Month: March 2018

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Rules developed after Unicorp: Needed to have a system that’s conscientious and fair to determine what defensive tactics are ok in the context of a TOB

1. NP 62-202

(!) Takeover Bids are a Good Thing : Media try to paint good/bad guys, there are just people that want to make $.

• (a) discipline on management (to make sure they do a good job)
• (b) reallocation of resources to their most effective uses

1. But we recognize that there’s a possibility that interests of management/board of target might differ from its SHs. Management and board might take certain steps to defeat that bid, either b/c they think it’s best for the company to do so/want a higher offer (good), or to entrench themselves (bad)
2. Primary objective of takeover bid legislation is protection of bona fide interests of SHs of target company
3. Second purpose/objective: create a regulatory framework where bids can happen in an open and evenhanded manner (shouldn’t favour management or offeror should put SHs in a position to make a fully informed decision)

• Concerned that certain defensive tactics employed by board may frustrate a fair bid and deny SHs the right to make the choice ^ Directors MIND the store, they don’t own it.

1. We, the regulators, believe is it inappropriate to specify a code of conduct for directors of a target company b/c that code runs risk of being insufficient in some cases and excessive in others

• Uncertain, they’ll review tactics in hindsight. IF they’re abusive to SHs (denies them rt to make choice), “we’ll kill you”

1. SH Approval (unrealistic)

• If you’re worried, get SH approval of your defensive tactic, if they say it’s okay, it’s okay. That sounds okay, but taking meeting of SH takes 60 days min, the game is over, takeover bids are fast – unrealistic in almost every case.

1. ***most significant point they’re going to make: administrators believe that unrestricted options produce most desirable results in takeover bids, and are reluctant to intervene in contested bids

• They want an auction! ^ get as many bidders as possible, get price as high as possible for SHs
• **why it might be okay to engage in these tactics: have time to get other bidders.

1. although that’s the case and auctions are best results/we don’t want to intervene, we really are going to kill you if results of your action is to deprive SHs of opportunity/right to respond to a bid***

• Difficult b/c forgetting bad intentions, if you don’t engage in DTs, might get a bad bid. But if you do, bid you don’t want might walk, and no white knight will come in ^ looks like you’ve denied SHs right to make a decision
• **blabla about not being worried about protecting yourself as a lawyer, do best for your client.

o When it turns out properly, SHs get more. If you’re legitimately pursuing higher offer or better deal for SHs and a risk it might turn out badly, but measured risk that makes sense

1. don’t think you can come to us and get prior approval for defensive tactic

• Do whatever you think you have to do, we’ll tell you if you’re right or wrong with benefit of hindsight later, won’t bless your transaction

6.8.3.2 Case Law

Teck Corp v Miller (BC SC) – Best Interests Test

Ratio: Best interests test: need to act in best interests of SH^“The directors must act in good faith. Then there must be reasonable grounds for their belief. If they say that they believe there will be substantial damage to the company’s interests, then there must be reasonable grounds for that believe. If there are not, that will justify a finding that the directors were actuated by an improper purpose”.

Producers Pipelines (Sask CA) – Proportionality Test

Ratio: Canadian law does not conflict with the business judgment rule.

In takeover situations, directors will often be in a conflict. In implementing a poison pill, the directors “must be able to establish that (a) in good faith they perceived a threat to the corporation, (b) they acted after proper investigation, and (c) the means adopted to oppose the takeover were reasonable in relationship to the threat posed”

• Defensive tactics that result in shareholders being deprived of the ability to respond to a takeover bid or to a competing bid are unacceptable

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• Issue new shares
• Seek a “white knight”
• Issuer bid for own shares
• “Crown Jewel”: sell of asset coveted by bidder. Or, grant option to third party to purchase “jewel” at low price if hostile bid succeeds
• Bust-up fee with white knight: if white knight’s bid is unsuccessful, target must pay a significant sum to white knight (i.e. substantial debt on hand for successful bidder—less valuable company)
• Delay the bid: commence litigation seeking an injunction until litigation is resolved, i.e. competition laws, poison pill (see below)

Regulation tends to encourage defensive tactics. It also facilitates white knight defences.

Union Enterprise (Unicorp Tender) (Example)

Example of defensive tactics – bought a pig farm to make company unattractive to bidder (too extreme, but case was before sec law)

Facts: Union enterprises was a massive utility company in Canada. Then a little nobody company, Unicorp makes hostile bid for union enterprises. Directors don’t like that, they get lots of perks, fight goes on for months. Costing Unicorp millions, union enterprises to fight it. Looks like unicorp is going to win. And Union Enterprise comes up with a smart idea. Decide they need a pig farm. Find two people that own one worth $10m, say “we’re going to pay you $80m for your pig farm, but won’t give you cash, will give you new shares of Union Enterprises.” If you do that, will expect you not to tender your shares to the unicorp bid. Makes bid at least $80m more expensive b/c new shares out there they have to buy. Also makes it hard b/c those 80m shares won’t be tendered to the bid, and if you win bid and buy union enterprises, you get a utility AND a pig farm!

They do the deal. Scorched earth – make it so unattractive bidder won’t want the company anymore. Unicorp still buys union enterprises, somehow was allowed to happen. Before they had defensive tactics.

Labatts (just an example)

Example of defensive tactics: used a poison pill (change in ownership would trigger tax liab); after this case brought in law re: defensive tactics (however, board did it’s job to buy time and eventual had a preferable bidder)

Facts: Labatts was controlled by Brascan, owned 40-50% of Labatt. Had big fight with CEO of Labatt. Rumour they’d be taken over (Labatt), so everyone wanted it, they owned beer company, TSN, Toronto blue jays, food, etc.. For months, speculation someone was going to make a takeover bid for Labatts.

• So they decided poison pill ^ turned down by SHs, so evidence it would absolutely be in play. Had some time (unusual) to prep for takeover bid (it’s usually by surprise). Saw stupid provision in income tax act – if we turn TSN from a corporation into a partnership, then we can trigger $150m tax liability on a change of control of Labatts. If someone acquires control of Labatts, will pay $150m of tax for nothing, if we change from corp to partnership, but only triggered if someone gains control. So changed it, didn’t tell anyone.
• Then Onex makes hostile t/o bid at huge premium to market. Everyone thought it was over, Labatts done. Time is $ for takeover bids, Labatts wants white knight, Onyx wants it to go quickly. Onyx sees change, goes nuts ^suing board, suing directors, everyone. (after defensive tactics introduced)

Onex Argument: “these guys are crooks b/c they entrenched themselves, denied SHs right to decide if they want to take our bid or not by creating an artificial $150m tax liability for no reason” ^ This actually levelled the playing field, and allowed Onex and Labatt to talk about it (Onex realized it would be long and drawn out if they didn’t talk to the board). But then someone else came and bought it from Belgium (COMPANY DID THEIR JOB, THEY BOUGHT TIME)

Max Milk and Beckers

Example of attempt by Max Milk to find a white knight

Facts: fierce rivals for years. Couche-Tard made an offer to buy Max Milk, then made a deal with Beckers (paid a lot). Sold shares on condition that they wouldn’t tender them to Couche-Tard. 2 years later Couche-Tard bought both!

1. Due Diligence – can restrict access

• Want to find white knight. Example of making info available to all bidders except you.
• Every time bid is made on hostile basis, everyone gets access except original bidder. And when OG bidder sues all directors, never heard of success

Sun Media and TorStar

Example where info was not made available to bidder. Also in this case, complained to competition bureau. Worked out since delay led to higher bid.

Facts: Sun Media went to competition bureau to buy itself time to think about TorStar bid.

• If in the same industry, might complain to anti-competition bureau and maybe a better bid comes along. But keep in mind you can’t fix this one!!
• SH of Sun Media and TorStar angry – took decision out of their hands! However, directors insulated b/c they bought time – then Quebecor made a higher bid! So it worked out.

Second Cup

Example of poison pill- not actually used, just threatened to give opp to talk

Facts: Owned partially by Cara. Made bid to own rest of company. Existing directors put in a poison pill (once x% acquired then every SH, gets ability to buy shares)

• NO ONE has ever actually triggered a poison pill – just threatened often to give an opp to talk

1. Golden Parachutes – all legal.

• Temptation to offer everyone a huge severance in case they get taken over b/c it’s the acquiror’s money. This is LEGAL.
• Policy argument is: important to behave in best interests of SHs, so if they give you that golden parachute, relieving you of any personal concerns of losing your job, so you can just act BIC

1. Poison Pills

• “Rights Plan” – Put provision in articles of corp saying “if someone acquires more than 20% of shares of this company, every SH of this company automatically [except person owning 20%] gets the right to buy 10 more shares at a penny”
• Makes the company impossible to buy b/c there are 10X as many shares that everyone acquires for a penny, so astronomical price.
• Almost every company subj to poison pill threatens to sue, every single company says don’t push us or we’ll exercise our rights plan, every company fighting takeover bid is afraid of implementing it, no company in history of world has ever executed a rights plan.

Again, levels the playing field:

• tells acquirer just relax. Talk to us. Because we need to talk. If you think you’ll dictate terms, we have a weapon. It buys time, it levels the playing field, and it creates a bit of leverage for there to be a negotiation

Main Principles:!) takeover bids are a good thing; 2) primary objective of t/o bid legislation is protection of bona fide interests of SHs of target company; 3) second purpose/ objective: create a reg framework where bids can happen in an open and even-handed manner; 4) Regulators believe it is inappropriate to specify a code of conduct for directors b/c that code runs risk of being insuff in some cases and excessive in others; 5) SH approval desirable (BUT this is unrealistic); 6) administrators believe that unrestricted options produce most desirable results in t/o bids and are reluctant to intervene in contested bids; 9) although auctions are best and don’t want to intervene, administrator will punish you if your action is to deprive SHs of opp/ rt to respond to a bid; 10) cannot come to administrator to get prior approval for defensive tactic

o SEC COMM CAN LIFT IT!!, but rarely would. (e.g. Cara for Second Cup) o Don’t lift it usually b/c think it creates opportunity for someone to come in at a higher price b/c that’s what they want.

You can grab notes on other topic from here.

You can grab notes on other topic from here.

Policy for defensive: you can do w/e you want to fight bid, but if you deprive SH of choice, you’re dead (prob b/c conflict of interest between directors interests and SH’s interests). It’s good to have them, because you maximize value of the enterprise.

1. Fiduciary Duty in the Context of Takeover Bid

• Traditionally, directors’ actions evaluated under the “business judgment rule” (Smith v. Van Gorkom) and have fiduciary duties of care/loyalty under CBCA

However, in the context of defensive measures, a more stringent view emerges. Directors must show:

• (a) They have reasonable grounds, based upon good faith and reasonable investigation, to believe that the takeover threat is harmful to the enterprise; and
• (b) Actions taken in response to the threat are reasonable or “proportionate” in relation to the threat posed.

o This is Intended to address the potential conflict of interest between management and SHs (that directors will just act in their own best interests in a TOB situation to entrench themselves)

1. NP 62-202: Tactics that will come under scrutiny Tactics that will come under scrutiny include:
2. Issuance of grant on, option, or purchase of outstanding securities of target
3. Sale or acquisition of asset of a material amount
4. Entering into a contract other than in the normal course of business.
5. Duty to Maximize SH Value

Competing goals of the directors: immediate maximization of SH value and pursuing the long-term best interests of the corporation.

You can grab notes on other topic from here.

You can grab notes on other topic from here.

I need to raise money, but I don’t want to lose control; thus, issue shares in classes, some voting, some not. I can issue equity without losing control. Investors are satisfied because they just want your expertise, don’t want to own the company.

Problem: investor does not have a problem with founder controlling the company, but there would be a huge

issue if controlling SH can sell shares at a PREMIUM that investors have no right to participate in.

Solution – Canada Decides…

• IF you want to create restricted voting shares, have to get a majority of the minority vote
• Have to call them restricted voting shares and
• COATTAIL Provision: if someone makes a takeover bid for my shares, then my shares become exactly like yours and we all get one vote, i.e. a bidder cannot attain control without making the same offer to all SHs.

Canadian Tire (1986, OSC)

Ratio: Coattail provision, despite not countering statute or case law, was not allowed to go through as it would prejudice minority shareholders (ex of OSC making any decision it sees fit in the public interest). Found that collateral agreement rule only applies in the context of a t/o bid (since this was not a takeover bid, collateral agreements did not apply)

Facts: Dealers of Canadian Tire formed a company, made an offer to purchase 49% of voting shares of Canadian Tire from Controlling SH (at a price of 160.24/share, when the stock was at $16/share= a massive premium for the voting shares of Canadian Tire!) As evidence of good faith, 30 million dollar irrevocable deposit. Dealers already owned 17.4% of the voting shares. If they were successful in their offer, they would own 66.66% of the voting shares.

• Coattail says in the event an offer is made and a majority of the voting shares have been tendered, each non-voting share shall be entitled to 1 vote. (Thus, we won’t get a premium you won’t get – protected in event of TOB). On that promise to SHs, they agreed to take back non-voting shares and give the family voting shares.
• Coattail was triggered by an offer. Dealers read the coattail, and said look at this. If we make an offer for 49% of the voting shares, it doesn’t trigger the coattail, we only have to buy from Controlling Family, and we get control of Canadian Tire (we already own 17%), and we can shut out the rest of the public. So they do it. The non-voting SHs go apoplectic.

Decision: OSC says nothing in this coattail stops this transaction. There is nothing in the case law that would stop the dealers. Nothing in the statute stops this transaction. No law, not precedent, no contract stopping this. I have no way of stopping the transaction. But they stopped it anyway – cease trade.

• Counter Argument: Can we not rely on the commercial world for certainty? The law is the law, there is a valid contract! (arbitrary!)

Collateral Agreement Rule Only Applies in the Context of a Takeover Bid

This is not a takeover bid, therefore collateral benefits do not apply; everyone would get the same price; 30 million was merely a deposit. It was not a premium. Collateral benefits only apply to takeover bids; this isn’t a takeover bid because the OSC said it isn’t a takeover bid. Once the OSC said no takeover bid, no takeover bid and collateral agreements don’t apply.

Now, if there is a takeover bid, (a legit one), the DEPOSIT will be deducted from the same price, and everyone gets the same price. It is simply a contract between dealers and Billes family, irrevocable.

• Now diff classes of shares and coattail provisions are much rarer

You can grab notes on other topic from here.

You can grab notes on other topic from here.

• 100 – Normal Course Exemption – Don’t Exceed 5% in 12 Months
• Even though what you own together with what you buy will come out to more than 20, we’ll exempt you from takeover bid requirements if you buy no more than 5% of shares in any 12 month period and price you pay does not exceed market price
• If market is dumb enough to let you keep doing it, then fine we don’t care, not at a premium

Ex. Exam Q: A(2%); B(4%)^H(3%)

• Always get to 19.9% with fewest purchasers poss (enter with 5/fewer sellers) – therefore, own most amount without triggering T/o bid

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You can grab notes on other topic from here.

Private Agreement Exemption (s.100.1(1) of OSA, most important)

• S.100.1(1): Takeover bid exempt from rules (requirement to do t/o bid circular to all SHs) if you’re going to buy from 5 or fewer people and the price you’re going to pay, including commissions, does not exceed 115% of the market price at the date of the takeover bid (or if no public listing, then what they think would be 115%)

o market price: defined as 20 day avg closing price (20 days preceding your bid) ^ your purchase from your 5 people can’t be for more than 115% above that market price o Can OFFER to more than 5, but can only buy from 5

o * Remember, you cannot act jointly. You cannot prepare your seller to fit within the 5 or fewer exemption

POLICY: why have this exemption?

• TOB: we don’t care who owns it or controls it, we care if you’re selling it at a premium, that doesn’ t belong to you, belongs to all shareholders. But if premium is small enough and they define 15% as de minimis, then all it is is whether you control company it or I control it, and who cares? So 15% is insignificant. They only care if there’s a big enough premium that it should be shared b/w everyone, all SHs (if it’s small, it doesn’t matter). If control person wants to sell it for under 15% premium, not really a control premium (theory)
• Overall: efficiency of capital markets, want big SHs to be able to extract themselves from companies, if they want to extract from without a big premium, then cool

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You can grab notes on other topic from here.

Pre-Bid Integration: Only applies to private agreements, you can do this on the open market if you want b/c it’s random

• E.g. If I know I’ll make a takeover bid tomorrow, I own no shares of a public company. B owns 19% of shares. Ill buy all your shares at $50 a share, stock trading at $10, you buy them. Nothing to stop that, 019, early warning, insider reporting, but nothing stopping it. Tomorrow, I make bid for the rest of the company at $20 a share = … no.

o OSA 93.2(1): when you make a formal t/o bid, going to look BACK 90 days from the date of your takeover bid. If in that 90 day period, you bought shares by way of private agreement from anybody, your t/o bid has to be for the highest price and highest percentage of shares you bought in that 90 day period. (if 91 days?)

o 90 days is a stupid bright line test, no significance. Can do it at 91 and you’re a-okay.

■ E.g. 40 days before, I buy 100% of A’s shares at $10, B I buy 50% of their shares at $12 at day 30. My bid has to be for 100% of shares of company at $12

1. Section 93.2(1): Restrictions on Acquisitions Before Formal Take-Over Bid

s.93.2(1): Restrictions on Acquisitions before Formal Take-Over Bid: If, within the period of 90 days immediately preceding a formal take-over bid, an offeror acquired beneficial ownership of securities of the class subject to the bid in a transaction not generally available on identical terms to holders of that class of securities, (private agmt ONLY)

• (a) the offeror shall offer,

o (i) consideration for securities deposited under the bid at least equal to and in the same form as the highest consideration that was paid on a per security basis under any such prior transaction, or

o (ii) at least the cash equivalent of that consideration; and

• (b) the offeror shall offer to acquire under the bid that percentage of the securities of the class subject to the bid that is at least equal to the highest percentage that the number of securities acquired from a seller in any such prior transaction was of the total number of securities of that class beneficially owned by that seller at the time of that prior transaction.

(2) Exception **once again, the rule in (1) ONLY APPLIES TO PRIVATE AGMTS!!: Subsection (1) does not apply to trades effected in the normal course on a published market if the trades satisfy such conditions as may be specified by regulation.

1. Legislative Goal Met

Equality: Ensures that certain shareholders are not being paid a premium that other SHs are not getting the advantage of, just b/c it was done in a roundabout way prior to the formal bid

1. Post-Bid Integration

Same as above in that this only applies to private agmts, not trades on market

• E.g. If you have takeover bid outstanding, you’re a big SH. You don’t want to tender at $20 a share and I need your shares. I say don’t worry, let me buy everyone else’s at $20, then buy yours a day after I close by bid by priv agreement at $25 a share (or do a new bid)

o Obviously can’t do this

o Section 93.3(1): if you have t/o bid outstanding, you cannot enter into any agmt with anyone else to buy their shares at a different price, or make a takeover bid at a higher price for at least 20 trading days after the expiry of the bid

6.5.3.1 Section 93.3

• s.93.3(1) Restrictions on acquisitions after formal bid: During the period beginning with the expiry of a formal bid and ending at the end of the 20th business day after that, whether or not any securities are taken up under the bid, an offeror shall not acquire or offer to acquire beneficial ownership of securities of the class that was subject to the bid except by way of a transaction that is generally available to holders of that class of securities on identical terms. **MUST BE ON IDENTICAL TERMS TO THE BID AND OPEN TO EVERYONE!!
• (2) Exception **again only applies to PRIVATE agmts: Subsection (1) does not apply to trades effected in the normal course on a published market if the trades satisfy such conditions as may be specified by regulation.

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