Lexpert US Guides

26 | LEXPERT • June 2016 | www.lexpert.ca/usguide-corporate/ TAKE-OVER BID REGIME The CSA proposal would have provided target boards with greater flexibility to use a poison pill as a defense tactic to "just say no" to a hostile bid. Under the CSA proposal, in order for a rights plan to remain effective in the face of a hostile bid, shareholders would have to approve it within 90 days of its adoption by the board (or, if imple- mented after a take-over bid had been launched, within 90 days of the date of the bid). The AMF proposal focused on whether target directors had com- plied with their fiduciary duties in responding to a hostile take-over bid consistent with the reasoning in BCE, and only contemplated regulator intervention where required to protect the public interest. This essentially would have allowed target boards to implement a poison pill without shareholder approval for an unlimited period of time, as is permitted in the United States. The competing proposals resulted in significant debate and, in September 2014, the CSA, including the AMF, announced that nei- ther of the competing proposals would be adopted. Instead, the CSA outlined a proposed regime largely consistent with the final version of the new rules. The first version of the new rules was published for comment in March 2015 and, following the receipt of comments, the new rules were adopted unchanged from the March 2015 proposal in any ma- terial respect other than shortening the minimum bid period from 120 days to 105 days. This change addressed concerns about whether a 120-day bid period would preclude bidders from using the compul- sory acquisition provisions under corporate law. Compulsory acqui- sition provisions generally require that a bidder has a statutory right to acquire any shares that are not tendered to a take-over bid if the bidder acquires at least 90 per cent of the shares not owned by it as of the date of the bid, but only if the shares are acquired within 120 days of the date of the bid. OVERVIEW OF THE NEW RULES The stated intent of the new rules is to enhance the quality and integ- rity of the take-over bid regime and rebalance the dynamic between all bidders, target boards and target shareholders by (i) facilitating the ability of target shareholders to make voluntary, informed and coordinated tender decisions, and (ii) providing target boards with additional time and discretion when responding to a take-over bid. These two objectives are advanced by requiring all take-over bids to: receive tenders of more than 50 per cent of the outstanding securi- ties of the class that are subject to the bid, excluding securities benefi- cially owned, or over which control or direction is exercised, by the bidder or by any person acting jointly or in concert with the bidder (the "Minimum Tender Condition"); be extended by the bidder for an additional 10 days after the Mini- mum Tender Condition has been achieved and all other terms and conditions of the bid have been complied with or waived (the "10 Day Extension Requirement"); and remain open for a minimum deposit period of 105 days unless (a) the target board states in a news release a shorter deposit period for the bid of not less than 35 days, in which case all contemporaneous take-over bids must remain open for at least the stated shorter deposit period or (b) the target issues a news release that it has agreed to enter into, or determined to effect, a specified alternative transaction (such as an arrangement), in which case all contemporaneous take-over bids must remain open for a deposit period of at least 35 days (the "105 Day Requirement"). The following table compares the key features of the new rules with the previous regime: Although the new rules provide target boards and shareholders sig- nificantly more time to consider and respond to hostile bids, as well as more leverage when negotiating with hostile bidders, they continue to reflect the CSA's traditional shareholder-centric outlook. The new rules do not change the CSA's perspective that target shareholders should ultimately be free to decide to tender to a bid even if the target board does not think the transaction is in the best interest of the tar- get, nor their view that regulators have a role to play in ensuring that a decision can be made. IMPLICATIONS AND ISSUES The CSA has clearly accomplished its goal of rebalancing the dynam- ics among bidders, target boards and target shareholders. The new rules have a number of important implications, some of which are clearly evident today. Others will no doubt only become apparent once the rules have been tested in practice. HOSTILE BIDS ARE NOW MORE CHALLENGING As intended, the new rules significantly shift leverage away from hos- tile bidders and to target directors and shareholders. This will make hostile bids more difficult to complete and could, as a result, reduce hostile bid activity in Canada. Time is generally the enemy of a hostile bidder. The longer a hos- tile bid remains outstanding, the greater the chance that a competing buyer will emerge, the target company's circumstances will improve, market conditions will change or some other unexpected develop- ment will derail the transaction. The 105 Day Requirement should give target boards ample runway to respond to an unsolicited offer and, if appropriate, run a thorough sales process to locate potential "white knight" bidders or make a more compelling case that target shareholders should reject the hostile bid. A hostile bidder therefore now faces higher completion risk, which would be exacerbated in the context of a share exchange bid (because the value of the consider- ation – the bidder's shares – will also be subject to market risk over a longer period). In some cases, the longer bid period may by itself be enough to dissuade a potential hostile bidder from proceeding. For example, in September 2015, Total Energy Services Inc. cancelled a proposed hostile bid for Strad Energy Services Ltd. after Strad adopt- Bidders are prohibited from taking up securities under a bid unless the bid receives tenders of more than 50 per cent of the securities of the class subject to the bid, ex- cluding those beneficially owned by the bidder. "Any and all" bids pro- hibited. Following the initial deposit period, all successful bids must be extended for an addi- tional 10 days to enable any shareholder that had previously not tendered to tender its securities. Minimum deposit period of 105 days, which may be reduced at the option of the target, or upon the acceptance by the target of a friendly transaction. PROVISION PREVIOUS REGIME NEW RULES Minimum tender requirement Extension of suc- cessful bid following the expiration of the bid Minimum deposit period No minimum tender requirement. Any mini- mum tender require- ment stated in the bid could be waived by the bidder prior to the expiration of the bid. "Any and all" bids permitted. No requirement to extend a successful bid, except to satisfy cus- tomary "permitted bid" requirements under a rights plan. Minimum deposit period of 35 days, with extensions given where variations are made to the bid.

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