Take-Over Bids (Part 1): The Regulation of Takeovers and Formal Bid Rules

• Author: Christopher Nicholls
• Pages: 119-193

119

CHA PTER 5

TAKE-OVER BIDS (PART 1):

THE REGULATION OF

TAKEOVERS AND

FORMAL BID RULES

A. INTRODUC TION

The phrase take-over bid is sometimes used by American lawyers as a n

imprecise synonym for “corporate acquisition” and sometimes as a syno-

nym for the particula r acquisition techn ique known in t he United States

as a “tender offer.” In Canada, t he term tender offer is not used or defined

in securities or corporate law statutes. However, the phrase take-over

bid has a very speci fic meaning under provincial securities legislation.

That technical statutory definition will be considered at length l ater in

this chapter. For the moment, it will be sufficient to say t hat the phrase

“take-over bids,” in Canada, refers to purchases of (or offers to purchase)

shares under certain legislatively defined circum stances that the legis-

lators (or regulators) have decided could likely result in the purchaser

attaining practical or effective control over a corpor ation.

Make no mistake: the general description in the preceding para-

graph is only intended at this point to sug gest to the reader an intuitive

explanation of why we regulate take-over bids at all. The actual def-

inition of take-over bid found in Canadian legislation and regulatory

instruments does not simply rely on vague, subjective concepts. On

the contrary, it uses a clear bright-line test: e ssentially a purchase of

(or offer to purchase) shares that will constitute at least 20 percent of

a class of a corporation’s outstanding voting or equity shares, when

the shares subject to the offer are combined with any shares of that

class that t he purchaser or offeror already owns. Such a bright-line

MERGERS AND ACQUISITIONS120

test markedly dist inguishes Canad ian takeover law from otherw ise

comparable US federal “tender offer” legislation.

In the United States, the Will iams Act1 (which refers to sections

13(d)–(e) and 14(d)–(e) of the Securities Exchange Act of 1934) contains

many provisions and protections t hat are similar to those found in Can-

adian take-over bid legislation. In the case of the US rules, the se provi-

sions are triggered when a sha re acquisition is made by way of a “tender

offer.” Yet the US legislation does not actually define the ter m tender

offer.2 To leave undefined what is arguably the most pivotal concept

in the legislation may well strike a Canadian re ader as peculiar. Many

leading American commentators have also puzzled over this del iberate

legislat ive omission.3 In 1979, the US Securities and Exchange Com-

mission did propose a rule th at would have defined the term tender

offer,4 but this attempt was ultimately abandoned. Having chos en to

regulate take-over bids in t he first place, why was it, as one commen-

tator has asser ted, that the Williams Act “intentionally did not define”5

the phrase upon which so much of the Willi ams Act depended? It may

well have been thought that, at the time of the statute’s enactment,

there was a sufficiently understood conventional understanding of the

term “tender offer”6 or that a bright-line test might have pulled more

transactions i nto the Williams Act orbit than either Congress desired

or the business community could tolerate.

There is an additional wrinkle in the fabric of US take-over bid

regulation. The principal source of secur ities regulation for publicly

traded corporations in t he United States is federal,7 whereas corporate

1 These provision s are referred to collectively a s the “Williams Act” af ter the

origina l sponsor of the legislation, S enator Harrison Wil liams.

2 Determin ing whether or not a particula r transaction is a “tender of fer” in the

United States t ypically involves applyi ng an “eight factor test,” articulated in

Wellman v Dickinson, 475 F Supp 783 (SDNY 1979).

3 See, for example, Loui s Loss & Joel Seligman, Sec urities Regulation, 3d ed, vol

5 (New York: Aspen Law & Busi ness, 1989) ch 6 at 2198: “[I]t is odd that, with

everyth ing in 14(d)–(f) t urning on the existenc e of a ‘tender offer,’ that term is

defined by neithe r statute nor rule.”

4 See Ronald J Gils on & Bernard S Black, The Law an d Finance of Corporate Acqui-

sitions, 2d ed (Westbur y, NY: Foundation Pre ss, 1995) at 981.

5 Steven M Davidoff, “The SEC and the Fai lure of Federal Takeover Regulation”

(2007) 34 Florida State University L aw Review 211 at 221.

6 See “The Developing Meaning of Tender Offer Under t he Securities Excha nge

Act of 1934” (1973) 86 Harvard Law Review 125 0 at 1250.

7 As Robert a Romano of the Yale Law School has noted , although there certain ly

is state-level sec urities legislation i n the United States, “as a general ization,

it would be most descr iptively accurate to say that fede ral securities law h as

occupied the secu rities field and that st ate law development has been marg inal”:

Take-Over Bids (Part 1): The Regulat ion of Takeovers and Formal Bid Rules 121

law is exclusively a state matter. Thus, there have been many impor tant

US state corporate law developments relating to busine ss combinations

and control share acquisitions th at significantly affect the way in which

the control of corporations changes ha nds. No more will be said of the

US regime here, although in the materia l that follows it will be use-

ful from time to time to dr aw insights and comparis ons from the rich

American experience.

The regulation of take-over bids in Canada has a lengthy history.

Philip Anisman h as chronicled this hi story in some depth.8 Only a

few of the more recent highlights will b e touched on here. At one

time, many decades ago, Canada had a Code of Procedure on “Takeover

Bid s” developed by self-regulatory organi zations.9 Since 1966, however,

securities legi slation in Ontario, Canada’s largest province, h as included

detailed take-over bid rules, other Canadian provinces h ave followed

suit, and, as discu ssed below, through the cooperative efforts of provin-

cial securities regulators, a uniform scheme of take-over bid regul ation

is now in place Canada-wide.

As the Dickerson Committee noted in 1971, most of the provisions

on take-over bids origina lly set out in Ontario’s Securities Act were

“derived from the United Kingdom ‘City Code on Takeovers and Mer-

gers’ of March 27, 1968 and its predecessors.”10 The common ancestry

of Canada’s current takeover rules and the most recent version of the

City Code (now called the Takeover Code) is still discernible, but there

have been significant developments on both sides of the Atlantic that

have resulted in a number of critic al differences between Canadian a nd

UK takeover rules tod ay.

Prior to 2001, the federal business corporation statute, the Ca n-

ada Business Corporations Act (CBCA), also contained its own take-over

bid provisions. These rules applied, of course, only to takeovers of

Roberta Rom ano, The Advantage of Competitive Federalism for Securitie s Regula-

tion (Washington: The A EI Press, 2002) at 2.

8 Philip A nisman, Takeover Bid Legislation in Ca nada: A Comparative Analysis

(Toronto: CCH Canadian Limite d, 1974).

9 Ibid at 4. This code of procedure, “A Recommended Code of Proce dure to be

Applied in Connect ion with Take-over Bids,” was produced in 1963 with i nput

from various i ndustry groups, includin g the Investment Dealers As sociation

of Canada and C anadian stock excha nges. However, the Kimber Committee,

writing i n 1965, indicate d that this voluntar y code “appears not to have been

followed in many ca ses.” See Report of the Attorne y General’s Committee on

Securities Leg islation in Ontario ( JR Kimber, Chair) (Toronto: Ministry of the

Attorney Genera l, March 1965) at 3.06 [Kimbe r Report].

10 Robert WV Dic kerson, John L Howard, & Leon Getz, Propos als for a New Business

Corporations Law for Can ada, vol 1, Commentary (Ottawa: Information Canada,

1971) at para 427.