April 13, 2016 - view full issue
Recent Developments in the Regulation of Defensive Tactics in Canadian Take-over Bids – Part III
By Ethan Minsky
This is the third and last instalment of a three part article. In the first part, we discussed the basic concepts and guiding principles applied by Canadian securities regulators when they are asked to cease trade an effort to defend against a take-over bid. In the second part, we discussed the British Columbia Securities Commission’s decision in Re Red Eagle, 2015 BCSECCOM 401, in which these guiding principles were applied. In this third part, we will discuss the Alberta Securities Commission’s decision in in Re Suncor Energy Inc. 2015 ABASC 984. If you missed any of the first two instalments and you would like to read them now, here is a link to the full article.
Suncor Energy Inc. (“Suncor”) and Canadian Oil Sands Limited (“COS”) are both reporting issuers headquartered in Calgary, Alberta. Suncor owns approximately 12% of the Syncrude Joint Venture in addition to other producing assets; COS owns approximately 37% of the Syncrude Joint Venture and has no other producing assets. The Syncrude Joint Venture operates the (large) Canadian oil sands project located in the Athabasca oil sands near Fort McMurray, Alberta. In the face of distressingly low oil prices, the Syncrude project faces economic challenges.
In April of 2013, the COS shareholders approved a rights plan (the “Old Plan”) that would have thwarted any takeover bid outstanding for less than 60 days. On October 5, 2013, Suncor launched a 60 day bid that qualified as a “permitted bid” under the Old Plan. On October 6, 2013, in response to the Suncor bid, the COS Board of Directors adopted a new rights plan (the “New Plan”) that provided that a bid was not a “permitted bid” unless it was to remain open for at least 120 days (as would have been required by the Proposed Amendment had the Proposed Amendment been adopted). After consulting with its advisors, the COS Board concluded, among other things, that the Suncor bid substantially undervalued COS and, in any event, COS did not need to be sold. It instructed management to look for alternatives and, on October 19, 2015, it recommended that the COS shareholders reject the Suncor bid.
Suncor asked the ASC to cease trade the New Plan, claiming that the Old Plan provided all of the protection necessary or desirable. COS argued that the New Plan was a reasonable and justifiable response to a financially inadequate and “opportunistic” Suncor bid.
In its analysis, the ASC referred to the CSA Proposal and the Proposed Amendment, noting that none of these had been adopted. The ASC then went on to list the following key factors to be considered in cease trading a rights plan derived from, among other prior decisions, in Re Royal Host Real Estate Investment Trust and Canadian Hotel Income Properties Real Estate Investment Trust (1999), 8 ASC 3672 #08/48:
- whether shareholder approval of the rights plan was obtained;
- when the plan was adopted;
- whether there is broad shareholder approval for the continued operation of the plan;
- the size and complexity of the target company;
- the other defensive tactics, if any, implemented by the target company;
- the number of potential, viable offerors;
- the steps taken by the target company to find an alternative bid or transaction that would be better for the shareholders;
- the likelihood that, if given further time, the target company will be able to find a better bid or transaction;
- the nature of the bid, including whether it is coercive or unfair to the shareholders of the target company;
- the length of time since the bid was announced and made;
- the likelihood that the bid will not be extended if the rights plan is not terminated.
Applying the Royal Host factors to the Suncor bid, ASC cease traded the New Plan, but only after the expiration of a one-month grace period intended to give COS more time to pursue alternatives and respond to the Suncor bid.
Both Suncor and Red Eagle are careful and comprehensive decisions and each covers more ground than I have covered in this article. I have limited my discussion of them to the purpose at hand, which is to show that the regulation of defensive tactics in take-over bids in Canada remains largely unaffected by the CSA and AMF Proposals and the Proposed Amendment which, as stated above, has yet to be adopted.
On February 26, 2016, after this article was originally published, the CSA issued a Notice of Amendments to the Take-Over Bid Regime (the “Notice”) in which it announced that, effective May 9, 2016 (or perhaps later in Ontario), it was adopting, with modifications, the changes described in the Proposed Amendment. The Proposed Amendment, which was discussed earlier in this article, was originally published for comment on March 31, 2015, with a comment period that expired June 29, 2015. The only significant departure from the regime originally suggested in the Proposed Amendment was to reduce the mandatory minimum deposit period for all non-exempt take-over bids from 120 days (the period suggested in the Proposed Amendment) to 105 days.
The new regime proposes to address the concern, expressed in both the CSA Proposal and the AMF Proposal, that take-over bids can be coercive in that shareholders, who act individually, might feel pressure to tender to a bid they do not support rather than risk being left behind. The Notice proposes to address this concern by requiring that all non-exempt take-over bids:
- be subject to a mandatory condition that a minimum of more than 50% of all outstanding target securities owned by persons other than the bidder be tendered;
- be extended by the bidder for an additional 10 days after the bidder receives the mandatory minimum number of securities tendered and has announced its intent to take up tendered securities; and
- remain open for a minimum deposit period of 105 days, subject to two exceptions – if either exception applies the bid must remain open for a minimum of 35 days.
The Notice cautions readers that the CSA has determined that it will not amend National Policy 62-202, Defensive Tactics, in connection with these amendments to the Take-Over Bid regime, and that National Policy 62-202 continues in effect.
If you have questions about this three-part article, contact any member of Clark Wilson’s Corporate Finance & Securities Group.
Securities Law Update is produced by the Corporate Finance & Securities Group at Clark Wilson. The information and links in this newsletter should not be treated by readers as legal advice and ought not be relied upon without further, detailed legal counsel being sought.