Insider Bids, Going-Private Transactions, and Other Business Combinations
Author | Christopher Nicholls |
Pages | 324-372 |
324
CHA PTER 8
INSIDER BIDS, GOING-
PRIVATE TR ANSACTIONS,
AND OTHER BUSINESS
COMBINATIONS
A. INTRODUCTION
Special rules apply when corporate transactions have been initiated by
persons likely to have in side knowledge or special influence or control
over publicly traded corporations. Regulator y concern about the potential
abuse of minority shareholders in such related-party trans actions might
be expected to be a more pressing issue in Canada than in the United
States because of the ow nership structure character istic of many Can-
adian public corporations. In the United St ates, the largest publicly traded
corporations typica lly have widely dispersed share ownership. Control-
ling shareholders of large corporations are rel atively rare. Accordingly,
the principal agency concern ar ises from the possibility of unconstrained
managerial opport unism, since effective monitoring of corporate man-
agers by shareholders is lacking, and collective action problems make it
difficult for shareholders to act to replace underperforming managers.
However, in Canada, although there certain ly are a number of large
corporations with w idely dispersed shareholdings, t he relative signifi-
cance of such corporations is different. So it is, as Daniels and Morck
have argued, that the prevalence of controlling shareholders in Can-
adian public corporations mean s that “dealing with controlling share-
holders is . . . the central issue in Can adian corporate governance.”1
1 Ronald J Daniel s & Randall Morck, Canadi an Corporate Governance Policy
Options, Discussion Paper No 3 (Ottawa: I ndustry Canada, Ma rch 1996) at 28,
online: http://corporationsc anada.ic.gc.ca.
Insider Bids, Goi ng-Private Transactions, and O ther Business Combinat ions 325
Following a lengthy evolutionary process, Canadian securities
regulators have developed regulatory i nstruments aimed at addre ssing
the principal issues raised by major corporate transactions 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 2008 and by Alberta, Ma nitoba, and New
Brunswick in 2017. The instrument has also been adopted as a policy
of the TSX Venture Exchange.3 This Multilateral Instr ument super-
seded Ontario Securities Commission (OSC) Rule 61-501 and, in Que-
bec, Autorité des marchés financiers (AMF) Regulation Q-27 (formerly
Policy Q-27). MI 61-101 is an important regu latory instrument, and CSA
staff have indicated t hat they “expect market participa nts to take a . . .
broad and purposive interpretation of MI 61-101 and to adopt practices
designed to effectively mitigate conf licts in materia l conflict of interest
transactions.”4
There are four basic categories of transact ions for which special
rules are thought necessary to protect minority shareholders:
• insider bids;
• is suer bid s;
• related par ty transactions; and
• going-private transactions and other “business combinations.”
Although related party transactions can certainly 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 remai nder of this chapter.
B. ISSUER BIDS AND INSIDER BIDS
Canadian sec urities regulators have long been aware of the need to scru-
tinize corporate transactions in which t here may be significant informa-
tion or power imbalances. In 1976, the Ontario Securitie s Commission
became concerned that there were no specific rules (other than under
the Canada Business Corporations Act) dealing with t he purchase by a
corporation of its own shares (popularly known as a share buyback, or
2 (2008), 31 OSCB 1321 [MI 61-101].
3 TSX Venture Exchange, Corporate Fina nce Manual, Policy 5.9, online: www.tsx.
com/resource/en/ 701.
4 CSA Staff Notic e 61-302 Staff Review and Comm entary on Multilateral I nstru-
ment 61-101 Protection of Minorit y Security Holders in Spec ial Transactions
(2017) 40 OSCB 6577 at 6578.
MERGERS AND ACQUISITIONS326
more formally in Canada as an “issuer bid” and in the United States
as an “issuer self tender offer”). To address these concerns, the OSC
formulated a policy statement dealing specifically with such purch ases,
OSC Policy 3-37.5 Policy 3-37 required an issuer intending to purcha se
its own securities to prepare an information circular containing disclo-
sures prescribed in Appendix B of the policy statement. This informa-
tion 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 in compliance with a number of the take-over bid
rules in the Securities Act.
One of the items in Appendix B requi red disclosure of “any appraisal
or valuation known to the directors or officers of the 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. Although
the proliferation of share buybacks by major corporations h as undoubt-
edly become an important and at times controversial phenomenon in
Canada,6 the United State s, and elsewhere, an issuer bid is not an acqui-
sition transaction in t he sense that it represents a cha nge in corporate
control, although it has occasionally been suggested that an issuer 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 securitie s statutes, 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) a n associated or affil iated entity of an issuer ins ider of the offeree
is suer,
(c) an a ssociated or affiliated ent ity of the offeree issuer,
5 Ontario Policy No 3-37, [1977] OSCB 253.
6 See, for example, Geoff Zochod ne, “‘The American Disea se’: Canadian Com-
panies Pouri ng Cash into Stock Buybacks as B acklash Grows Abroad,” Finan-
cial Post (21 August 2019), online: https: //business.fin ancialpost.com/ news/
fp-street /the-american- disease-c anadian-compan ies-pouring-ca sh-into-stock-
buybacks-as-b acklash-grows-abroad.
To continue reading
Request your trial