Lock-up Agreements/ Tendering Agreements – Securities Regulation

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You can grab notes on other topic from here.

  1. Lock-up Agreements/ Tendering Agreements (Allowed)

93.1(1) of the OSA says you can’t enter into any agreement to enter shares while bid is outstanding (in a private agreement)

  1. Section 2.1(2) of Rule 62-504

However, Section 2.1(2) of Rule 62-504 (Take Over Bids and Issuer Bids) says I can enter into a lock-up agreement with you ^ whereby the shareholder and offeror making bid will contract to effect that shareholder will tender his shares to a formal TOB made by the offeror made in accordance with proper terms/conditions of her bid

  • You can negotiate this, it’s a contract
  • For instance, in the clause it may state that the SH is not obligated to tender to the original bidder at a certain price if a higher bidder comes along BUT then the SH must give the original bidder a % of the profits. If there is NO such clause in the LU agreement, then the SH is stuck.

o E.g. you’re a big SH and I say I’m thinking of making bid at $20 a share, but I will only make that bid if you agree that you’ll tender to it. Then negotiate (you can add whatever conditions you want, have it irrevocable where they cannot withdraw the tender and tender to a higher competing bid, or not, probably would though)

Why would a big SH do that?

  • The large shareholder would encumber themselves like this in order to ensure the bid happens and their shares get bought
  • If they said no, not doing it for $20 a share… two choices, sit with share at $10 or agree to lockup agreement, and make sure they get the $20 bid (the premium)

NOTE!!! – and see below chart for legislative goals

  • still have to comply with the terms and conditions of a takeover bid (e.g. taking up shares pro rata), nothing untoward going on, there is no extra consideration or premium going to the SH who is a part of the lock up agmt

o Pre-bid integration only protects little guys (doesn’t matter that previous purchases were for less)

Ex. Say 60 D before offer to buy all shares of A (at $9/share); 45 D before offer to buy all of B’s shares (at $12/share). Then take-over bid (might be prejudicial to other parties). Therefore, take-over bid must be for highest price and highest % you purchased in the previous 90 day period.

• Thus to legitimize these transaction would have to buy for $12 and 100% (higher payment and higher % than before – note: therefore, should not buy up 100% of A first)

  1. Section 93.1: Restrictions on acquisitions during formal take-over bid

An offeror shall not offer to acquire, or make or enter into an agreement, commitment or understanding to acquire beneficial ownership of any securities of the class that are subject to a formal take-over bid or securities convertible into securities of that class otherwise than under the bid on and from the day of the announcement of the offeror’s intention to make the bid until the expiry of the bid.

  1. OSC RULE 62-504: TAKE OVER BIDS AND ISSUER BIDS

Per s.2.1(2): Subsection 93.1(1) of the Act does not apply to an agreement between a security holder and the offeror to the effect that the security holder will, in accordance with the terms and conditions of a formal take-over bid, deposit the security holder’s securities under the bid.

• Interpretation: So this means they will deposit their securities in accordance with the usual bidding rules!

  1. Legislative goal is STILL met

Promote TOB, Equality and Information – policy as to why this is allowed

  1. Equality: all SHs are being treated equally: b/c all SHs being treated equally, big SH not getting more money than little SH
  2. Information: This is not secret (it will be disclosed in the takeover circular)
  3. Promotes TOB: Is not a collateral agmt b/c SHs still treated equally, however lock-ups help to allay the expense of TOBs to offerors b/c it lowers the risk of the bid failing and are thus in accordance with the intention of the Act to promote TOBs

You can grab notes on other topic from here.


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