No collateral agreements – Securities Regulation

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You cannot enter into a collateral agmt with anyone

  1. Section 97.1
  • Prohibition against collateral agreements: If a person or company makes or intends to make a formal bid, the person or company or any person or company acting jointly or in concert with that person or company shall not enter into any collateral agreement, commitment or understanding that has the effect, directly or indirectly, of providing a security holder of the offeree issuer with consideration of greater value than that offered to the other security holders of the same class of securities.
  • (2) Exception, employment benefit arrangements: Subsection (1) does not apply to such employment compensation arrangements, severance arrangements or other employment benefit arrangements as may be specified by regulation.
  1. Legislative Goal Met

Equality : Ensures that all shareholders are getting an equal share of the premium for their securities and you can’t go making agreements that allow you to circumvent this rule by providing extra consideration to other people under the table for their shares

How do you determine if you’re entering into an agreement that provides a security holder of the offeree issuer with consideration of greater value than that offered to the other security holders of the same class of securities vs. one that is allowed?

  • E.g. I want to buy Canadian tire and 30% of those shares owned by dealers of CT. Dealers pay 6% royalty for right to carry on dealership. If I go to dealers, say I’m going to make takeover bid for CT, and I’m going to pay everyone $50 a share. If I’m successful, you should know, I’m going to cut your royalty from 6% to 3% (good for dealer). Want to retain dealers.
  • E.g. 2: If I want to buy apple, give everyone $750 for their shares. Go to CEO and say, if I’m successful in acquiring, I’m raising your compensation from 50m a year to 150m. Should I be able to do that?

Depends on the reason (intention). See test below.

Test for whether or not collateral agreements are ok

May apply to the OSC to ask them if a certain agreement is okay (s.104(2)) (Why do you need it? *diff of INTENTION):

  1. are you inducing that person to sell you their stock? (not okay) OR
  2. do you need them and their expertise or are doing it for a legitimate business purpose that had nothing to do with whether or not that person owned shares? (okay)
  • If I’m trying to maintain them and their expertise for the best interests of the corporation and I’m dropping all of this $ and think that they’d better be sticking around if I’m going to spend that much, then it’s fine. If I’m doing it to induce them to tender their shares and I’m finding a way to get their shares without directly paying them more money, then not okay. I’m giving someone else a benefit that I’m not giving to the other SHs

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