Commentary: New takeover bid rules take effect in Canada

As of May 9, new takeover bid rules took effect across Canada. These new rules will undoubtedly impact the Canadian mining sector, which accounts for 40% of the number of listed companies on the Toronto Stock Exchange and TSX Venture Exchange.

The new rules are intended to enhance the quality and integrity of the takeover bid regime and rebalance the dynamic between bidders, target boards and target shareholders by facilitating target shareholders’ ability to make voluntary, informed and coordinated tender decisions; and provide target boards with more time and discretion when responding to a takeover bid.

The key aspects of the new rules are:

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Bids must now be open for at least 105 days (up from 35 days), unless the target board states in a news release that a shorter deposit period (not less than 35 days) is acceptable; or has agreed to enter into, or determined to effect, an alternative transaction, in which case all contemporaneous takeover bids must remain open for a deposit period of at least 35 days.
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A new minimum tender condition that acts as a de facto minority vote on any deal, since a bid must receive tenders of more than 50% of the outstanding securities of the class that are subject to the bid, excluding securities owned by the bidder and a related requirement to extend a bid for another 10 days if the 50% condition is satisfied, and all other terms and conditions of the bid have been met or waived.

As intended, the new rules significantly shift leverage from hostile bidders to target directors and shareholders. Some of the likely impacts of the new rules include:

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Hostile bids are harder — The longer bid period enhances the ability of target boards to locate potential white knight bidders or recommend to shareholders that they reject the hostile bid. The longer bid period should also make it more difficult or expensive for bidders to obtain financing.
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Potential coercion minimized — The 50% condition and 10-Day extension requirement take away what has traditionally been one of the most effective tactics available to a hostile bidder: the ability to waive its minimum tender condition and acquire “any and all” tendered shares. Under the old rules, shareholders would not know before the tender deadline what the outcome of the bid would be, leading to persistent concerns that shareholders had to tender to avoid being “left behind” with an illiquid investment.
• 
Hostile bid tactics will evolve — Since a bid’s success or failure will turn on collective decision-making by the target shareholders, we expect that bidders will devote more resources to aggressive public relations and solicitation campaigns (e.g., social media, white papers, websites, etc.) to convince shareholders to tender. Proxy solicitors, public relations consultants and social media experts will become key members of the deal team on both sides of the transaction.
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Rights plans will remain in place — Although the need for targets to adopt “tactical” rights plans in the face of a hostile bid will decrease, issuers are likely to keep rights plans to prevent “creeping” takeover bids that are still possible through the takeover bid exemptions (for instance, the new rules do not impact the ability to acquire shares under a private agreement or through limited market purchases).

In today’s environment of low commodity prices and with many mining companies trading at or near historic lows, the new rules should provide welcome relief to target companies fearing opportunistic bids.

While the new rules rebalance the playing field, they do not abandon the Canadian principle that a target board cannot indefinitely “just say no.” If there is an offer on the table, shareholders will have the final say.

— Gesta Abols (gabols@goodmans.ca and tel. [416] 597-4186) and Grant McGlaughlin (gmcglaughlin@goodmans.ca and [416] 597-4199) are partners at law firm Goodmans LLP and members of its Mining and Natural Resource Group, with expertise in mergers and acquisitions (M&A).

Based in Toronto, Goodmans has market-leading expertise in M&A, corporate and transaction finance, private equity, real estate, tax, restructuring, litigation and other business-related specialties. Please see www.goodmans.ca for more information.