Insider Bids, Going-Private Transactions, and Other Business Combinations

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, University of Western Ontario
• Pages: 283-330

283

Cha pter 8

insider bids, going-

privAte tr AnsActions,

And other business

coMbinAtions

a. Int roduCtIon

Special rules apply when corporate tr ansactions have been init iated by

persons likely to have in side knowledge or special inf‌luence or control

over publicly traded corporations. Regulator y concern about the poten-

tial abuse of minorit y shareholders in such related-party transactions

might be expected to be a more pressing issue in Canada t han in the

United States because of the ow nership structure characterist ic of many

Canadian public corporat ions. In the United States, most of the largest

publicly traded corporations have widely di spersed share ownership.

Controlling shareholders of large corporations are rel atively rare. Ac-

cordingly, the principal agency concern arise s from the possibility of

unconstrained man agerial opportunism, since effective monitoring of

corporate managers by shareholders is l acking, and collective action

problems make it diff‌icult for shareholders to act to replace underper-

forming managers.

However, in Canada, although there certain ly are a number of large

corporations with w idely dispersed shareholdings, the relative signif‌i-

cance of such corporations is different. So it is, as Daniels and Morck

have argued, that the prevalence of controlling sh areholders in Can-

Mergers And Acquisitions284

adian public corporations, mean s that “dealing with controlling share-

holders is . . . the central issue in Canadian corporate governance.”1

Following a lengthy evolutionary process, Can adian securitie s

regulators have developed regulatory instruments aimed at addre ssing

the principal issues raised by major corporate tran sactions involving

insiders or other persons rel ated to the corporation. The most important

of these today is Multil ateral Instrument 61-101,2 which was adopted in

Ontario and Quebec in 20 08. This Multilateral Instrument supersedes

Ontario Secur ities Commission (OSC) Rule 61-501, and, in Quebec,

Autorité des marchés f‌inanciers (“AMF”) Regulation Q-27 (formerly

Policy Q-27). There are four basic categories of transactions for which

special rules are thought necessary to protect minority shareholders:

• insider bids;

• issue r bids;

• related party transactions; and

• going-private transactions and other “business combinations.”

Although related party transactions can cert ainly include sales or pur-

chases of major busines s assets, the other three forms of transaction

are more central to the conduct of mergers and acquisitions in Can ada,

and so are the focus of the remainder of this chapter.

B. Issuer BIds and InsIder BIds

Canadian sec urities regulators have long been aware of the need to

scrutinize corporate transactions in which there may be signif‌icant in-

formation or power imbalances. In 1976, the Ontario Securities Com-

mission became concerned t hat there were no specif‌ic rules (other than

under the Canada Business Corporations Act) dealing w ith the purchase

by a corporation of its own shares (popularly known as a share buy-

back, or more formally in Canada as an “issuer bid,” or in the U.S. as

an “issuer self tender offer”). To address these concerns, the OSC for-

mulated a policy statement dealing specif‌ically with such purcha ses,

OSC Policy 3-37.3 Policy 3-37 required an issuer intending to purchase

its own securities to prepare an information circular containing dis-

1 Ronald J. Daniel s & Randall Morck, Canadi an Corporate Governance Policy

Options, Discussion Paper No. 3 (Ottawa: Indu stry Canada, Ma rch 1996) at 28,

online: htt p://corporationscan ada.ic.gc.ca.

2 (2008), 31 OSCB 1321 [MI 61-101].

3 Ontario Policy No. 3-37, [1977] OSCB 253.

Insider Bids, Goi ng-Private Transactions, a nd Other Business Combin ations 285

closures prescribed in Appendix B of the policy statement. This infor-

mation circular was t hen to be f‌iled with the OSC and mailed to the

holders of securities subject to the bid. In addition, the policy stated

that issuer bids were to be made i n compliance with a number of the

takeover bid rules in the Secur ities Act.

One of the items in Appendix B required disclosure of “any apprais-

al or valuation known to the directors or off‌icers of t he issuer, regarding

the issuer, its material a ssets or securities w ithin the two years preced-

ing the date of the bid.” Policy 3-37 would later mark an important step

in the development of the regulatory approach to “going-private trans-

actions” as discuss ed in some detail later in this chapter. However, with

respect to issuer bids t hemselves, no more will be said here. An issuer

bid, after all, is not an acquisition tr ansaction in the sense t hat it repre-

sents a change in corporate control, although it has occ asionally been

suggested that an is suer bid can be used to effectively place control of a

corporation in the hands of its incumbent managers.

One special category of acquisition transaction that does mer it par-

ticular mention here, however, is the “insider bid.” An insider bid is

not typically def‌ined in provincial securities st atutes, but is def‌ined in

Multilateral Instr ument 61-101 to mean:

a take-over bid made by

(a) an i ssuer insider of the offeree issuer,

(b) an associate d or aff‌iliated entity of a n issuer insider of the of-

feree issuer,

(c) an a ssociated or aff‌iliated entity of t he offeree issuer,

(d) a person or company described i n paragraph (a), (b) or (c) at any

time withi n 12 months preceding the commencement of the bid, or

(e) a joint actor w ith a person referred to in para graph (a), (b), (c) or (d);4

Insider bids raise sp ecial concerns. Since insiders, by virtue of thei r

positions, have access to inform ation about the corporation that is not

generally available to the corporation’s shareholders, the insiders are

in a far better position tha n ordinary shareholders to as sess the cor-

poration’s future prospects and determine the value of the cor poration’s

assets and business. Of course, we should expect that a corporation’s

public shareholders are also well aware of thi s information asymmetry,

and so will greet w ith appropriate caution any offer to purchase their

shares they may receive from information-privileged insiders. But this

4 MI 61-101, s. 1.1. Needless t o say, a number of the ter ms found within thi s

def‌inition are a lso specif‌ically def‌i ned in MI 61-101, including issuer insider, af-

f‌iliated entity, associated entity, and joint actors.