[Last updated: 1 June 2022, unless otherwise noted]
As previously mentioned, there are two principal ways in which an offeror could effect an acquisition of the target:
- a takeover bid (often followed by a compulsory acquisition of all the shares not tendered in the bid (if available) or another form of subsequent acquisition transaction); or
- a court approved plan of arrangement or other corporate transaction.
The method of acquisition is often determined based on the cooperation (or lack thereof) of the target. In a hostile acquisition environment, the acquirer would only have the option of structuring the acquisition as a takeover bid (since a plan of arrangement requires the target's cooperation). In a friendly acquisition environment, the determination to proceed with either structure will be dependent on the particular facts of each case and may be influenced by tax considerations.
The following provides a general overview of each of these two acquisition methods and discusses certain advantages and disadvantages associated with each. Illustrative timelines are also included for reference in 5.
4.1 Takeover Bids
(a) What is a takeover bid?
A takeover bid is an offer to acquire outstanding voting or equity securities of a class made to shareholders of the target, where the securities subject to the offer, together with the offeror's existing holdings, constitute 20% or more of the outstanding securities of that class. Existing holdings include securities held by any person or company deemed to be "acting jointly or in concert" with the offeror.
(b) To whom must the bid be made?
Subject to certain exemptions, a formal bid must be made to all Canadian holders of securities of the class subject to the bid and delivered to holders of securities that may be converted into securities of that class before the expiry of the bid. The offeror is required to comply with the takeover bid regime in each of the jurisdictions in which shareholders of the target reside.
(c) Confidentiality agreement
In a friendly bid, the parties often enter into a confidentiality or non-disclosure agreement. In addition to regulating the disclosure and use of confidential information, confidentiality agreements also typically include "standstill" provisions that will limit the offeror's ability to acquire target securities, or to undertake any transaction or other actions that have not been approved by the target's board, for a period of time after the due diligence period.
(d) Acquiring a "toe-hold"; early warning reporting
The acquisition of a "toe-hold" position in the target's securities (up to 19.99%) is permitted, subject to compliance with the EWR regime. For further information, see also the pre-bid integration trading restrictions discussed below.
Every offeror who, together with any joint actors, acquires a 10% stake in a Canadian public company must immediately issue a press release and, within two business days, file an early warning report with securities regulators. This report must include disclosure of the offeror's intentions in purchasing the securities and any future intentions to acquire additional securities. Similar disclosure must be made whenever a further 2% interest is acquired or disposed, there is a decrease below 10% or there is a change in any material fact in the required disclosure. Once 20% of the voting or equity securities have been or are proposed to be acquired, the provisions relating to takeover bids apply.
(e) Insider trading restrictions
The acquisition of target securities by the offeror itself does not give rise to liability under Canadian insider trading rules, unless the offeror has knowledge of undisclosed material information concerning the target. However, any insider of the offeror, e.g., a director, officer or principal shareholder, is subject to insider reporting and trading rules (as are certain other persons in a "special relationship") and should not acquire securities of the target with knowledge of the undisclosed proposed bid.
(f) Pre-bid integration trading restrictions
Certain pre-bid integration rules apply with respect to any shares of the target acquired by the offeror within 90 calendar days prior to the making of a bid. For example, the offeror must offer consideration in the same form and which is at least equal to the highest consideration paid under any of the pre-bid transactions, or must offer at least the cash equivalent of such consideration.
(g) Lock-up agreements
Before (or after) making an offer, the offeror is free to seek lock-up agreements from shareholders of the target. Lock-up agreements can be "hard" (where the shareholder's undertaking to tender into the bid is irrevocable) or "soft" (where the shareholder agrees to tender but is free to withdraw if a higher competing bid is made).
To avoid making the locked-up shareholder a "joint actor" of the offeror, no collateral benefit, i.e., a benefit not offered to other shareholders, may be offered and the locked-up shareholder cannot actively participate in the strategy of the bid.
(h) Support agreement
In a negotiated transaction, it is customary for the offeror and the target to enter into a support agreement. The support agreement usually covers issues such as (i) the terms and conditions of the transaction (including the amount and form of consideration to be exchanged for the securities of the target), (ii) management's support of the transaction, (iii) break fees, (iv) "no-shop" provisions and (v) representations, warranties and covenants.
(i) Defensive tactics
Directors of Canadian companies have both statutory and common law fiduciary duties to act honestly and in good faith with a view to the best interests of the corporation, and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In a negotiated transaction, this is achieved through bargaining, the creation of a special (typically independent) committee and the use of independent professional advisers.
However, where an offeror makes an unsolicited bid or the bid is otherwise unsupported by the directors of the target, the directors have an array of defensive tools which can be used to delay or thwart the bid if they deem it necessary, subject to their overarching fiduciary obligations. These may include: (i) employing a shareholder rights plan (also known as a "poison pill"), although changes to the law in May 2016 have limited the general usefulness of poison pills (see 6), (ii) finding an alternative purchaser (also known as a "white knight"), (iii) disposing of certain key assets (also known as "selling the crown jewels") or engaging in other restructuring transactions, for business purposes, (iv) seeking a strategic investment from a friendly party, or (v) bringing legal or regulatory challenges to the bid.
(j) The offer
All shareholders of the target must be offered identical consideration. Accordingly, agreements that have the effect of paying an indirect premium to certain shareholders are prohibited. Certain collateral agreements are permitted in limited circumstances (such as a specified employment agreement with a senior officer of the target who is also a shareholder).
An offeror may attach almost any condition to its obligation to complete a takeover bid, e.g., minimum tender condition, receipt of requisite government consents and absence of material change. In the case of cash consideration, takeover bid legislation requires an offeror to have made adequate arrangements prior to the bid to ensure that funds are available to acquire all of the securities subject to the bid. Such financing arrangements may be subject to conditions, if, at the time the bid is commenced, the offeror reasonably believes the possibility to be remote that, if all other bid conditions are satisfied or waived, the offeror will be unable to pay for the securities deposited under the bid due to a financing condition not being satisfied.
(k) Timing and process
A takeover bid may be kept open for any amount of time, provided that it remains open for at least 35 days if certain conditions applicable to a friendly bid are met (or 105 days otherwise).
The offeror may vary the terms of a bid made (including to extend the bid) at any point up to the expiry of the offer (subject to complying with certain prescribed requirements).
The offeror may not take up any shares deposited in acceptance of the bid until after the bid period has expired.
If all the terms and conditions of the bid have either been met or waived, the offeror must take up and pay for all shares deposited no later than 10 days after the expiry of the bid and any securities taken up by the offeror under the bid shall be paid for as soon as possible, and in any event not more than three business days after the taking up of the securities.
A target shareholder may withdraw target shares deposited under the bid at any time if (i) the target shares have not yet been taken up by the offeror, (ii) if the target shares have been taken up by the offeror but not paid for within three business days or (iii) within 10 days from the date of notice of change or variation of the bid.
If there is a variation including any extension in the bid, the offeror must send a notice of variation to the shareholders and, in some circumstances, the bid period must be extended by at least 10 days (see 6).
(l) Disclosure obligations
A takeover bid circular must be prepared by the offeror and sent to the target and its shareholders. The circular includes a certificate of the offeror certifying that the circular does not contain a misrepresentation. Canadian securities laws provide that, where a takeover bid circular contains a misrepresentation, each security holder has a right of action for recession or damages against the offeror and for damages against, among others, its directors and executive officers who signed the certificate in the circular. In addition, the circular must be filed with the securities regulatory authority of each jurisdiction in which shareholders of the target are resident. However, the circular is not automatically subject to formal review by the regulatory authorities prior to its use.
The offeror's circular must contain certain prescribed information about the offer and the offeror (including prospectus level disclosure about the offeror where share consideration is involved).
Within 15 days of the bid, the directors of the target must send a circular to the shareholders of the target, the offeror and securities regulators containing certain prescribed information, including the directors' recommendation to accept or reject the bid and the reasons for making those recommendations, or, if no recommendation is made or is unable to be made, the reasons for not making or being unable to make the recommendation.
(m) Restrictions on trading during the bid
Subject to one specified exception (allowing the purchase of up to 5% of the target shares on the market if certain prescribed requirements are met), an offeror may not acquire shares of the target during the term of the bid.
(n) Post-bid considerations and post-bid purchases
For post-bid considerations and restrictions on post-bid purchases, see 7 below.
4.2 Arrangements
(a) Arrangement agreement
As an arrangement is a negotiated transaction, a common step is the entering into of an arrangement agreement between the offeror and the target. The arrangement agreement usually covers issues such as (i) the terms and conditions of the transaction (including the amount and form of consideration to be exchanged for the securities of the target), (ii) mutual representations, warranties and covenants, (iii) break fees, (iv) "no shop" provisions, and (v) the calling of a shareholders' meeting to vote on the arrangement.
(b) Interim court order
Once the arrangement agreement has been entered into, the parties apply for court approval. In the first of two applications, the court is asked to direct that a shareholders' meeting be held to consider the arrangement and to prescribe the level of voting required to approve the arrangement. The court will usually require the approval of at least 662/3% of shareholder votes and may, if appropriate, also require that the arrangement be approved by a majority of the target's disinterested shareholders. The court will typically expect the offeror to grant rights of dissent to shareholders who do not approve of the transaction and wish to be paid fair value for their shares instead of the consideration being offered under the arrangement.
(c) Shareholder approval
The target's directors are required to prepare and mail an information circular to its shareholders in connection with the special meeting called to consider the transaction. If the approval of the shareholders of the offeror is required as a result of the structure of the transaction, the offeror also sends an information circular to its shareholders. The target and offeror circulars can be combined into one. The information circular will contain certain prescribed disclosure about the offer and the offeror (including prospectus level disclosure about the offeror where share consideration is involved). In addition, the circular usually contains a copy of a fairness opinion from a financial adviser stating that the consideration to be received by the target's shareholders in the transaction is fair, from a financial point of view, to the shareholders.
(d) Final court order
If the required levels of shareholder approval are obtained at the shareholders' meeting, the court will be asked to give its final approval for the arrangement in a hearing at which all affected security holders are entitled to attend. In sanctioning the arrangement, a court will consider whether the statutory requirements have been strictly complied with and whether the arrangement is fair and reasonable to all classes of affected security holders.