Overview of How Takeover Bids – Securities Regulation

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Dealt with in Sections 89-105.1 of Securities Act. If you’re not a reporting issuer in province of Ontario, not subject to takeover bid rules

2 Kinds of bids: 1) Exempt takeover bids; 2) vendor takeover bids

Two Kinds of Bids:

  1. Exempt Takeover Bids (Next section.)
  2. Vendor Takeover bids
  • If I own no shares of a public company, I can buy as many as I want from wherever, whoever, I don’t have to tell anyone anything.
  • When I hit 10%, have insider reporting and early warning, and every 2% thereafter until I hit 20.
  • When I hit 20%, in takeover bid regime.

Overview of Process:

  1. Definition
  2. Policy/Object of Legislation

Takover Bid: Generally speaking, a takeover bid is the acquisition of shares of a company (the “target”) which, together with the shares already owned by the purchaser, will put the purchaser’s shareholdings in the target over a certain threshold, generally 20%.

• The object of takeover bid legislation is to ensure that shareholders and the investing public receive sufficient information about the terms of the bid and that all shareholders are treated alike.

  1. Takeover Bid Circular

Takeover bid circular: communicates details to shareholders – will describe the offer (the price, number of shares and any conditions) and is sent to all SHs

  1. Bid Open for 35 Days

Bid Open for 35 D: To ensure that shareholders have an opportunity to receive the circular, review it and decide whether they want to sell (“tender”), a bid must be open for acceptance for at least 35 days.

  1. Shareholder Right of Withdrawal

SH right of withdrawal: The offeror can’t take-up the tendered shares for 35 days and the shareholder can withdraw the shares at any time before the securities are taken up.

  • This allows shares which have been tendered to be withdrawn if the shareholder changes his/her mind (which generally occurs when a higher offer is made).
  1. Director’s Circular of Recommendations

Director’s Circular of Recommendations: recommends acceptance/ rejection/ neutrality + reasons, which are sent by target to all SHs

  • Shareholders in deciding whether to tender would generally consider the advice of directors of the target. For this reason, a Directors Circular must be sent out
  1. Change in Terms of Offer – Extension of Tendering

Change in Terms of Offer – Extension of Tendering: If a term of the offer is changed (i.e., the offer price increased), this must be communicated to all shareholders who are given an extra 10 days to tender their shares.

  • Most changes (other than an increase in price or the waiver of a condition) allow a shareholder to withdraw tendered shares for 10 days.

H. Withdrawal if no Payment

Withdrawal if no Payment: To prevent an offeror from holding on to shares for too long after taking them after having been taken  up, a shareholder can withdraw their shares if not paid for within 3 business days up

I. Shares are Taken up Pro Rata

Shares are taken up pro rata: If the offeror wants to buy a maximum number of shares and more than this number is tendered, the shares are taken-up pro-rata and not first come, first serve.

• This ensures shareholders are not pressured to tender early (and can therefore review all pertinent information) and are treated equally

J. SHs offered Same Consideration and No Collateral Agmts

SHs offered same consideration + no collateral agreements: All shareholders must be offered the same consideration and no collateral agreements may be entered into

This ensures that a higher price per share is not paid for larger blocks or for shares tendered early. If, after shares have been taken up, the offer price is increased, all shareholders, including those whose shares have already been taken up, are entitled to the higher price.

K. Pre-Bid Integration Rules

An offeror must offer to buy from the public the highest percentage of shares at the highest price acquired in that 90 day period

Pre-Bid Integration Rules: Shares purchased before the offer is made but within the previous 90 days from the date of the offer can affect the price of and number of shares the offeror must buy (pre-bid integration).

L. Post-Bid Integration Rules

Post-Bid Integration Rules: An offeror can’t purchase shares of the target for 20 business days after the termination of a bid, except pursuant to another circular bid or the exceptions

M. Exceptions to having to issue a takeover bid circular

Exceptions to having to issue t/o bid circular: 1) 100.1 of OSA: can buy whatever as long as it’s from 5 people or less, and you don’t pay more than 115% of market price (realistically, can probably only use this once, but don’t know); 2) 100 of OSA: can buy 5% on the open market every 12 months, at market price.

  1. OSA: Part XX: Takeover Bids and Issuer Bids, s.89(1)
  • s.89(1) Takeover Bid: Means an offer to acquire outstanding voting or equity securities of a class made to one or more persons or companies, any of whom is in Ontario or whose last address on the books is in Ontario, where the securities subject to the offer to acquire, together with the offeror’s securities, constitute in the aggregate 20% or more of the outstanding securities of that class
  • (this is the important part.. but continues…) (of securities at the date of the offer to acquire but does not include an offer to acquire if the offer to acquire is a step in an amalgamation, merger, reorganization or arrangement that requires approval in a vote of security holders).

o Interpretation of Rules:

  • If what you own, together with what you’re about to by, is 20% or more – that is a takeover bid! You can’t do that unless you make the same offer to all SHs pursuant to a takeover bid circular
  • E.g. if I own 14%, and I want to buy 7%, what I own w/ what I want to buy is over 20, have to do takeover bid and give same consideration to everyone
  • Offer to Acquire: means an offer to purchase, or a solicitation of an offer to sell, or an acceptance of an offer to sell
  • Indirect Acquisition: defined in s. 92: includes a direct or indirect offer to acquire or the direct/indirect acquisition of securities, e.g. treats (see below)
  • Offeror’s Securities: includes securities controlled, beneficially owned, or deemed by s. 90(1) to be beneficially owned by an offeror or persons acting jointly or in concert with the Offeror ^ therefore includes securities you own and anyone you ’re acting jointly or in concert with ^ So A can’t buy 10, B buy 10, and C buy 10 without issuing a circular and then say hah! We have 30% and we now control you
  • [1]note: for options, deemed owned if exercisable in the next 60 days**
  • Problem with 20% Bright Line Test:
  • Someone might already own 70% of the company, but then they want to buy another 20%. They ALREADY HAVE CONTROL, so there won’t be a PREMIUM PAID for those extra shares, but they still have to take part in the takeover bid regime. This is where bright line test breaks down
  • 102.2(1): Acquisitions during a bid by an acquiror, 5 per cent rule: If, after a formal bid has been made for voting or equity securities of a reporting issuer and before the expiry of the bid, an acquiror acquires beneficial ownership of, or the power to exercise control or direction over, securities of the class subject to the bid which, when added to the acquiror’s securities of that class, constitute 5 per cent or more of the outstanding securities of that class, the acquiror shall disclose the acquisition in the manner and form required by regulation.
  • (2) Same, further 2 per cent rule: An acquiror who is required to make disclosure under subsection (1) shall make further disclosure in the manner and form required by regulation each time the acquiror or any person or company acting jointly or in concert with the acquiror acquires beneficial ownership of, or the power to exercise control or direction over, an additional 2 per cent or more of the outstanding securities of the class to which the disclosure required under subsection (1) relates.

**ALSO SEE 7.2 of RULE 62-504: this person has to follow the format for disclosure

POLICY: Why do you need to do this?

  • Because there will have to be a PREMIUM on the shares you’re purchasing that put you into a control position

o E.g. If I own 51% of shares of public company, or any company, and you own 49%… I decide I want to pay a dividend, you decide we shouldn’t. Let’s vote, you vote no, I vote yes, I win. I will always win vote (ignoring special resolution), even though I only own 2% more than you.

o If I say I’ll sell you 2% of company, if you thought about it, you’d pay me a lot more for that 2% than what it’s actually worth, with that 2% comes control and control is valuable b/c then you set direction of company

o If shares worth $100, company worth that, if every share is worth $1 and there are 100 outstanding, you’ll pay me more than $2 for those shares

  • Premium you ’re prepared to pay to get control of this company

So trick: (Achieving Equality Goal)

• Securities act says as long as you own control, you can exercise it. But b/c you’re public company and you’ve invited everyone else into the game, the price you pay for doing that is that when you go to sell control to someone else, that premium you’re going to get for control does not belong to YOU, it belongs to the whole company and you have to share that evenly with the rest of the company

o You can get that $1 for your shares, but if you’re getting $1.50, the extra .50 is the premium for control and has to be shared with all SHs. Only way you can sell it is if person buying it agrees to buy it at same price/same percentage from all other SHs (they don’t all have to tender to it, but those that do will get a share in the premium) o Note: this is very diff than other aspects of society, where owner gets all of premium o Instead of 51 -49, they say 20 ^ 20% is stupid bright line test (effective control at 20%, BUT this doesn’t work in all fact scenarios)

• Have to make offers to all SHs on same terms *

  • Section 92: Application to direct and indirect offers: For the purposes of this Part, a reference to an offer to acquire or to the acquisition or ownership of securities or to control or direction over securities includes a direct or indirect offer to acquire or the direct or indirect acquisition or ownership of securities, or the direct or indirect control or direction over securities, as the case may be.

Russell Holdings (Treats)

Ratio: Indirectly trying to acquire through what is essentially a takeover bid will count as one EXAMPLE OF NO SMART GUYS WITH TAKEOVERS ^ if you’re going to buy a public company/gain control of it through a private company, you have to issue a takeover bid circular

Facts: Russell Holdings, private company, holds 60% of treats, a public company. 5 SGs own Russell holdings. Smart Guy came and said, treats is trading at 10/share, I don’t want to buy all shares at $20 a share to gain control because that’s a lot. Takeover bids don’t apply to private companies (they don’t have to share premium with anyone else who might own piece of it). Don’t want to pay SHs $, therefore, offered the owners of the private company that OWNS Treats $25 a share for their ownership in Russell Holdings. Then “Smart Guy” controlled Treats through that private company. SGs got a huge premium, treats SH got nothing and control changed hands

Two things happen:

  1. OSC said damn, no law stopping it (t/o bids don’t apply to private companies), but stopped it anyway.
  2. s. 92 introduced by OSC^no one in universe knows what this means. Other than know that you can’t do that above situation.

Note: Sec commission knew about this, b/c of need to report after ownership of more than 10% of shares (insider rules)

  • Why did he go after the Russell holding shares? ^ strategic – Smart Guy could have bought shares from all shareholders of Treats pro rata (maybe for same price) ^ BUT b/c it would be pro rata, Russell would only be able to sell a fractional amount of its shares (wouldn’t want to do that)

Policy Notes:

  • Cannot indirectly acquire a company without issuing a t/o bid circular: So if they were going to take over the private company, buy public through private, have to make a takeover bid
  • Bad Facts make Bad Law: That’s what happens when entire sec act is 92stupid people do stupid things, end up with stupid legislation; Dumbest section in. 

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