Public mergers and acquisitions in Canada: overview
A Q&A guide to public mergers and acquisitions law in Canada.
The country-specific Q&A looks at current market activity; the regulation of recommended and hostile bids; pre-bid formalities, including due diligence, stakebuilding and agreements; procedures for announcing and making an offer (including documentation and mandatory offers); consideration; post-bid considerations (including squeeze-out and de-listing procedures); defending hostile bids; tax issues; other regulatory requirements and restrictions; as well as any proposals for reform.
To compare answers across multiple jurisdictions visit the Country Q&A tool.This Q&A is part of the Practical Law Global Guide to mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/acquisitions-guide.
The Canadian M&A market had a strong year in 2014, recovering significantly from a decline in activity levels in the prior two years. 2,869 deals were announced in 2014, up 13% from 2013 and back on par with activity levels in 2010 and 2011. The total value of announced transactions also grew compared to 2013, surging to Can$238 billion, a 23% year-on-year increase and its highest level in the past five years.
2014 was notable for the resurgence of "mega-deals" (over Can$1 billion), but also for strong and sustained levels of mid-market activity. For a third year in a row, the most active sector by deal count was real estate, with 465 transactions announced. However, the most active sector by deal value was the consumer discretionary sector. Driven by several noteworthy mega-deals the consumer discretionary sector generated some 280 transactions worth Can$59 billion. These mega-deals included the:
Acquisition of Tim Hortons by Brazilian private equity group 3G Capital for Can$14.6B in a transaction that combined Tim Hortons with Burger King (a 3G portfolio company) to form New York Stock Exchange (NYSE) listed Restaurant Brands International.
Acquisition by TSX-listed online gaming company Amaya Inc of UK-based Rational Group for Can$5.8 billion.
The energy sector remained another strong source of M&A activity in 2014, spawning the year's largest transaction, which was the acquisition of Talisman Energy Inc by Spanish energy giant Repsol SA for Can$15.7 billion.
As of October 2015, Canadian M&A activity in 2015 is expected to surpass 2014 levels. Consistent with prior years, the real estate sector has remained active. However, soft energy and mining markets have been eclipsed by robust activity in the financial services sector, including:
CPPIB Credit Investments Inc acquiring General Electric's (GE) private equity lending arm for US$12 billion.
BMO's proposed acquisition of GE Capital's transportation finance business in the US and Canada.
Royal Bank of Canada's acquisition of City National Corporation for US$5.4 billion.
Other notable transactions in 2015 have included:
Emera's proposed US$10.4 billion cross-border acquisition of TECO Energy.
The acquisition of Cirque du Soleil by a consortium led by TPG Capital, with minority investors Caisse de dépot et placement du Québec and Fosun International.
With the Canadian dollar near an 11 year low against the US dollar, significant inbound M&A might be expected for Canada. However, the weaker currency has not prevented significant outbound acquisitions by Canadian corporations and pension funds. Continued strength of the Canadian M&A market will largely depend on a rebound in the energy and mining sectors, including significant acquisitions by purchasers located outside of Canada. Suncor's Can$6.6 billion unsolicited bid for Canadian Oil Sands may be a precursor to significant consolidation in the oil and gas industry in western Canada.
Control of Canadian public companies is usually obtained through:
A formal takeover bid under Canadian securities laws.
An arrangement (often referred to as a plan of arrangement) under the Canadian corporate statute governing the target company.
Other means of acquiring control include an amalgamation under the governing corporate statute, control of the board through a proxy contest and acquisition of a control block through an exempt takeover bid.
An arrangement is the most common form of transaction structure used to acquire control of a Canadian public company. Unlike a takeover bid, an arrangement cannot be forced upon a Canadian corporation without board support.
An arrangement is a court-sanctioned process allowing companies governed by a Canadian corporate statute to reorganise their share capital and terminate the interests of current shareholders in exchange for a cash payment or other securities. Court approval of an arrangement transferring control of a company generally requires approval by two-thirds of the votes cast by holders of affected shares at a meeting of shareholders and, if applicable, "majority of the minority" approval. An arrangement generally includes dissent rights that entitle shareholders to a judicial determination of the fair value of their shares.
Advantages of an arrangement include:
The flexibility to pay some shareholders different consideration, subject to the impact on voting requirements.
Less stringent legal requirements for financing.
An ability to deal with multiple classes of securities, such as options, warrants and preferred shares.
Potential additional tax flexibility.
Potential availability of the section 3(a)(10) exemption under the US Securities Act of 1933 where non-cash consideration is offered and will be received by US shareholders.
Acquisition of 100% of the equity of the target occurs at one time rather than the requirement of a compulsory acquisition or subsequent acquisition transaction in a takeover bid (see Question 20).
Court approval limits the risks of liability of the target corporation and its directors for shareholder claims post-completion of the transaction.
The "fiduciary out" of the board almost always ends at the date of shareholder approval, whereas in a takeover bid it effectively extends to the date shares are acquired under the bid. This is favourable from a purchaser's perspective where the time required to obtain regulatory approvals is lengthy.
Unlike under the takeover bid regime, there is no obligation to distribute a French-language circular to shareholders in Québec.
Generally, the timeframe for completing an arrangement is similar to that of a supported takeover bid.
A takeover bid is defined under Canadian securities laws (see Question 4) as an offer to acquire outstanding voting or equity securities of a class made to one or more persons in a Canadian jurisdiction (or with an address on the register of the target issuer in such a jurisdiction), where the securities subject to the offer, together with securities over which the offeror and its joint actors have beneficial ownership or control or direction, would constitute 20% or more of the securities of that class.
Certain acquisitions are exempt takeover bids and not subject to the formal takeover bid rules. These include the purchase of shares from not more than five persons for consideration not greater than 115% of the shares' market price (as defined).
A non-exempt takeover bid must be made to all shareholders in Canada, all of whom must be offered identical consideration. For companies governed by a Canadian corporate statute, where the bidder doesn't acquire all the target securities, a takeover bid is generally followed by a compulsory acquisition or second step squeeze-out transaction to acquire 100% of the target (see Question 20).
Board supported formal takeover bids are becoming increasingly rare. Takeover bids are now used principally for hostile bids and insider bids.
Hostile bids are allowed, but constitute a very small fraction of overall Canadian public company M&A transactions. In the first three quarters of 2015, there were ten formal takeover bids made for Canadian public companies, in the following categories:
Six hostile bids.
One white knight bid.
Two bids by insiders that were not supported by the target board.
One arm's length bid supported by the target board.
With the absence of staggered boards in Canadian companies and securities regulators that historically have struck down shareholder rights plans between 50 and 70 days after commencement of the bid (see Question 23, Shareholder rights plans), the Canadian regulatory framework has previously been viewed as very favourable to bidders for Canadian corporations compared with US target companies. However, if proposed amendments to the takeover bid legislation take effect in 2016, hostile takeover bids will become more difficult in Canada and may become even more uncommon. Under the proposed amendments, takeover bids will, among other things, be:
Required to remain open for 120 calendar days (although this period may be shortened in certain circumstances to the current minimum requirement of 35 calendar days).
Subject to a mandatory minimum tender requirement of 50% of the outstanding securities owned by persons other than the bidder and its joint actors.
Subject to a ten-day bid extension period after the minimum tender condition is achieved and the bidder announces its intention to take up and pay.
For a more complete overview of the proposed legislative amendments, see Question 29.
Regulation and regulatory bodies
The regulatory framework for Canadian public M&A transactions involves the application of both securities and corporate law requirements.
Canada's ten provinces and three territories have jurisdiction over securities regulation within their borders and have their own provincial or territorial securities regulatory body (for example, the Ontario Securities Commission (OSC) in Ontario and the Autorité des marchés financiers in Québec). The securities regulatory authorities are the principal regulators of takeover bids in Canada, with the authority to exempt or cease trade bids or enforce compliance with takeover bid rules. While actions and decisions of these regulatory authorities can generally be appealed in the courts, the courts almost always defer to the regulators' expertise.
Takeover bids. Provincial and territorial laws governing takeover bids are largely harmonised. If the proposed amendments to the takeover bid regime are implemented (see Question 29), full harmonisation will occur and Ontario will adopt Multilateral Instrument 62-104, which currently governs takeover bids in all provinces other than Ontario.
Disclosure obligations. National Instrument 62-103 governs early warning disclosure obligations by potential bidders across Canada (see Question 8), much in the same way Schedule 13D and Schedule 13G reporting requirements under the US Securities Exchange Act of 1934 apply in the US. Multilateral Instrument 61-101 (MI 61-101) applies in Ontario and Québec (and thereby to most significant reporting issuers in Canada) and imposes additional disclosure and substantive obligations, including a requirement to obtain a formal valuation for insider bids, which include bids by:
A director or senior officer of the target.
A shareholder beneficially owning or exercising control or direction over more than 10% of the votes attached to voting securities of the target.
Persons affiliated with any of the above.
Persons acting jointly or in concert with any of the above.
MI 61-101 also provides for exemptions from the valuation requirements in specified circumstances.
Subsequent acquisition transactions. MI 61-101 also has implications on certain squeeze-out transactions, including a requirement for "majority of the minority" approval in certain circumstances (see Question 20).
Additionally, each province and territory has adopted National Policy 62-202 – Defensive Tactics, concerning defensive tactics used by a target in response to a hostile bid (see Question 23). National Policy 62-203 – Takeover Bids and Issuer Bids provides additional guidance regarding the application of certain rules in the bid regime.
Corporate law regulates the following:
Duties of directors in connection with a bid or arrangement.
Compulsory acquisitions where the bidder has acquired in the bid 90% of the shares not already owned by the bidder and its affiliates and associates.
The corporate approval level required to effect a squeeze-out transaction, which is generally two-thirds of the votes cast at the shareholder meeting to approve the transaction. MI 61-101 can also impose a majority of the minority vote under applicable securities legislation.
Other relevant regulation
Where a Canadian business is acquired, the following legislation must also be considered:
Investment Canada Act (Canada).
Competition Act (Canada) (see Question 25).
Certain industries are subject to additional, industry-specific rules, including telecommunications, broadcasting, transportation and financial services (banking and insurance).
Prior to contacting a target, a bidder will typically review publicly available information, including information on the System for Electronic Document Analysis and Retrieval (SEDAR) (see below, Public domain), which is the Canadian equivalent of the US's Electronic Data Gathering, Analysis and Retrieval System (EDGAR). The bidder will then negotiate a confidentiality agreement to obtain access to the target's non-public information.
A confidentiality agreement between a potential bidder and public target will generally contain the following:
Standstill provisions prohibiting the bidder from acquiring securities of the target or launching a hostile takeover bid or proxy contest against the target without the target board's consent.
A "spring" that removes the standstill prohibitions in specified events, for example, the target announcing a supported bid or other negotiated sale transaction.
Restrictions that prohibit the potential bidder from teaming up with other potential bidders for the target.
Provisions detailing the bidder's permitted use of information provided under the confidentiality agreement. Restricting the scope of permitted use can effectively act as an additional standstill and prohibit a hostile bid even where the standstill restrictions have expired. As a result, most confidentiality agreements now explicitly deal with "use" restrictions so as not to prevent offers for securities of the target once the standstill provisions have expired.
Depending on the context of negotiations, a requirement that the target agree to deal exclusively with the bidder for a limited period of time.
A hostile bidder is usually limited to publicly available information. As many hostile bids end up turning friendly, often the hostile bidder will be given access to the target's data room later in the process, sometimes in return for incremental consideration.
Publicly available information regarding Canadian public companies generally consists of the documents filed on SEDAR by the issuer as required by NI 51-102 – Continuous Disclosure Obligations and NI 62-103. The information that can be found on SEDAR is similar to EDGAR filings, including:
Financial statements and related management's discussion and analysis.
An annual information form describing the issuer's business, for issuers listed on a senior stock exchange, including the Toronto Stock Exchange (TSX), the NYSE and NASDAQ.
Material change reports and business acquisition reports.
Material contracts to which the issuer is a party, and voting agreements to which the issuer has access.
Documents affecting the rights of shareholders, including the issuer's incorporation documents and any shareholder rights plan.
Shareholder meeting/proxy related materials.
Early warning reports and alternative monthly reports filed under NI 62-103.
Additionally, companies with mining or oil and gas operations must provide certain expert reports and disclose all other scientific and technical disclosure, in accordance with NI 43-101 – Standards of Disclosure for Mineral Projects and NI 51-101 – Standards of Disclosure for Oil and Gas Activities, respectively.
An issuer's insiders are required to disclose their security holdings on the System for Electronic Disclosure by Insiders (SEDI) under NI 55-104 – Insider Reporting Requirements and Exemptions.
Canadian securities legislation restricts a person that is considering or evaluating whether to make a takeover bid or propose an arrangement from informing another person of a material fact with respect to the target that has not been generally disclosed other than in the necessary course of business relating to the takeover bid or arrangement. The necessary course of business exception generally permits a bidder to discuss a lock-up agreement with significant shareholders.
Canadian securities laws and stock exchange rules provide enough flexibility for parties to an M&A transaction to maintain the confidentiality of a transaction until definitive documents have been executed absent unusual circumstances. However, these laws and rules can require a target to disclose negotiations with the potential bidder in circumstances where leaks or rumours regarding the potential transaction affect the target's trading.
Subject to any confidentiality agreement, a potential bidder is permitted to announce an intention to bid before making the formal bid. However, announcing an intention to bid places certain restrictions on the bidder, including restrictions on the acquisition of the beneficial ownership of securities subject to the bid (see Question 8). These restrictions do not apply to lock-up agreements in which the holder agrees to tender to the takeover bid.
Agreements with shareholders
In a supported transaction, a bidder will generally require that the target's directors and officers, and significant shareholders of the target, enter into lock-up agreements with the bidder at or prior to the date the supported bid is announced.
Agreements to tender to a bid must be filed publicly not later than the date the takeover bid circular is filed, which is generally the date of commencement of the bid. There are generally no legal restrictions on their terms, provided that no collateral benefits are given to locked-up shareholders (benefits that exceed what other non-locked-up shareholders receive).
When a potential bidder acquires beneficial ownership of, or control or direction over, 10% or more of the issued voting or equity securities of a reporting issuer (or 5% if any bid has been announced), a bidder must:
Promptly issue and file a press release.
File an early warning report on the System for Electronic Document Analysis and Retrieval (SEDAR) within two business days of the acquisition.
A bidder must issue a further press release and publicly file an additional early warning report when either of the following applies:
The bidder acquires beneficial ownership of, or the power to exercise control or direction over, an additional 2% of the outstanding shares.
There is a change in any material fact contained in a previously filed early warning report.
A bidder required to file an early warning report is also subject to a moratorium or "cooling off" period prohibiting any further purchases from the time of the purchase giving rise to the obligation to file the report until the expiry of one business day after the early warning report is filed. This moratorium does not apply after the bidder has beneficial ownership of, or control and direction over, 20% or more of the class of voting or equity securities. At that point, the takeover bid rules are applicable.
Beneficial ownership of convertible securities is included in calculating early warning thresholds.
Bid integration rules
Under the bid regime's pre-bid integration rules, a takeover bid must be for at least the same consideration in amount and form as the consideration paid (or at least the cash equivalent of that consideration) and in the same percentage as any private purchases made by the bidder during the 90 days before the bid. This means that a bidder is required to offer the highest price paid per security and offer to acquire the highest percentage of securities acquired in any relevant pre-bid transaction to all target shareholders. However, the pre-bid integration rules do not apply to normal course trades made on a published market (such as the Toronto Stock Exchange (TSX)) if the following conditions are satisfied:
Any broker acting for the purchaser or seller does not perform services beyond customary broker's functions and does not receive more than the usual fees or commission for comparable services.
The purchaser or any person or company acting for the purchaser does not solicit or arrange for the solicitation of offers to sell the securities.
The seller or any person acting for the seller does not, to the knowledge of the purchaser, solicit or arrange for the solicitation of offers to buy the securities.
Large block trades negotiated in the "upstairs market" may not benefit from the normal course trade exemption.
The pre-bid integration provisions will not be an issue where the bidder is bidding for 100% of the shares, paid cash in the prior transactions and is offering in the bid at least the highest cash amount per share paid in the prior transactions.
Once a bid is announced, the bidder cannot make any share purchase outside the bid until the third business day after the formal takeover bid circular (see Question 14) is mailed to the target's shareholders or the bid is commenced by advertisement, and then only if all of the following apply:
The takeover bid circular states the bidder's intention to make further purchases or, where the bidder changes its intention, it publishes such change in a press release issued and publicly filed at least one business day before making such purchases.
The purchases are made in the normal course on a published market.
The purchases do not exceed 5%, in the aggregate, of the outstanding securities of the class being acquired.
The bidder issues and files a press release each day that purchases are made disclosing, among other things, the number of securities purchased and the highest price paid.
The above restriction on purchases does not apply to lock-up agreements in which the shareholder agrees to tender to the bid.
Agreements in recommended bids
It is very common to have a formal agreement between the target and the bidder when the board is recommending acceptance of a bid.
The main issues that are likely to be covered in a support agreement include:
The terms of the bid, including the consideration and conditions of the bid.
Permitted amendments of the bid, including whether the bidder is permitted to waive the minimum tender condition.
A requirement that the bidder launch its bid by a specified date.
A requirement that the target board recommend that shareholders accept the bid, subject to a fiduciary out.
Representations and warranties of both the bidder and target.
Restrictive covenants prohibiting the target (and sometimes the bidder where the consideration offered includes bidder's securities) from acting outside the ordinary course of business or undertaking specified actions.
Covenants on the preparation of bid materials (see Question 14).
Required regulatory approvals, including covenants to pursue these approvals.
Indemnification of the target's directors and officers following completion of the acquisition.
Non-solicitation provisions prohibiting the target from soliciting, or engaging in discussions or negotiations with, other potential purchasers. These provisions are, with few exceptions, subject to the ability of the target board to respond to an unsolicited proposal that would reasonably be expected to result in a proposal that is superior to the bidder's offer. A "superior proposal" will be a defined term in the agreement and will almost always require that the proposal be superior from a financial point of view as compared to the supported offer. The fiduciary out would allow the target board to change its recommendation, in which case the bidder can typically terminate the support agreement and collect a break fee, or to terminate the support agreement in order to enter into a definitive agreement with the interloper making a superior proposal provided the target pays the break fee to the original bidder (see Question 10). Some support agreements give the power to the board to change its recommendation even in the absence of a superior proposal if required by the directors' fiduciary duties.
The bidder's right to match (or exceed) the terms of any superior proposal during a specified period.
A break fee payable upon certain triggering events (see Question 10).
In responding to a formal bid that has commenced, the target board must either:
Recommend that shareholders accept or reject a takeover bid, and give reasons for any recommendation.
Advise shareholders that it is unable to make, or is not making, a recommendation, and state its reasons for this position.
Advise shareholders that the board is considering whether to make a recommendation to accept or reject the bid.
This recommendation or advice is included in a directors' circular that must be provided to the target's shareholders no later than 15 calendar days after the date of the bid. If the board advises that it is considering whether to make a recommendation, the board must also communicate a recommendation or, if not making a recommendation, a decision that it is unable to make or is not making a recommendation, at least seven days before the scheduled expiry of the deposit period of the bid.
During the term of a bid or after its expiry (but before the expiry of shareholder withdrawal rights, see Question 12), a target board must promptly issue a news release and send a notice of change to shareholders where a change has occurred in the information contained in the directors' circular (or any previous notice of change to the directors' circular) that is reasonably expected to affect the decision of the shareholders to accept or reject the bid.
A support agreement will almost always include a break fee payable by the target in certain circumstances, including where:
There is a change or adverse modification to the target board's recommendation in favour of the bidder's offer.
The target terminates the agreement to enter into an agreement in respect of a superior proposal (see Question 9).
A competing proposal is announced before termination, the minimum tender condition is not met and a competing transaction is completed by the target within a specified period after termination that usually does not exceed 12 months.
Break fees generally range from 2% to 4% of the target's equity value. Bidders offering a significant premium are more likely to obtain a higher break fee. White knights tend to require higher break fees, although they generally fall within the range specified above. Break fees have been challenged both in the courts (Ontario) and before the securities regulatory authorities (British Columbia), in each case unsuccessfully.
Reimbursement of the bidder's expenses is often required. Triggers for expense reimbursement include one or more breach of representation or covenant and rejection of the bid by target shareholders.
Reverse break fees
Reverse break fees are most commonly found in transactions involving a private equity purchaser. Reverse break fees tend to relate to certain post-announcement conditions including:
Shareholder or governmental approvals required for the buyer to complete the transaction.
Where the consideration offered includes cash, the bidder is required to make adequate arrangements before the bid to ensure that funds are available to make full payment of the securities it has offered to acquire.
Funding arrangements can be subject to conditions if, at the time the bid is commenced, the bidder reasonably believes the possibility is remote that, if the conditions of the bid are satisfied or waived, the bidder will be unable to pay for the securities deposited under the bid due to an unsatisfied financing condition.
Bidders must disclose the details of financing arrangements in the bid circular (see Question 14).
A target will rarely agree to a supported bid if the bidder does not provide evidence of financing arrangements, with no more conditionality than the bid (in practice, the conditions to funding generally mirror the bid conditions).
Announcing and making the offer
Making the bid public
A bid is formally commenced by either:
Publishing an advertisement containing a summary of the bid in at least one major daily newspaper of general and regular paid circulation in the relevant Canadian jurisdictions.
Sending a bid circular to shareholders (see Question 14).
If commenced by way of advertisement, a bidder must have delivered its bid circular to the target on or before the date of first publication of that advertisement.
A bidder is permitted to announce an intention to bid prior to making the formal bid (see Question 6). In practice a bidder with a support agreement will publicly announce its intention to make a bid and the terms of the support agreement between the target and the bidder (see Question 9), and commence the formal bid later when the bid circular is prepared. If the bid is supported, the bid circular and the directors' circular are generally sent together.
The terms of a bid must provide for a period of at least 35 calendar days from the date of the bid before the bidder is permitted to take up any securities. Any variation (including a waiver of a condition) in a bid requires a minimum ten-day extension, other than a waiver of a condition in an all-cash bid.
If all terms of a formal bid have been satisfied or waived, the bidder is required to take up securities within ten days after the expiry of the bid, and must pay for them no later than three days after the securities are taken up. Where securities are deposited after the date on which the bidder first takes up securities deposited under the bid, the bidder must take up and pay for these securities no later than ten days after their deposit.
The bid regime provides shareholders with the ability to withdraw deposited securities in the following situations:
Any time before the bidder takes up the securities.
If the securities have not been paid for by the bidder within three business days after having been taken up.
Before the expiration of ten calendar days from a notice of change or variation to the takeover bid circular (see Question 14), subject to limited exceptions.
Any competing bid is also required to remain open for a minimum of 35 calendar days.
Under the current rules, the timetable of a bid is not altered if there is a competing bid. See Question 29 for proposed amendments to the takeover bid regime.
In hostile bids, the conditions are often lengthy and very bidder-friendly. In a supported bid, the conditions are extensively negotiated as part of the support agreement and provide far less scope for the bidder to walk from the deal.
The conditions usually attached to supported Canadian takeover bids include:
Minimum tender. Generally, a minimum two-thirds of the shares subject to the bid and 50% of the outstanding minority shares have been deposited and not withdrawn, on a diluted basis.
Regulatory approvals. All regulatory approvals, domestic and foreign, have been obtained (or waiting periods expired) on reasonably satisfactory terms.
No material adverse effect. There has not been any change in the business or the affairs of the target that would have a material adverse effect on the value of the target securities, subject to standard carve outs.
No existing or pending litigation. No suit against the target has been commenced or threatened that would have a material adverse effect on the target's business.
No legal impediments. No laws have been enacted or proposed that would:
prevent the bidder from proceeding with the bid; or
prevent the bidder from taking up and paying for the shares.
Support Agreement in effect. The support agreement has not been terminated by the target or the bidder in accordance with its terms.
The target's shareholders receive similar documents in the context of both recommended and hostile bids.
A bidder must provide each shareholder with a formal takeover bid circular setting out the terms and conditions of the bid and other mandatory disclosure regarding the bid, including:
The identity of the bidder.
The conditions of the bid.
Prospectus-level disclosure regarding any securities offered as consideration (see Question 17).
The bidder must provide a notice of variation or change, as applicable, to each shareholder where one of the following applies:
The terms of the bid are varied, other than a waiver of a condition in an all cash bid.
A change in the information contained in the takeover bid circular (or in any previous notice of change or variation to the takeover bid circular) occurs that would reasonably be expected to affect the decision of the shareholders to accept or reject the bid.
A bidder will also provide shareholders with a letter of transmittal and notice of guaranteed delivery, which are both used in the deposit of securities to the bid, although in rare circumstances a notice of guaranteed delivery is not used.
The target's board must provide each shareholder with a directors' circular and any notice of change as detailed in Question 9.
Bid documents delivered to shareholders in Québec must be in French or in French and English, unless:
The number of holders of the class of securities subject to the bid in Québec is fewer than 50.
The securities held by such holders represent, in aggregate, less than 2% of the outstanding securities of that class.
Security holders in Québec are entitled to participate in the bid on terms at least as favourable as the terms applicable to the general body of security holders of the same class.
At the same time as material relating to the bid is sent by bidder to security holders of the class that is subject to the bid, the material is filed and sent to security holders in Québec.
Any advertisement published in Québec under the take-over bid regime is also subject to the same language requirements and exemption.
A target's board is not required to inform or consult its employees about a takeover bid.
However, to fulfil its fiduciary duties, the board of a Canadian corporation must consider the interests of stakeholders of the target, including target employees in determining whether to enter into a support agreement with the bidder (BCE v 1976 Debentureholders (Supreme Court of Canada, 2008) (BCE)).
The bid regime does not contain any requirements to make a mandatory offer. A non-exempt takeover bid must be made to all shareholders in Canada (see Question 2).
Consideration usually consists of cash, the securities of a bidder or a combination of the two.
Securities offered as consideration are generally common equity securities (for example, common shares). Warrants entitling the holder to purchase the bidder's equity securities are used on occasion. The mandated disclosure in the bid circular regarding securities offered as consideration is substantially similar to the disclosure that would be required as part of a public offering of those securities in Canada, referred to as prospectus-level disclosure.
Bidders with mining or oil and gas operations must comply with specific disclosure requirements under NI 43-101 – Standards of Disclosure for Mineral Projects and NI 51-101 – Standards for Oil and Gas Activities, respectively. These impose significant constraints on a bidder wishing to offer its securities if that bidder does not already report in accordance with NI 43-101 or NI 51-101 (for example, private company bidders or foreign-listed bidders) and allow very few exceptions.
Tax and other considerations can also make it practically difficult for a foreign bidder to offer its securities as consideration. However, an exchangeable share structure has and can be used to provide newly issued exchangeable securities that are the economic equivalent of a bidder's security and allow for deferred taxation (see Question 19).
There are generally no additional restrictions or requirements on the consideration that foreign bidders can offer.
However, unless the bidder is a reporting issuer in Canada or is prepared to become one, a foreign bidder is generally limited to offering cash as consideration. This is due to the prospectus-level disclosure requirements that apply to issuers of securities offered as consideration. In addition, a foreign bidder can become a reporting issuer by offering its own securities to Canadian shareholders.
Even where a foreign bidder is able and prepared to offer securities as consideration, tax treatment for target shareholders can be a significant issue. Generally, the exchange of securities of a Canadian entity for those of a foreign entity is a taxable event (without cash inflow to the shareholder to pay taxes), whereas their exchange for securities of a Canadian entity commonly qualifies for deferred tax treatment. Offering exchangeable securities of a subsidiary entity of the bidder can mitigate these tax issues (see Question 17).
For US issuers, certain concerns set out above may be mitigated under the Canada-US Multijurisdictional Disclosure System, which facilitates cross-border takeover bids.
Compulsory purchase of minority shareholdings
Successful takeover bids of Canadian companies are generally followed by a compulsory acquisition or squeeze-out transaction carried out in accordance with the relevant corporate statute and US Multilateral Instrument (MI) 61-101 (see Question 4).
Where at least 90% of the shares not owned by the bidder and its affiliates and associates are tendered within 120 days of date of the bid, the remaining shares can generally be acquired for the same consideration as in the bid through a statutory compulsory acquisition. This triggers dissent rights that entitle shareholders to a judicial determination of the fair value of the shares.
Where the 90% threshold is not achieved but the minimum tender condition (two-thirds ownership and a majority of the minority) is achieved, bidders can either:
Take up the tendered shares and extend the bid in an effort to reach the 90% threshold.
Take up the tendered shares and proceed with a second step squeeze-out transaction (often an amalgamation with a subsidiary of the bidder) that would require approval by two-thirds of the votes cast at a shareholder meeting.
For a squeeze-out transaction, MI 61-101 requires the approval of a majority of the target's minority shareholders. However, where a squeeze-out transaction follows a bid and the bidder's intention to carry out the squeeze-out is disclosed in the bid circular and at least the same consideration is offered in the squeeze out, minority shares tendered into the first-step takeover bid may be counted as minority votes in favour of the squeeze-out for the purposes of the second-step minority approval requirement, subject to certain exceptions.
Restrictions on new offers
There are no restrictions on launching a new takeover bid made to all remaining shareholders, subject to complying with applicable disclosure and valuation requirements. Other purchases or offers by the bidder are prohibited for a period of 20 business days after the expiry of the bid. However, trades in the normal course on a published market are generally not subject to this prohibition.
After a successful takeover bid, de-listing can be accomplished by a formal request to the relevant stock exchange that must be accompanied by certain customary supporting materials, including evidence of the successful bid and board resolutions approving the de-listing.
In addition to de-listing, a bidder will usually apply to the relevant provincial or territorial securities regulatory authorities (with the exception of British Columbia) for a decision that the target has ceased to be a reporting issuer and is therefore not subject to, among other things, ongoing continuous disclosure requirements (see Question 5). A simplified and expeditious procedure is available provided that, at the time of application, all of the following apply:
The target is not or is no longer a reporting issuer in British Columbia.
The target is seeking a decision that it is not a reporting issuer in each Canadian province or territory in which it is a reporting issuer.
The target's outstanding securities, including debt securities, are beneficially owned, directly or indirectly, by:
fewer than 15 shareholders in each of the jurisdictions of Canada; and
fewer than 51 shareholders worldwide.
The target's securities, including debt securities, are not traded in Canada or another country on a marketplace or any other facility for bringing together buyers and sellers where trading data is publicly reported.
The target is not in default of its obligations under Canadian securities laws as a reporting issuer.
A target's reporting issuer status in British Columbia can be voluntarily surrendered where the target's outstanding securities are beneficially owned, directly or indirectly, by not more than 50 persons and are not traded or quoted on any exchange or quotation system.
The principal defence against a hostile bid is a shareholder rights plan while the target seeks out other offers.
Based on the current law in Canada, a "just say no" defence is not practical for Canadian issuers. This is because the shareholder rights plan will generally be cease traded by the applicable securities commission unless the target can demonstrate that it needs more time to secure a better offer for shareholders. Accordingly, once a hostile offer is commenced, most issuers will immediately start a process to obtain another offer.
Shareholder rights plans
Shareholder rights plans are the principal tactic used by a target's board in response to a hostile bid, both pre-bid and post-bid. The form of shareholder rights plan differs depending on whether it is adopted pre or post-bid.
A shareholder rights plan typically gives a target's shareholders, other than the acquiror, the right to acquire the target's shares at a substantial discount in circumstances where an acquiror (such as a hostile bidder) acquires a significant stake of the target's equity securities, usually 20% or more on a partially diluted basis.
A pre-bid shareholder rights plan adopted by an issuer listed on the Toronto Stock Exchange (TSX) must be approved by shareholders within six months of its adoption. Because of the requirement for shareholder approval, pre-bid Canadian shareholder rights plans tend to be relatively uniform, inflexible and benign. They are usually designed to allow an unsolicited bidder to make a permitted bid without triggering the rights plan, ensuring that the target is not shielded indefinitely from a hostile bid. A permitted bid is typically defined as a bid made to all shareholders that remains open for a specified period (of at least 60 days) which is conditional on the acceptance of the bid by unrelated shareholders holding more than 50% of the shares not held by the bidder or related parties. Permitted bids often include partial or non-cash bids.
Post-bid shareholder rights plan tend to be more favourable to target boards as they are expected to be short-lived, and therefore less constrained by concerns about shareholder's approval.
Regulatory response to defensive tactics
Provincial and territorial securities regulatory authorities are responsible for monitoring any defensive tactics employed by targets of hostile bids. These authorities usually have relatively broad powers to make orders in the public interest and generally have jurisdiction to prohibit certain defensive tactics, in particular to cease trade a target's shareholder rights plans (see Question 3).
In practice, a hostile bidder will typically apply to the relevant authority to cease trade a shareholder rights plan before the scheduled expiry of its bid. Subject to limited exceptions, Canadian securities regulatory authorities have tended to reject a "just say no" defence (see Question 3) and cease traded a target shareholder rights plans about 50 to 70 days following the launch of a hostile bid on the basis that such period of time is generally adequate for a white knight or alternative transaction to emerge. However, there are recent proposed amendments to the bid regime to extend the mandatory bid period to 120 days (see Question 29), which will likely render shareholder rights plans largely unnecessary except to prevent purchases pursuant to exempt takeover bids.
In what may be the last major rights plan decision before the adoption of amendments to the bid regime, on 30 November 2015 the Alberta Securities Commission (ASC) cease-traded the tactical shareholder rights plan of Canadian Oil Sands Limited effective on the 91st day following the commencement of Suncor Energy Inc's hostile bid. While full reasons were not released by the ASC at the time of its decision, comments by the panel indicate that the current jurisprudence governing rights plans remains in effect until new legislation is adopted. The panel allowed the rights plan to remain in place for an additional period of time as there was a real and substantial possibility that additional time might allow an alternative proposal or transaction to be generated that could increase shareholder choice and maximise shareholder value.
Fiduciary duties of target boards
Defensive tactics used by directors of targets governed by Canadian corporate legislation (for example, the sale of material assets or the issuance of securities) can also be scrutinised by the courts on the basis that directors must act in the best interests of the target company under their fiduciary duties. However, courts in Canada have been very deferential to the business judgement of directors.
Other regulatory restrictions
Certain large transactions trigger advance notice and approval requirements under the Competition Act, including ultimate approval by Canada's Commissioner of Competition, and cannot be completed until the end of the applicable waiting period. This depends on the following factors:
The shareholding to be acquired.
The size of the parties.
The target's assets in, and revenues in and from, Canada.
The principal substantive test under the Competition Act is whether the transaction is or is likely to prevent or lessen competition substantially in a relevant market.
The review period for transactions for which there is a genuine concern regarding the prevention or lessening of competition generally extend beyond the minimum 35-day bid period for a takeover bid, and sometimes considerably beyond this period.
Parties can apply for an advance ruling certificate that, if issued, serves as an exemption from the notification requirement. It is only available in circumstances where the Commissioner of Competition is clearly of the view that a transaction will not or will not be likely to substantially lessen or prevent competition in a relevant market.
The Investment Canada Act (Canada) (ICA) allows the Canadian federal government to screen proposed foreign investments, including the acquisition of a Canadian business, to ensure they are likely to be of net benefit to Canada.
Under the ICA, all transactions that result in an acquisition of control of a Canadian business by a non-Canadian are either:
Subject to review and pre-closing approval.
Subject to a post-closing notification requirement only.
A takeover bid by a foreign investor for a Canadian public company is subject to review if the enterprise value of the target exceeds certain dollar thresholds. Foreign investors that are considered to be stated-owned enterprises are subject to a lower threshold based on book value of the target's assets.
A very low threshold for review and approval applies to all foreign investors where the target operates a cultural business within the meaning of the ICA.
Where transactions are subject to review under the ICA, purchasers will be expected to give binding undertakings negotiated with the Canadian federal government on matters that include:
Canadian head office and management.
Capital and R&D expenditure levels.
The review process under the ICA usually takes approximately 75 days from the date that materials are submitted to the government, but can take longer (100 days or more), especially in the case of high-profile, politicised transactions.
The ICA also includes provisions that allow the Canadian federal government to block a transaction on the basis of national security concerns. These provisions are infrequently used, but have been relied on in a small number of cases to block investments in Canada in sensitive businesses. The Canadian government is not required to provide any reasons for rejecting the transaction. Therefore, foreign purchasers must be mindful of national security considerations when considering the acquisition of Canadian businesses in sensitive industries. It is also believed that several other proposed (but unannounced) transactions have collapsed in the face of national security reviews. However, information on the national security review process and the basis for such decisions is not publicly disclosed by the Canadian government.
Certain industries, including telecommunications, broadcasting, transportation and financial services (banking and insurance) are subject to additional industry-specific rules on foreign ownership.
Any person acting jointly or in concert with a bidder is subject to the same restrictions as a bidder under the bid regime, including the bid integration rules (see Question 8, Bid integration rules). After the announcement of a bid, non-associated third parties are subject to a reduced early warning threshold of 5% instead of the ordinary 10% threshold (see Question 8, Early warning).
To address concerns that the Canadian takeover regime is too favourable to bidders, in March 2015 the Canadian Securities Administrators published for comment amendments that require any formal bid for a Canadian public target to contain the following:
120-day requirement. A minimum bid period of 120 days, subject to two exceptions. First, the target issuer's board of directors may issue a "deposit period news release" in respect of a proposed or commenced take-over bid providing for an initial bid period that is shorter than 120 days but not less than 35 days. If so, then all other outstanding or subsequent bids are also entitled to the shorter minimum deposit period counted from the date that other bid is made. Second, if an issuer issues a news release that it has entered into an "alternative transaction", effectively a friendly change of control transaction (such as an arrangement), then all other outstanding or subsequent bids are entitled to a minimum 35-day deposit period counted from the date that the applicable bid is made. Extending the minimum bid period was motivated by concerns that target boards were not being afforded sufficient time to respond to unsolicited takeover bids with appropriate action, such as seeking alternative transactions.
50% minimum tender requirement. A mandatory minimum tender requirement of more than 50% of the outstanding securities of the class that are subject to the bid, excluding those beneficially owned, or over which control or direction is exercised, by the bidder and its joint actors.
Mandatory extension period. A ten-day bid extension period after the minimum tender condition is achieved and the bidder announces its intention to take up and pay.
Variations. A ten-day bid extension period after any reduction or extension of the deposit period.
Mandatory take-up. A requirement that the bidder immediately take-up securities deposited under the bid if, at the expiry of the deposit period, the 120-day requirement (subject to permitted reduction)m, the minimum tender condition and all other terms and conditions of the bid have been complied with or waived.
The comment period closed on 29 June 2015, and the current expectation is that a proposed rule will be published in first quarter 2016 and come into effect later in 2016.
The regulatory authorities
Canadian Securities Administrators
Main area of responsibility. Official website of the Canadian Securities Administrators (CSA), providing access to CSA members' websites, a national registration database and other investor tools.
Ontario Securities Commission
Main area of responsibility. The Ontario Securities Commission administers and enforces securities legislation in the province of Ontario, Canada's most populous province and leading market participant.
Main area of responsibility. A ministry of Canada's federal government with the mandate to help make Canadian industry more productive and competitive in the global economy. It is responsible for the Canada Business Corporations Act and its investment review division administers the Investment Canada Act.
Main area of responsibility. An independent law enforcement agency mandated with ensuring that Canadian businesses and consumers prosper in a competitive and innovative marketplace. It is responsible for the administration and enforcement of the Competition Act.
Canadian Securities Administrators (CSA) Members Website - Access to Rules and Policies
Description. Maintained by the Canadian Securities Administrators, provides links to the areas of the official websites of each of Canada's provincial and territorial securities regulatory authorities listing securities legislation, instruments and policies.
Justice Laws Website (Federal Government of Canada)
Description. Official online source of the consolidated acts and regulations of Canada, including the Canada Business Corporations Act, the Investment Canada Act and the Competition Act. The consolidations are generally updated on a biweekly basis.
Canadian Legal Information Institute (CanLII)
Description. Managed by the Federation of Law Societies of Canada, provides access to court judgments, tribunal decisions, statutes and regulations from all Canadian jurisdictions.
Osler, Hoskin & Harcourt LLP
Professional qualifications. Ontario, Canada
Areas of practice. Mergers and acquisitions; corporate finance and corporate restructurings.
- Canadian counsel to Sears Holdings Corporation in its rights offering of 40 million shares of Sears Canada Inc.
- Counsel to Maple Leaf Foods in its disposition of its 90% holding in Canada Bread Company.
- Counsel to Cameco Corporation in its disposition of its remaining interest in Bruce Power LP.
Osler, Hoskin & Harcourt LLP
Professional qualifications. Ontario, Canada
Areas of practice. Mergers and acquisitions; corporate finance; mining; private equity.
- Counsel to the special committee of the board of directors of Canadian Oil Sands in response to a Can$6.6 billion unsolicited bid by Suncor Energy Inc.
- Counsel to the special committee of the board of directors of Inmet Mining Corporation in response to the Can$5.1 billion unsolicited offer by First Quantum Minerals.
- Counsel to Mitel Networks Corporation on its US$400 million acquisition of Aastra Technologies.
Osler, Hoskin & Harcourt LLP
Professional qualifications. Québec and Ontario, Canada.
Areas of practice. Mergers and acquisitions; corporate finance; corporate governance.
- TPG Capital LP in connection with the formation of a partnership (with Fosun, Caisse de Dépôt and Guy Laliberté) and the acquisition of Cirque du Soleil (the largest private equity deal in Québec in 2015).
- Atrium Innovations Inc (a Québec based global leader in natural health products) in connection with its acquisition in 2014 by the Permira funds, the Fonds de solidarité FTQ and Caisse de dépôt et placement du Québec in a transaction with an enterprise value of Can$1.1 billion (the largest private equity deal in Québec in 2014).
- TELUS Corporation in connection with its successful move in 2013 from a dual class share structure to a single class of outstanding common shares, and related proxy fights during 2012 with Mason Capital Management (a Lexpert Top 10 Deal for 2012).
Osler, Hoskin & Harcourt LLP
Professional qualifications. Ontario, Canada
Areas of practice. Mergers and acquisitions; private equity.