A new takeover bid regime in Canada came into force on May 9, 2016. In implementing the new regime, the Canadian Securities Administrators (the “CSA”) focused on, among other things, giving bidders, target boards and target security holders increased clarity on the regulatory treatment of one defensive tactic: the “poison pill.” Other defensive tactics, however, such as strategic private placements, may now become the focal point of contested public M&A transactions.
The recent decision of the British Columbia Securities Commission (“BCSC”) in Re Red Eagle, may act as a helpful guide in evaluating the appropriateness of a target board using a private placement to secure a friendly deal.
The New Canadian Takeover Bid Regime
The CSA stated that the purpose of the new bid amendments is to enhance the quality and integrity of the takeover bid regime and rebalance the current dynamics among bidders, target boards, security holders and targets by: (i) facilitating the ability of the target security holders to make voluntary, informed and coordinated tender decisions; and (ii) providing the target board with additional time and discretion when responding to a takeover bid.
Specifically, the new regime requires that all non-exempt takeover bids: (i) receive tenders of more than 50 per cent of the outstanding securities of the class that are subject to the bid (excluding securities owned by either the bidder or any person acting jointly or in concert with the bidder) (the “Minimum Tender Requirement”); (ii) be extended by the bidder for an additional 10 days after the Minimum Tender Requirement is achieved; and (iii) remain open for at least 105 days unless, generally speaking, the target board agrees to a shorter period (not to be less than 35 days), or announces a specified “alternative transaction” (such as an amalgamation or arrangement), in which case all contemporaneous takeover bids can remain open for only 35 days.
The new Minimum Tender Requirement may incentivize target boards to pursue a strategic private placement. A target board could disrupt a hostile bidder’s attempt to meet the threshold under the Minimum Tender Requirement by placing additional securities into the hands of friendly investors. However, the Re Red Eagle decision suggests that securities regulators may intervene in circumstances where such actions interfere with the ability of a target’s shareholders to tender to a bid.
The Re Red Eagle Decision
Re Red Eagle centred around CB Gold Inc. (“CB Gold”), a junior mineral exploration company. CB Gold was the subject of hostile bid launched in June 2015 by Red Eagle Mining Corporation (“Red Eagle”). Red Eagle’s bid initially had a 50.1 per cent minimum tender condition.
On July 24, 2015, CB Gold announced a friendly transaction with Batero Gold Corp. (“Batero”) pursuant to which Batero agreed to acquire CB Gold. Batero had also agreed to provide cash to CB Gold under a private placement of CB Gold shares (the “Private Placement”).
At the initial expiry date of Red Eagle’s bid, approximately 48 per cent of the CB Gold shares had been tendered to Red Eagle’s bid, which would have constituted 52 per cent of the CB Gold shares if the shares issued under the Private Placement had been excluded from the calculation. As a result, Red Eagle extended its bid and made an application to the BCSC to, among other things, cease trade any securities issued pursuant to the Private Placement on the basis that the Private Placement was an inappropriate defensive tactic.
The BCSC declined to cease trade the Private Placement stating that the Private Placement: did not violate applicable securities laws, there had been no abuse to the capital markets and, in fact, without the Private Placement, it is unlikely that the auction for CB Gold would have occurred; was not clearly a defensive tactic. At the time of the Private Placement, CB Gold required financing to maintain itself as a going concern; and did not limit CB Gold shareholders from tendering to the Red Eagle bid, as prior to the hearing, Red Eagle had waived its 50.1% minimum tender condition (something that will not be possible under the new bid regime), thus negating the possibility that the Private Placement could act as a bar to the CB Gold shareholders having their shares acquired under the Red Eagle bid.
The BCSC stated that it had the authority to determine whether a particular transaction was an improper defensive tactic and “… to override the business judgment rule and cease trade a private placement that inappropriately alters the basic dynamics of an M&A transaction.” The BCSC cautioned that “… securities regulators should tread warily in this area and that a private placement should only be blocked by securities regulators where there is clear abuse of the target shareholders and/or the capital markets.”
The new bid regime no doubt will impact the manner in which Canadian public M&A transactions are conducted. Parties to an M&A transaction will need to consider the following:
- Acquirers will need to be mindful of the implications of attempting to use a private placement as a deal protection device, as securities regulators could view a private placement as an inappropriate defensive tactic restricting target shareholders from tendering to a competing bid.
- Where a target company has a legitimate need for imminent financing, the target will want to consider conducting a private placement in the context of a supported takeover bid provided that the private placement does not limit target shareholders from tendering to a competing bid.
- As Canadian securities regulators continue to exercise their “public interest jurisdiction muscles”, participants will need to weigh what forum – the commissions or the courts – will better serve their needs for proceedings in connection with contested public M&A transactions.
George Dubé, is a partner at Bennett Jones LLP in Toronto and represented one of the parties at the BCSC hearing in the Red Eagle case.
On May 9, 2016, the new Canadian formal takeover bid regime came into force. Here are some of the changes:
|No Minimum Tender Requirement.
||50% plus 1 Minimum Tender Requirement.
|A bidder can acquire any and all shares that get tendered to its bid.
||To acquire any shares of the target, at least a majority of the target’s shares need to be tendered to a bid.
|Bids have to stay open for 35 days.
|Bids have to stay open for 105 days, unless a target’s board agrees to a shorter time period (not to be less than 35 days).
|Bids do not have to be extended beyond their original expiry date.
||Successful bids must be extended for an additional 10 days after the original expiry date to give target shareholders another chance to tender to the bid.