2008 and no other significant changes are expected in the near future. However, the federal government is reviewing the application of the Investment Canada Act to sovereign wealth funds and has set up a Competition Policy Review Panel with the mandate of ensuring that the competition legislation is working effectively. An overhaul of the foreign investment rules could affect the approach of foreign bidders looking to acquire Canadian businesses.
For further information on this topic please contact Frank Allen or Paul Mingay at Borden Ladner Gervais LLP's Toronto office by telephone (+1 416 367 6000) or by fax (+1 416 367 6749) or by email (firstname.lastname@example.org or email@example.com). Alternatively, contact Fred Pletcher at Borden Ladner Gervais LLP's Vancouver office by telephone (+1 604 687 5744) or by fax (+1 604 687 1415) or by email (firstname.lastname@example.org).
An earlier version of this Overview first appeared in the PLC Cross-border Mergers and Acquisitions Handbook 2008/09.
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