Lexpert US Guides

www.lexpert.ca/usguide-corporate/ | LEXPERT • June 2016 | 27 ed a rights plan that required a 120-day offer period for "permitted bids." In its press release announcing its decision to cancel the pro- posed offer, Total stated that "the 120 day period associated with the Poison Pill is inordinately long and exposes Total to an unacceptable level of risk in the context of challenging and uncertain industry and market conditions." In addition, a longer bid period means that third-party financing could be harder to obtain, and at the very least may be more expen- sive, as the lender's commitment will need to be in place for longer than has traditionally been the case. Bidders may also find it more challenging to convince target shareholders to "lock up" to their offer in advance for a minimum of 105 days. The Minimum Tender Condition and 10 Day Extension Require- ment take away what has traditionally been one of the most effective tactics available to a hostile bidder — the ability to waive its Mini- mum Tender Condition and acquire "any and all" shares that are tendered. That ability permitted a hostile bidder to acquire an effec- tive control position in the target, allowing it to block a competing transaction even if it was unable to gain majority control. This, com- bined with the fact that target shareholders would not know prior to the tender deadline what the outcome of the bid would be, led to persistent concerns under the prior regime that shareholders could be coerced into tendering to a hostile bid due to concerns over being "left behind" in what (they feared) would become an illiquid investment with no prospect of another control transaction. These concerns have been addressed in the new rules by requir- ing (i) a shareholder "vote" on a take-over bid through the Minimum Tender Condition, which precludes "any and all" bids and (ii) the 10 Day Extension Requirement, which alleviates the pressure on share- holders to tender before the initial expiry date, allowing those who are unsure about the bid to wait and see if it will be successful before deciding to sell. This may mean more shareholders prefer to wait for the 10 Day Extension Period before tendering, which could make it even harder for hostile bids to succeed. None of these changes make hostile bids impossible. Even under the new rules, Canada will remain a "bidder-friendly" place relative to other jurisdictions, including the United States. As Suncor's ulti- mately successful bid to acquire Canadian Oil Sands demonstrates, a hostile bidder that is prepared to wait out the 105 Day Requirement and accept the increased completion risk associated with the Mini- mum Tender Condition can still achieve its objectives — just not quite as easily as before. PARTIAL BIDS ARE MUCH MORE CHALLENGING If hostile bids will generally be harder to complete under the new landscape, partial bids – offers to acquire less than all of the target company's outstanding shares – will be much more difficult. Because the Minimum Tender Condition applies to all bids, a bidder who launches a bid for even a relatively small percentage of the target's shares must still convince the holders of more than 50 per cent of the outstanding shares not owned by it to endorse the offer by tendering to it. This could be a significant hurdle, particularly if the bidder already owns a significant amount of the outstanding shares or if there are one or more large shareholders who are not prepared to tender — either because they do not support the bid generally or they do not wish to sell their shares (the new rules do not provide any mechanism for shareholders to endorse a bid other than by ten- dering). Commenters raised this as a "practical issue" with partial bids under the new rules. The CSA has acknowledged that concern and advised that it will be monitoring partial bids to see if the new rules require further adjustments vis-à-vis partial bids. Since partial bids are rare in Canada and, rightly or wrongly, have been heavily criticized as being particularly coercive, the impact of the new rules on partial bids is likely of little practical consequence. Still, there may be situations where the new rules will preclude a par- tial bid that is appropriate and not coercive — such as a partial bid used to facilitate the sale of a large block of shares at a price that ex- ceeds 115 per cent of market price. In certain circumstances, it may be possible to obtain discretionary relief from the CSA to avoid having the majority tender requirement apply to a partial bid in order to fa- cilitate those kinds of transactions. HOSTILE BID TACTICS WILL EVOLVE We believe that the new rules will force both bidders and targets to adjust their hostile bid tactics. Since hostile bids will now truly be marathons, both sides will be forced to commit significant resources to waging a hostile bid cam- paign. Timing considerations will no longer be particularly impor- tant to bidders and the target board's ability to reduce the 105-day bid period to 35 days in the context of a friendly transaction should give it additional leverage in negotiating with a hostile bidder. Target boards, their advisors and their families will be glad to know that, among other things, this likely means the end (or at least a sharp cur- tailment) of the "Christmas special" — a hostile bid that is launched immediately before the Christmas holidays in order to have the bid period start to run at a time when the target board will likely be un- able to effectively respond. Since the success or failure of a bid will turn on collective, and not individual, decision making by the target shareholders, we also expect that bidders will devote more resources to aggressive public relations and solicitation campaigns (social media, white papers, websites, etc.) to convince shareholders to tender. These will be opposed by equal- ly vigorous campaigns against the bid by the target and potentially by significant shareholders who oppose the transaction, although targets will have to be mindful that their public opposition doesn't make a subsequent endorsement of the bid difficult or awkward if a friendly transaction can be successfully negotiated. (Suncor's recent hostile bid for Canadian Oil Sands likely represents a good preview of the way parties will approach soliciting shareholder support under the new rules.) Proxy solicitors, public relations consultants and so- cial media experts will all be key members of the deal team on both sides of the transaction. Some parties may start to consider proxy con- tests for control of the target's board of directors as a prelude or even an alternative to launching a hostile bid. The new rules will affect how hostile bidders approach lock-up agreements and building toe-hold positions prior to launching a bid. The Minimum Tender Condition means lock-ups will be even more valuable than toe-holds because shares tendered under a lock-up will count towards reaching the Minimum Tender Condition but toe- hold shares will not. Since toe-holds will no longer give hostile bid- ders an effective head start in acquiring a potential control position, they will likely have limited tactical value going forward. Although the impact of the new rules on the likelihood of a target company be- ing sold once it is in play remains to be seen, there could be increased financial risk associated with acquiring a toe-hold if the new rules make it less likely that a target company will be sold (i.e., a toe-hold A longer bid period means that third-party financing could be harder to obtain, and more expensive, as the lender's commitment will need to be in place for longer than has been the case. TAKE-OVER BID REGIME

• cover
• TOC
• features
• firm
• Lawyers to watch