Post-Bid: Directors’ Circular (Response) – Securities Regulation

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  • The directors of the target company have an obligation to deliver a director’s circular to all their shareholders within 15 days from the date of the bid

o They must tell SHs that they recommend that the shareholders accept the bid, reject the bid, make no recommendation at all, or say that they’ll let them know at a later time, and give their reasons for any of these decisions

o If within the 15 day period you aren’t ready to give your reasons, you can do it later in a second document as long as it is 7 days BEFORE the expiry of the bid

  • As SHs, you are entitled to know what your directors/managers think of this bid!

o *and keep in mind that directors don’t always act in the company’s best interest b/c it conflicts with their own interests

  1. Section 95: Offeree Issuer’s Obligations
  • (1) Duty to Prepare and Send Directors’ Circular: If a formal take-over bid has been made, the board of directors of the offeree issuer shall prepare and send, not later than 15 days after the date of the bid, a directors ’ circular to every person or company to whom the bid was required to be sent.
  • (2) Duty to Evaluate and Advise: The board of directors of the offeree issuer shall evaluate the terms of a formal take-over bid and, in the directors ’ circular,

o (a) shall recommend to security holders that they accept or reject the bid and give reasons for the recommendation;

o (b) shall advise security holders that the board is unable to make, or is not making, a

recommendation and state the reasons for being unable to make a recommendation or for not making a recommendation; or

o (c) shall advise security holders that the board is considering whether to make a recommendation to accept or reject the bid, shall state the reasons for not making a recommendation in the directorscircular and may advise security holders that they should not deposit their securities under the bid until they receive further communication from the board in accordance with clause (a) or (b).

• (3) Further Communication: If clause (2) (c) applies, the board of directors shall communicate to security holders a recommendation or the decision that it is unable to make, or is not making, a recommendation, together with the reasons for the recommendation or the decision, at least seven days before the scheduled expiry of the period during which securities may be deposited under the bid.

  1. Legislative Goal Met Information and time
  2. Shareholders are entitled to know what the directors think: gives them sufficient information, considering they may have less knowledge than the individuals working on the inside
  3. Have enough time to make an informed decision: If they’re going to give a recommendation (or not give one), they have to let the SHs know of their decision with enough time for the SHs to make an informed decision about tendering

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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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Payment for Securities (investor protection generally)

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  • You can attach any condition you want to your bid, except financing
  • Best to have AS FEW CONDITIONS as possible on the offeror’s bid: sounds good to attach conditions to a bid and protect themselves (e.g. being able to get out of it), but at end of the day, you want to win. Best way to win is to have as clean a bid as possible. If you have conditions attached, makes it less attractive, opportunities for others to beat you (although sometimes you need conditions ^ e.g. conditional upon me getting 2/3rds of shares, Competition Act approval, CRTC approval, etc. (e.g. Astral BCE ^ BCE made bid to buy Astral, conditional on CRTC approval, CRTC turned it down)

Biggest difference b/w Canada and US

  • One condition you CANNOT do in Canada is making your bid subj to financing

o In US: I can say “I want to make bid for 100% of apple, and hope I find the $” o In Canada: can’t make takeover bid unless you can reasonably show that you can come up with $

POLICY: Cant put company into chaos and then not be able to complete it

$$ Problem:

  • Very expensive, when you need standby loan from bank for $1b, charge you a shit ton of interest to have it there for you (to give you right to be able to call It if you need it) ^ why there are fewer takeover bids in Canada
  1. Section 97.3: Financing Arrangements
  2. (1) If a formal bid provides that the consideration for the securities deposited under the bid is to be paid in cash or partly in cash, the offeror shall make adequate arrangements before the bid to ensure that the required funds are available to make full payment for the securities that the offeror has offered to acquire.
  3. Legislative Goal Met

Investor protection: Doesn’t really reach one of 3 obj, but does protect investors, you have to be able to complete the bid, can’t put everything in complete chaos and then not go through with it b/c you couldn’t get financing

  1. Payment for Securities (investor protection generally)
  2. Section 98.3: Obligation to Take Up and Pay for Deposited Securities
  • (1) If all the terms and conditions of a formal bid have been complied with or waived, the offeror shall take up and pay for securities deposited under the bid not later than 10 days after the expiry of the bid or at the time required by subsection (2) or (3), whichever is earliest.
  • (2) Same: An offeror shall pay for any securities taken up under a formal bid as soon as possible, and in any event not later than three business days after the securities deposited under the bid are taken up.
  • (3) Same: Securities deposited under a formal bid subsequent to the date on which the offeror first takes up securities deposited under the bid shall be taken up and paid for by the offeror not later than 10 days after the deposit of the securities.
  1. Legislative Goal Met

investor protection: Doesn’t really reach one of 3 obj, but does protect investors, have to make sure they get paid within a reasonable time after tendering their shares (protecting their reasonable expectations)

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Conditions (just investor protection)

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  • You can attach any condition you want to your bid, except financing
  • Best to have AS FEW CONDITIONS as possible on the offeror’s bid: sounds good to attach conditions to a bid and protect themselves (e.g. being able to get out of it), but at end of the day, you want to win. Best way to win is to have as clean a bid as possible. If you have conditions attached, makes it less attractive, opportunities for others to beat you (although sometimes you need conditions ^ e.g. conditional upon me getting 2/3rds of shares, Competition Act approval, CRTC approval, etc. (e.g. Astral BCE ^ BCE made bid to buy Astral, conditional on CRTC approval, CRTC turned it down)

Biggest difference b/w Canada and US

  • One condition you CANNOT do in Canada is making your bid subj to financing

o In US: I can say “I want to make bid for 100% of apple, and hope I find the $” o In Canada: can’t make takeover bid unless you can reasonably show that you can come up with $

POLICY: Cant put company into chaos and then not be able to complete it

$$ Problem:

  • Very expensive, when you need standby loan from bank for $1b, charge you a shit ton of interest to have it there for you (to give you right to be able to call It if you need it) ^ why there are fewer takeover bids in Canada

Section 97.3: Financing Arrangements

  1. If a formal bid provides that the consideration for the securities deposited under the bid is to be paid in cash or partly in cash, the offeror shall make adequate arrangements before the bid to ensure that the required funds are available to make full payment for the securities that the offeror has offered to acquire.

Earliest of: a) You have to take up and pay for them within 10 days after expiry of the bid; OR

  1. Once you’ve taken them up, you have 3 days; OR
  2. For securities deposited AFTER the date on which the offeror first takes them up have to be paid for by the offeror within 10 days after deposit

Legislative Goal Met

Investor protection: Doesn’t really reach one of 3 obj, but does protect investors, you have to be able to complete the bid, can’t put everything in complete chaos and then not go through with it b/c you couldn’t get financing

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Withdrawal and Change of Info or Variation in Terms (time and info)

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  • Shares cannot be taken up for 35 days and shares deposited within the 35 day period can be withdrawn at any time prior to the end of the 35 day period.
  • If there is a variation in the bid, the withdrawal right is extended by 10 days unless the shares have already been taken up (35 days has passed) or the variation is simply an increase in the consideration offered or a waiver of a condition.

Section 98.1: Withdrawal of securities

  • (1) A security holder may withdraw securities deposited under a formal bid,

o (a) at any time before the securities have been taken up by the offeror;

o (b) at any time before the expiration of 10 days from the date of a notice of change under section 94.3 or a notice of variation under section 94.4; or

o (c) if the securities have not been paid for by the offeror within three business days after the securities have been taken up.

 

Section 94.3: Change in Information

  • (1) If, before the expiry of a formal bid or after the expiry of a bid but before the expiry of all rights to withdraw the securities deposited under the bid, a change has occurred in the information contained in the bid circular or any notice of change or notice of variation that would reasonably be expected to affect the decision of the security holders of the offeree issuer to accept or reject the bid, the offeror shall promptly

o (a) issue and file a news release; and

o (b) send a notice of the change to every person or company to whom the bid was required to be sent and whose securities were not taken up before the date of the change.

Section 94.4: Variation of Terms

  • (1) If there is a variation in the terms of a formal bid, including any extension of the period during which securities may be deposited under the bid, and whether or not that variation results from the exercise of any right contained in the bid, the offeror shall promptly issue and file a news release and send a notice of variation to every person or company to whom the bid was required to be sent and whose securities were not taken up before the date of the variation.

Legislative Goal Met

Protect SHs by providing time and information (and payment)

Gives Time for SHs to Wait and See if there is a Higher Bid:

  • Everyone tenders on last day anyway, bc they’re waiting to see if there is a higher one
  • After Amendment, gives time to assess information:
  • 10 day w/d right, as long as shares haven’t already been taken up
  • Encourages Company to Pay

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Pro Rata (Equality) – Securities Regulation

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  • First-come, first-serve offers are NOT ALLOWED
  • IF more shares are tendered than requested, they MUST be taken up on a PRO RATA basis (e.g. buy 75% of each SH’s tendered holdings to get to your desired amount)
  1. Section 97.2: Consideration

s.97.2(1) If a formal bid is made, all holders of the same class of securities shall be offered identical consideration.

  1. Legislative Goal Met

Protect SHs by ensuring equality among them and providing time Provides:

  1. Equality: treated equally, no SH is benefitting more from a premium than another
  2. Time to review/no pressure: Gives the SH time to review the transaction and all of the pertinent information to ensure an informed decision because they are NOT PRESSURED TO BID EARLY (since it’s not first come, first serve)

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Minimum Period of Bid (Time) – Securities Regulation

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The takeover bid circular must be open for at least 35 clear calendar days in order to give people time to assess, give management an opportunity to give their opinion, and give other bidders the chance/right to mount a competing bid (auction)

  1. s.98: Bid Mechanics
  2. Minimum deposit period: An offeror shall allow securities to be deposited under a formal bid for at least 35 days from the date of the bid.
  • Interpretation: May be open longer than 35 days
  1. Prohibition on Take Up: An offeror shall not take up securities deposited under a formal bid until the expiration of 35 days from the date of the bid.
  2. Legislative Goal Met Protect SHs by providing Time
  • Note: Bidders have interest in doing transaction as quickly as poss; and company and shareholders want more time (for reasons below)

Provides time for:

  1. Shareholders: to assess the merits of the bid and decide whether or not to tender shares (and can take them back w/in 35 days)
  2. Management: to make recommendations and try to maybe attract others
  3. Other Potential Bidders: To create an auction and entice a White Knight
  • To create auctions (by allowing other people to make competing bids),
  • To make sure that the company is purchased for the best price (makes market efficient, don’t want anyone to get it at a large discount, should reflect actual value as much as possible)
  • Need to find a white knight (the person you actually want to buy it)
  • In practice: company wants it to be as long as possible (so they can find higher bidders), purchaser wants it shorter to buy it at cheapest price (tensions in practice happen here)

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Takeover Bid Circular (Information) – Securities Regulation

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  1. Takeover Bid Circular (Information)

General Rule: If I what I own + what I buy is over 20, can’t do it without a takeover bid. If you want to own or control 20% or more of the securities of a reporting issuer, you can only do so by takeover bid circular (unless an exemption is available)

  1. Section 94.1(1) and Form 62-504F1: Making a Formal Bid
  • Section 94.1(1): Deliver doc to all securityholders, publish advertisement in a newspaper, then immediately file takeover bid circular with everybody
  • 94.1 (1) Commencement of formal t/o bid: An offeror shall commence a formal take-over bid,

o (a) by publishing an advertisement containing a brief summary of the bid in at least one major daily newspaper of general and regular paid circulation in Ontario; or o (b) by sending the bid to the security holders described in section 94 (all securityholders, all holders of class of securities subject to the bid who are in Ontario)

  • Form 62-504F1: The Circular: Must contain information set out in Form 62-504F1 ^ tells you what has to go in t/o bid circular, mandates information like a prospectus: objective is to give people sufficient information to make an informed decision

o Information in takeover bid circular includes: name of offeror and issuer; ownership and trading by offeror; method/time of pmt for shares; source of funds to be used for pmt; whether offeror intends to purchase shares subject to the bid in the mkt; info indicating a material change in the offeree issuer since last interim/ annual financial statements; material facts rel to offeree issuer; appropriate prospectus info if offer is a share exchange offer

  1. Legislative goal met

*Protect SHs by providing Information and Time

  1. Information
  • Provides information to assist the offeree SH in deciding whether of offer share or hold shares in hopes of (i) sharing in gain accruing post-takeover or (ii) getting a subsequent competing offer.
  • Takeover Bid Circular provides information similar to a prospectus and provides information relating to the bid.
  • Time: Allows them time to review what’s in the circular

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Deemed Ownership – Securities Regulation

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You are Deemed to own Shares you have a right to acquire within 60 days of the date of any takeover bid (i.e. options)

  1. Sections 89(5) and 90(1)
  • 89(5) Deemed convertible securities: For the purposes of this Part,

o (a) a security shall be deemed to be convertible into a security of another class if, whether or not on conditions, it is or may be convertible into or exchangeable for, or if it carries the right or obligation to acquire, a security of the other class, whether of the same or another issuer; and

(b) a security that is convertible into a security of another class shall be deemed to be convertible into a security or securities of each class into which the second-mentioned security may be converted, either directly or through securities of one or more other classes of securities that are themselves convertible.

90 (1) Deemed beneficial ownership***

For the purposes of this Part, in determining the beneficial ownership of securities of an offeror or of any person or company acting jointly or in concert with the offeror, at any given date, the offeror or the _person or company shall be deemed to have acquired and to be the beneficial owner of a security, including an unissued security, if the offeror or the person or company is the beneficial owner of a security convertible into the security within 60 days _ following that date or has a right or obligation permitting or requiring the offeror or the person or company, whether or not on conditions, to acquire beneficial ownership of the security within 60 days, by a single transaction or a series of linked transactions.

  1. Sample problems – “Sunlor”

What matters:

  • Order of Purchase
  • Who Purchasing From

Question 1: If on Day 1, I own 10%, on Day 4, I have an option from the company to purchase 9% of shares exercisable at any time, and on day 6, I consider buying 2% on the open market. Is the acquisition of 2% a takeover bid?

  • Yes ^ Own 10%, deemed to own 9% that I can exercise from company (will be outstanding if I buy them), and then I buy 2% = puts me over 20. I bought the portion that put me over 20% and the portion that gives me control (so paying a premium for these) on the open market (I bought 2% of OUTSTANDING shares, which puts me over 20% total ownership) ^ I have to issue a takeover bid circular to all SHs to treat them equally and not give a premium to the SH from whom bought that last 2 on the open market

Question 2: On Day 1, I own 10%, on Day 4, I have option to purchase 9% from an individual, exercisable at any time, and then on day 6, I consider buying 2% on the open market. Is the acquisition of 2% a takeover bid?

  • Yes ^ still exercisable at any time, deemed 19%, and the 2% puts me over.

Question 3: Day 1, I own 10%. Day 4, I have option from an individual to purchase 9% of common shares exercisable in 6 months. Then on day 6, I consider buying 2% on open market.

  • (a) Is the acquisition of 2% a takeover bid?

o No ^ because I only own 12% and that’s all I’m deemed to own (I can’t exercise option in the next 60 days)

  • b) When I exercise the option for 9%, is it a takeover bid?

o Yes ^ I own 12% after buying on market, and the 9% of outstanding shares from the person puts me over.

Question 4: Own 10% on day 1, option from company to purchase 9% in six months, on day 6 I consider buying 2% on open market.

  • (a) Is acquisition of 2% a takeover bid?

o No, again, I only own 12% with the option to take the 9 in six months.

  • (b) When I exercise option for 9% is it a takeover bid?

o No ^ because if I’ve bought 2% on open market, I now own 12%. I’m then purchasing shares from the COMPANY, meaning that I’m not buying outstanding shares that put me over the 20% (so not being unfair to SHs by offering a premium to some SHs over others for control, it’s going to the company, which really means it’s going to the SHs) o The whole purpose for takeover bid legislation is that when you buy control at a premium it belongs to ALL shareholders because, in theory, they helped to create value o POLICY: premiums are to be shared by all shareholders equally; therefore, if there are not premiums resulting from the proposed transaction (i.e. option being exercised from the company) there is no problem

  • Thus, control can be sold by the company and its not a problem b/c the value of that control goes to the company and indirectly to all shareholders
  • Only when you’re buying outstanding (already issued) shares from other SHs would you be giving a bigger premium to those SHs ^ this does exactly what the takeover bid legislation is designed to do

• ALSO, ORDER: you bought the part that put you over 20 on the open market, order matters… what you pay for first 49 shares isn’t what you pay for 50 and 51 and 20 is new 50

  1. Mechanics of a Vendor Takeover Bid

**remember each of these is achieving one of three things in order to achieve the overall objective of protecting SHs of the target company: (a) time, (b) information to SHs and (c) equality

*Two types:

  1. Vendor Takeover Bid and

o 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.

o When I hit 10%, have insider reporting and early warning, and every 2% thereafter until I hit 20. o When I hit 20%, in takeover bid regime.

  1. Exempt Takeover Bid (see rules below, 100 and 100.1 of OSA)

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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. 

You can grab notes on other topic from here.