When its target is a Canadian public company, a prospective acquiror can choose from a number of acquisition mechanisms, such as a take-over bid, which is comparable to a U.S. “tender offer” and primarily regulated by securities laws, or various “one step” transactions provided for under corporate law, such as a statutory plan of arrangement or a statutory amalgamation.
The choice of mechanism will depend in part on whether the acquisition is friendly or hostile. A hostile (or “unsolicited”) acquisition will usually take the form of a take-over bid, while a friendly (or “negotiated”) acquisition can use any of the mechanisms.
Note: There are also a number of distinct requirements if the bidder is already an insider of the target. See the discussion of “Related party transactions” in Chapter E of M&A Activity in Canada: “Minority Shareholder Protections”.
Negotiated Approach or Unsolicited Bid?
A threshold question for a prospective acquiror is whether to proceed with an acquisition in a negotiated or unsolicited manner. This typically depends on a number of factors that need to be assessed in light of the particular circumstances.
A negotiated transaction proceeds on the basis of an agreement between the target and the acquiror. Factors that militate in favour of a negotiated approach include:
- The bidder needs to conduct significant due diligence on the target (e.g. as a condition imposed by its own financial backers);
- The target’s value depends heavily on management or employees who might leave in the event of a hostile acquisition;
- A structured, negotiated transaction would produce desired tax benefits;
- The bidder wants to avail itself of “deal protections” (such as “no-shop” provisions and “break fees”) that are only available in negotiated transactions; or
- The target is in a highly concentrated or regulated business (regulatory concerns being potentially more easily resolved in the context of a negotiated deal).
Typically, the most attractive aspect of a negotiated acquisition is the target’s co‑operation, both in the lead-up to the transaction (e.g., through due diligence access) and in its execution (e.g., in obtaining the required regulatory and shareholder approvals). Access to confidential information in a negotiated transaction is generally subject to confidentiality and “standstill” provisions negotiated with the target (i.e. no offer may be made, or securities acquired, for the standstill period without the prior approval of the target’s board).
An unsolicited (hostile) acquisition may be desirable or necessary where:
- Attempts at a friendly acquisition have failed;
- The value of the target’s co-operation is more limited, such as where the target is vulnerable and there are few, if any, competing bidders on the horizon; or
- The bidder’s objective is not necessarily to succeed in acquiring the target but to serve as a catalyst to provoke an auction to realize value on an existing investment or to “force” industry consolidation.
While not quite as common in Canada as they are in the U.S., unsolicited bids are by no means unusual. It is also not uncommon for an acquisition that begins with an unsolicited bid to be concluded, once the parties have accepted the inevitability of a deal, as a negotiated transaction.
Having determined whether to proceed with an unsolicited or a negotiated approach, it will next be necessary to consider the mechanism of the acquisition. This section outlines the requirements and relative merits of the three most commonly used public M&A acquisition mechanisms:
- Take-over bid;
- Plan of arrangement; and
- Statutory amalgamation (“squeeze out”).
The take-over bid is the Canadian equivalent of the U.S. “tender offer”. A take-over bid is defined by a bright-line test in Canada as an offer to acquire outstanding voting or equity securities of a class that would bring the holdings of the bidder (and its joint actors) to 20% or more of the securities of the class. Complex counting rules apply in determining these ownership percentages. Note that the take-over bid process is often used in Canada to effect “friendly” acquisitions, particularly where all-cash consideration is being offered.
Cash offer or share offer?
Take-over bids can offer cash, shares or other forms of securities (or some combination of these) as consideration. In the case of all-cash or partial-cash bids, Canadian securities laws require that adequate financing arrangements be in place before the launch of the bid to ensure that funds are available to pay for tendered shares. In other words, bids conditional on financing are not permitted.
Among the factors pertinent to the decision whether to proceed by way of a cash offer or a share offer are the following:
- Disclosure – If a bidder’s securities are to be offered, prospectus-level disclosure of the bidder and the resulting business is required, although there is generally no securities commission review of the offer document. However, if the bidder was not previously a public company in the relevant provinces, a discretionary exemption order will likely be necessary, which will involve securities commission review of the take-over bid circular. For various other reasons depending on the nature of the offered securities, discretionary exemptive relief may also be required. In contrast, a lower level of bidder disclosure is required for an all-cash offer. The information necessary to allow reasonable shareholders to make an informed decision about whether to tender their shares must, in any event, be disclosed;
- Target shareholders’ preferences – Generally, institutional shareholders will prefer cash, particularly where there are alternative investment vehicles in the target’s industry. Founders and other insiders may prefer share consideration in part due to the tax considerations discussed immediately below; and
- Tax considerations – An offer of shares of a Canadian bidder may provide a tax deferred roll-over to Canadian target shareholders (see Chapter G of M&A Activity in Canada: “Exchangeable Share Structures”). If the target shareholders have capital losses rather than capital gains, however, this will not be an advantage. Institutional shareholders are largely non-taxable, so a share deal may not hold any special attraction for them from a tax perspective.
Launching the bid
The bidder is required to deliver a take-over bid circular (containing the terms and conditions of the offer, as well as certain other required disclosure) to the shareholders of the target and to those holding securities that are convertible into shares, together with a French translation if there are a material number of target shareholders in Quebec. It must also be delivered to the directors and auditors of the target. The delivery of this circular will generally mark the formal commencement of the take-over bid, except where the bidder elects to commence its bid by way of advertisement, as discussed below.
In order to deliver the circular to shareholders, the bidder must obtain the shareholder list, which the target company has a legal obligation to furnish. In the case of an unsolicited bid, this can be highly problematic, as a request prior to the bid will obviously tip off the target. To avoid this problem, Canadian securities legislation generally allows a bid to be commenced by a newspaper advertisement, before a shareholder list is obtained. In that case, the 35‑day period starts upon publication of the advertisement. However, a request for a shareholder list must be made prior to the publication of the advertisement. The bidder must file the bid and advertisement with the applicable securities regulatory authorities and must send the bid to the target no later than the date of publication of the advertisement and must mail the bid to shareholders within two business days of receiving the shareholder list.
Note that, under a take-over bid, all shareholders must be offered identical consideration (or an identical choice of consideration) and collateral agreements are generally not permitted, with certain exceptions.
Once the bidder’s take-over bid circular is delivered to securityholders, the target’s board of directors is required to prepare and deliver to securityholders, within 15 days of the bid, a directors’ circular containing one of the following:
- A recommendation to accept or reject the bid or a statement that the board is not making (or is unable to make) a recommendation; or
- A statement that the board is considering whether to recommend the bid (in this event the board may choose to advise securityholders not to deposit their securities under the bid until the board advises them whether or not it will be recommending the bid (or that it will refrain from making any recommendation), which it is required to do no later than 7 days prior to the scheduled expiry of the period during which securities may be deposited under the bid).
The board’s recommendation or statement must be accompanied with a statement of its reasons for the recommendation or decision not to make a recommendation.
In the case of an insider bid (as defined under MI 61-101), the bidder will generally be required to include in the disclosure document for the insider bid a summary of a formal valuation of the securities of the target (if it wishes, it may include the entire valuation). This valuation would be prepared by an independent valuator selected and supervised by an independent committee of the directors of the target, but paid for by the bidder.
Timing and duration of bid
The minimum period for the deposit of the target’s securities under a take-over bid is 35 calendar days. No securities may be taken up by the bidder until at least 35 days after the day of the bid. As noted above, a take-over bid can be commenced by the mailing of a take-over bid circular or by means of an advertisement (in a newspaper). One practical difference between these approaches is that the first requires that a securityholder list be obtained in advance while the second requires only that a request for one be made before the advertisement is published.
Subject to the rights of securityholders to withdraw securities, a take-over bid may be kept open as long as the bidder wishes or needs to achieve satisfaction of its conditions. If there is any variation in the terms of the take-over bid, the deposit period must remain open for at least 10 days after the notice of variation is sent to securityholders (except where the variation is a waiver of a condition, and any extension of the bid resulting from the waiver, in an all-cash bid – in which case no extension of the deposit period is required, provided that a press release is promptly issued). An increase in consideration, however, requires the deposit period to remain open for at least 10 days after the notice of variation.
It should be emphasized that, in an insider bid context, the preparation of the valuation (subject to applicable exemptive relief) must be complete before the take-over bid circular can be finalized, because the summary of the valuation must be disclosed in the take-over bid circular. Although MI 61‑101 requires the target’s independent committee to use its best efforts to ensure that the formal valuation is completed and provided to the bidder in a timely manner, this process can potentially take several weeks.