Acquiring A Canadian Public Company 2023 - Corporate and Company Law

Introduction

This Guide offers preliminary assistance to those considering acquiring a Canadian public company.

It provides a brief overview of certain legal considerations for acquirors, including relating to corporate and securities law, tax, competition (antitrust), foreign investment review and labour and employment.

Each transaction has its own unique facts and circumstances for consideration and we welcome any questions that you have.

Part 1 provides an overview of the three principal methods by which an acquiror can acquire a Canadian public company, namely by take-over bid, plan of arrangement, or amalgamation, and includes a list of pre-acquisition considerations for a potential acquiror.

Part 2 describes the general rules, process and timing applicable to take-over bids, plans of arrangement, and amalgamations.

Part 3 sets out a target's potential response to a proposed change of control transaction, and includes a discussion of a target board's fiduciary duties and certain defensive tactics commonly used.

Part 4 discusses the protections afforded to minority shareholders under Canadian corporate and securities law.

Part 5 outlines the competition (anti-trust) regime applicable to acquisitions of Canadian public companies.

Part 6 sets out certain additional considerations for foreign acquirors, namely foreign investment review, tax matters, securities law matters and employment matters.

Part 1 Overview of Public Acquisitions in Canada and Pre-Acquisition Considerations

A. Principal Methods

Most Canadian public change of control transactions are structured as a plan of arrangement, which is a one-step transaction requiring securityholder and court approval. A plan of arrangement can provide for almost any type of transaction or combination of transactions in a single but flexible step.

Take-over bids, which are similar to a US tender offer, are the next most common way Canadian public companies are acquired. These trigger the detailed prescriptions of Canada's take-over bid regime, which was significantly revised in 2016.

A third alternative for a change of control transaction is a securityholder approved amalgamation, although this type of transaction is rarely used unless the transaction steps are relatively straightforward and the acquiror wants to avoid the court approval that is required for a plan of arrangement.

The table on the next page sets out the main advantages, disadvantages and key considerations that an acquiror should assess when choosing the method to acquire for a Canadian public company. We explore each of the transaction structures in more detail in Part 2 of this Guide.

	Friendly/ Hostile?	Advantages	Disadvantages	Key Agreement
Plan of Arrangement A transaction that is effected through a statutory process based on transaction steps that are set out in a detailed “plan of arrangement”. An arrangement is typically implemented by negotiated agreement between the acquiror and the target.	Friendly1	Acquisition of shares and other related transactions can be completed in one step. Allows for flexibility in structuring, including in respect of convertible securities and tax planning. Plan of arrangement can effect a broad variety of transactions in addition to a share acquisition, such as asset transfers or reorganizations. Provides exemption from the U.S. registration requirements for the issuance of securities to U.S. persons.	Court-approval process introduces a degree of risk and provides a ready-made forum for dissidents opposed to the transaction to complain. Typically requires the approval of at least two-third of the votes cast by target shareholders (and potentially other securityholders). Collateral benefits may require minority approval.	Acquiror and target enter into arrangement agreement. Acquiror and securityholders may enter into voting support agreements.
Take-Over Bid An offer made directly to target securityholders to acquire more than 20% of the voting/ equity securities of a class. If at least 66⅔% of the securities are tendered, the acquiror can generally be assured that it can acquire 100% in a second- step transaction.	Friendly or Hostile	Does not require negotiation with, or the support of, the target board. Acquiror controls disclosure document content and timing (take-over bid circular). The minimum tender condition of 50% of target securities not held by the acquiror is less than the two-thirds shareholder approval typically required under a plan of arrangement (or amalgamation).	Acquisition of 100% of the target must be completed in two steps. Financing conditions are provided for. Prohibition on treating securityholders differently.	Acquiror and target enter into support agreement (if friendly). Acquiror and securityholders may enter into lock-up agreements.
Amalgamation A transaction that is effected through a statutory process which allows two or more Canadian companies to merge directly into one combined company	Friendly	Acquisition of shares can be completed in one step. No court approval required making it more difficult for dissidents to stop the transaction.	Limited flexibility in the transaction structure. Typically requires the approval of at least two-third of the votes cast by target shareholders. Convertible securities of the target must be dealt with outside of the amalgamation.	Acquiror and target enter into amalgamation agreement. Acquiror and securityholders may enter into voting support agreements

B. Pre-Acquisition Considerations

A potential acquiror will want to consider a number of pre-acquisition matters prior to commencing a change of control transaction, including the following:

Available Financing

If the consideration for a take-over bid is cash or partly cash, the acquiror must have sufficient funds or financing arrangements in place to make full payment for the securities that the acquiror has offered to acquire prior to making the bid, such that the offer cannot be made conditional on financing.

Unlike a take-over bid, a financing condition is permissible under applicable law for a plan of arrangement or an amalgamation, although the target may not agree to it and shareholders may find it unacceptable.

Acquiring a Pre-Bid Toe-Hold

Following the public announcement of a take-over bid, an acquiror's ability to purchase additional shares of the target company outside the take-over bid is restricted. As such, acquirors prefer to accumulate shares of a target (either through purchases in the public market or by private agreement) prior to announcing a take-over bid, thus acquiring a “toehold” in the company.

Once a potential acquiror has acquired 10% or more of the target's shares, it becomes subject to specific insider reporting requirements. This results in:

The loss of the advantage of surprising the target.
The obligation to file an initial “insider report”, disclosing the number of securities the acquiror controls, as well as subsequent “insider reports” when there are any changes in this position.
The obligation to file a press release and an “early warning report,” disclosing the name of the acquiror, the number of securities it controls, the purpose of the transaction, and the names of any joint actors.
The prohibition from acquiring any additional securities of the same class for one business day from the date the early warning report is filed.

Any additional transactions that result in 2% increases or decreases to the holdings of the acquiror in respect of the target's securities will also trigger another early warning report. In addition, once the acquiror is a reporting insider, each acquisition or disposition of a security will trigger an insider reporting requirement since, unlike the early warning reporting regime, there are no percentage thresholds for an insider filing to be required.

An acquiror should be cautious of acquiring more than 19.9% of the target's total securities, including securities beneficially owned by the acquiror and joint actors, since exceeding this limit may trigger the take-over bid rules.

Click here to continue reading . . .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.