CSA Proposes Broad Amendments to the Issuer Bid, Take-Over Bid and Beneficial Ownership Reporting Regimes

The Canadian Securities Administrators (CSA) published a notice and request for comment on a broad package of proposed amendments to Canada’s issuer bid, take-over bid and early warning reporting regimes and related guidance (collectively, the “Proposed Amendments”).¹ The Proposed Amendments aim to, among other things, provide issuers with greater flexibility to repurchase their shares, enhance transparency of derivative interests, and reduce regulatory burden.

Overview of Key Proposed Amendments

• Selective Repurchase Exemption – This exemption (the “Selective Repurchase Exemption”) would permit issuers to repurchase up to 5% of a class of their outstanding securities within a 12-month period, subject to the satisfaction of certain conditions.
• Enhanced Disclosure of Equity Equivalent Derivatives – Bidders, activists and other soliciting securityholders would be required to disclose their aggregate economic positions, including equity equivalent derivatives, in take-over bid and proxy solicitation materials.
• Strengthened Early Warning Reporting:
  • Guidance on Acquirors’ Plans or Future Intentions Disclosure – This proposed guidance would clarify that acquirors should reassess their “plans and future intentions” disclosure each time the requirement to file a report is triggered and that concrete steps or actions are not sheltered by prior boilerplate disclosure reserving the right to take such actions.
  • Deemed Acquisitions for New Reporting Issuers and Joint Actors – The requirement to file an early warning report would be deemed to apply to security holders with 10% or greater ownership at the time the issuer becomes a reporting issuer and joint actor relationships would be deemed to have formed upon their establishment, rather than upon the acquisition or disposition of a security.
  • Entry and Re-Entry into the AMR System – Eligible institutional investors that have been disqualified from the alternative monthly reporting (the “AMR”) system would be permitted to enter or re-enter the AMR system once the disqualifying circumstances have ended, subject to the issuance and filing of a news release and a subsequent report.
• Codification of Common Discretionary Exemptions and Elimination of the 5% Market Purchase Exemption for Take-Over Bids – Several commonly requested exemptions would be codified, including relief from the extension take-up requirement, and use of proportionate tenders, in the context of modified Dutch auction issuer bids. The 5% market purchase exemption for bidders during a take-over bid would also be eliminated.

Selective Repurchase Exemption

The Selective Repurchase Exemption would permit issuers to enter into bilateral private agreements to repurchase shares outside the formal issuer bid framework (akin to the existing take-over bid private agreement exemption), subject to the satisfaction of certain conditions (described below). The proposed exemption aims to enhance the competitiveness of Canadian capital markets – selective repurchases have long been permitted in the United States and stakeholders have expressed concern that the restrictions on an issuer’s ability to effect selective buybacks in Canada may inhibit the ability of block holders to obtain liquidity and lead to dispositions of block positions in the market, creating an overhang effect on the issuer’s share price. Securities acquired under the proposed exemption would be in addition to the repurchase limits under the normal course issuer bid and employee, officer, director and consultant exemptions.

The following parameters apply to the Selective Repurchase Exemption:

• Volume Limits – Repurchases may not exceed 5% of the outstanding securities of a class, in each 12-month period, and may be made from no more than five persons in up to five transactions in the aggregate during that period.
• Discount Requirement – The consideration paid for securities, inclusive of any fees or commissions, must be less than the closing price of the class of securities on their principal market on the date of the bid.
• Liquid Market Requirement – A liquid market must exist for the securities, as determined in accordance with applicable rules, and the issuer’s board of directors must determine that the bid would not reasonably be expected to materially reduce market liquidity or have a significant adverse effect on the market price or value of the securities.
• No Material Undisclosed Information – Neither the issuer nor, to its knowledge after reasonable inquiry, the selling securityholder may have knowledge of any material fact or material change in respect of the issuer or its securities that has not been generally disclosed at the date of the bid.

Enhanced Disclosure of Equity Equivalent Derivatives in Specified Circumstances

The Proposed Amendments would require enhanced disclosure of bidders’, activists’ and other soliciting securityholders’ aggregate economic positions (i.e., the combination of beneficial ownership and economic interests in related financial instruments and other agreements, arrangements, or understandings that have the effect of altering the economic exposure to the issuer) in the context of take-over bids and shareholder activism, where an information circular is required to be sent. Through these proposed changes, the CSA seeks to address concerns that derivative-based strategies may influence outcomes without sufficient transparency in circumstances where security holders are induced to make tendering or voting decisions.

Equity equivalent derivatives (e.g., total return swaps and contracts for difference) are generally excluded from early warning reporting requirements unless the securityholder can acquire the underlying securities or direct the voting of securities held by counterparties. In Re Bison Acquisition Corp, however, the Alberta Securities Commission found that, in certain circumstances, derivative-based strategies can be abusive of the capital markets and the target’s securityholders, notwithstanding that the bidder had complied with applicable early warning disclosure requirements. Despite these concerns, the CSA does not propose real-time disclosure of derivative accumulation during stake-building or the aggregation of equity equivalent derivatives with beneficial ownership for purposes of the early warning regime or that any new disclosure of such interests be required for proxy solicitations made in reliance on the “quiet solicitation” or “public broadcast” exemptions.

For bidders, the Proposed Amendments would require:

• disclosure in take-over bid circulars of interests in related financial instruments and other arrangements affecting the economic position of the offeror or joint actors, with a six‑month look-back period;
• issuance of a news release before the opening of trading on the next business day if, during a bid, the offeror acquires or disposes of such interests or enters into, amends or terminates related arrangements; and
• disclosure of relationships between the offeror or joint actors and derivative counterparties that could influence those counterparties’ investment or voting decisions.

For activists and other soliciting securityholders, the Proposed Amendments would:

• deem an acquiror or joint actors to have beneficial ownership or control of securities underlying equity equivalent derivatives during a proxy solicitation for purposes of early warning reporting; and
• require disclosure in information circulars and public broadcast solicitations of beneficial ownership, equity equivalent derivative positions and other arrangements affecting economic exposure.

Amendments to Early Warning Reporting

Plans and Future Intentions Disclosure

The Proposed Amendments include guidance that clarifies the CSA’s expectations regarding acquirors’ “plans or future intentions” disclosure. Specifically, the CSA has observed that acquirors often use broad, boilerplate language to describe their plans or future intentions in early warning reports and rely on such language as a basis for not filing updated reports when there has been a change in intention or specific actions taken that would otherwise trigger the requirement to update the market. The proposed guidance reminds acquirors of the need to reassess their “plans or future intentions” disclosure each time an early warning obligation is triggered and to update such disclosure, if required, including when intentions change or significant steps are taken (even absent definitive agreements, bid launches or proxy solicitations and notwithstanding prior disclosure using general language that reserves the acquiror’s right to take such actions).

Deemed Acquisitions for New Reporting Issuers and Joint Actors

The Proposed Amendments would:

• Require a person who beneficially owns, or exercises control or direction over, 10% or more of the outstanding securities of a class at the time an issuer becomes a reporting issuer, to file an early warning report (rather than relying on the disclosure in the prospectus or other continuous disclosure materials). The news release and moratorium requirements otherwise required to be filed alongside an early warning report would not apply.
• Deem the establishment of a joint actor relationship to trigger the requirement to file an early warning report, without any contemporaneous purchase or sale of securities. The CSA believes the policy purpose of the early warning regime supports this change and refers to the contrasting view of the British Columbia Securities Commission in NorthWest Copper Corp. (the details of which can be found in our Update, British Columbia Securities Commission Provides Guidance on Early Warning and Joint Actor Rules in Proxy Solicitations), in which the commission concluded, consistent with the law in force today, that absent an acquisition, the applicable early warning requirements do not apply.

Entry and Re-Entry into the AMR System

The Proposed Amendments would permit eligible institutional investors to enter or re-enter the AMR system once disqualifying circumstances have ended (relieving existing uncertainty regarding their ability to do so). An eligible institutional investor seeking to enter or re-enter the AMR system would be required to promptly issue and file a news release confirming its eligibility and intention to file under the AMR system and subsequently file a report in accordance with the applicable rules.

Codification of Common Discretionary Exemptions and Elimination of the 5% Market Purchase Exemption for Take-Over Bids

The Proposed Amendments would codify customary exemptive relief to make Dutch auction and proportionate issuer bids work in a manner that better ensures equal treatment of all securityholders. The Proposed Amendments would also eliminate the exemption permitting offerors to make market purchases of up to 5% of outstanding securities of a class during a take-over bid, in light of its limited historical use and concerns that it could be used tactically to deter competing bids.

Concluding Remarks

The Proposed Amendments would, if adopted, represent meaningful changes to the Canadian securities regulatory landscape through reduced regulatory burden and improved transparency.

For further information regarding this Update, please contact any member of our Capital Markets Group.