CHAPTER 05 Public Mergers & Acquisitions
Like the regulations in the United Kingdom and unlike those in the United States, Canadian regulations require that takeover bids be “fully financed.” This rule requires an offeror commencing a takeover bid to have adequate financing arrangements in place to ensure the payment of the cash purchase price to the shareholders at the expiry of the bid. This does not mean that the offeror must have the cash on hand when the takeover bid is commenced, but rather, if it does not have the cash on hand, it must have an adequate commitment from a lender and/or an equity provider to provide the financing. Unlike the U.K. rules, the Canadian takeover bid rules do not require that a third party (e.g., a financial adviser) confirm that financing is fully available to the offeror. If the acquirer is offering securities as consideration, it must take into account a number of factors. The takeover bid circular would need to contain prospectus- level disclosure regarding the acquirer, and, in certain cases, pro forma financial statements giving effect to the acquisition. The acquirer may also become subject to ongoing public disclosure requirements in Canada. A takeover bid circular offering securities as consideration is not subject to approval from Canadian securities regulators. However, if the issuance of the securities is also subject to U.S. securities laws, a plan of arrangement may be a preferred structure in order to take advantage of an exemption from U.S. registration requirements that is available for Canadian arrangements. Although a foreign acquirer cannot exchange target shares for acquirer shares or merge the two entities on a tax-deferred basis, it can utilize an “exchangeable share” structure to provide such tax deferral. In an exchangeable share structure, a foreign acquirer will form a Canadian subsidiary to acquire the shares of the Canadian target. Transferors that do not need a tax-deferred transaction (such as most non-residents
and tax-exempt shareholders) will receive shares of the non-Canadian parent, while Canadian shareholders that need a tax-deferred transaction will receive exchangeable shares of the Canadian subsidiary on a tax-deferred basis. The exchangeable shares may be exchanged into shares of the non-Canadian parent and, as a consequence, will typically track the shares of the non-Canadian parent. Because such exchange will be taxable, Canadian shareholders will typically wait to exercise their exchange right until they wish to sell the shares or are required to exchange them under the share terms. PROCESS A takeover bid can be commenced in one of two ways: by mailing a takeover bid circular and offer to the shareholders; or, in the case of an unsolicited (or hostile) bid, by placing an advertisement in a Canadian newspaper. A takeover bid is required to be open for acceptance for at least 105 days in Canada and may be extended by the offeror. In a negotiated (or friendly) bid, the period during which shares may be deposited under a takeover bid may be shortened to a minimum of 35 days. In any event, no later than 15 days after the date of the bid, the target company must prepare and send to the shareholders a directors’ circular recommending whether shareholders should accept or reject the bid, or stating that the board of directors is unable to make a recommendation. After the expiry of the initial deposit period, if all the conditions to the completion of the bid have been met or waived, the offeror must extend for at least 10 days the period during which shares may be deposited under the bid. After the expiry of the takeover bid, the offeror “takes up” (accepts the tenders of shares), announces that it is completing its bid and pays for the shares tendered to the bid.
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