Take-Over Bids (Part 2): Exemptions

• Author: Christopher Nicholls
• Pages: 194-222

194

CHA PTER 6

TAKE-OVER BIDS (PART2):

EXEMPTIONS

A. INTRODUC TION

The definition of “take-over bid,” for purposes of the Canadian t ake-

over bid regime, as noted in Chapter 5, is extremely broad. As a result,

the onerous, time-consuming, and ex pensive formal take-over bid rules

would apply to a number of transactions where such requirements

would be unnecessari ly and inappropriately burdensome. Exemptions

are therefore available in the cas e of share tr ansactions where legislators

and regulators have decided that, on ba lance, the protections of the for-

mal take-over bid rules a re not necessary. The principal take-over bid

rule exemptions are these:

• normal course purch ase exemption;

• private agreement exemption;

• private (target company) non-reporting issuer exemption;

• foreign bid exemption; and

• de minimis exempt ion.

Of course, securities reg ulators may also grant an exemption from the

application of the take-over bid rules upon application by an interested

party and provided that the regulators are satisfied that granting such

an exemption “would not be prejudicial to the public interest.”1

1 See, for example, Secur ities Act (Ont ario), s 10 4(2).

Take-Over Bids (Part 2): Exemption s 195

B. NORM AL COURSE PURCHASE EXEM PTION

Once a shareholder has acquired a 20 percent voting or equit y interest

in a public corporation, the purchase of any additional shares — even

the purchase of a single share — would constitute a take-over bid within

the meaning of National In strument 62-104. This sweeping coverage was

deliberate, intended to avoid murky interpretation challenges t hat might

weaken the protections the take-over bid rules were intended to provide.

Yet many (perhaps most) purchases of a modest number of securities

do not usually raise the concerns that the statutory t ake-over bid rules

were intended to address. The take-over bid rules t herefore include an

exemption from the formal bid requirements for a purchase of a modest

number of securities th at would otherwise constitute a ta ke-over bid

under the following cond itions:2

1) The bid itself is for not more than 5 percent of the outstanding secur-

ities of a class of the target.

2) Within any t welve-month period, no more th an 5 percent of a class of

outstanding secur ities may be purchased i n reliance on this exemp-

tion.

3) There must be a published market for the class of secur ities purchased.

4) The price paid for the securities acquired must not exceed t he market

price at the time of purchase.3

This exemption is referred to as t he “normal course purchase exemp-

tion.” Although the take-over bid rules in National Instr ument 62-104

generally apply only to the purchase of outstanding securities, rather

than to purchas es from the issuing company itself of newly issued tre as-

ury securit ies, it has been observed th at the 5 percent annual limit now

found in National Instrument 62-104, section 4.1(b) is calculated by

adding the number of outstanding securities subject to the bid to the

number of securities acqui red in all other “acquisitions otherwise made”

by the offeror and anyone acting jointly or in concert with the offeror.

This broad language would appear to include not only purchase s of out-

standing secur ities but also purchases of securities from treasury (that

2 National Inst rument 62-104 [NI 62-104], s 4.1.

3 “Market price” is defi ned for this purpose in NI 62-104, s 1.11. The buyer may

also pay rea sonable brokerage fees and commis sions. In the usual cas e, market

price will me an the simple average of the closing pr ice for the twenty busines s

days precedi ng the acquisition. There are spe cial rules in case s where this

calculat ion cannot be applied or where the secur ity trades on more than one

published market . For further discuss ion of market price in the context of the

private agreeme nt exemption, see Section C(5) below in this ch apter.