Takeover Bids (Part 1): Formal Bid Rules

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, University of Western Ontario
• Pages: 104-165

104

Cha pter 5

tAkeover bids (pArt 1):

forMAl bid rules

a. Int roduC tIon

The phrase takeover bid is sometimes used by A merican lawyers a s an

imprecise synonym for “corporate acquisition,” and sometimes as a

synonym for the particular acquisition technique known in the United

States as a “tender offer.” In Canada the term tender offer is not used or

def‌ined in securitie s or corporate law statutes, but the phrase take-over

bid has a very specif‌ic meaning under provincial securities legislation.

That technical statutory def‌inition will be considered at length later in

this chapter. For the moment, it will be suff‌icient to say th at “ta ke-over

bids,” in Canada, refer to purchases of share s (or offers to purchase)

under certain statutori ly def‌ined circumstances t hat the legislators

have decided could likely result in the purcha ser attaining practical or

effective control over a cor poration.1

Make no mistake: the general de scription in the preceding par a-

graph is only intended to suggest to the reader an intuitive explanation

of wh y we regulate “takeover bids.” The actual def‌inition of takeover

bid found in the statute books does not rely on any vague, subjective

concepts. It uses a clear “bright-line” test, namely, a purchase (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 combined

1 For a more detailed rev iew of Canadian takeove r bid rules, see Jeffrey G. MacIn -

tosh & Christ opher C. Nicholls, Securities Law (Toronto: Irwin L aw, 20 02) c. 10.

Takeover Bids (Part 1): Formal Bid Rules 105

with any shares of t hat class that the purchaser or offeror already ow ns.

Such a bright-line test markedly disti nguishes Canadian takeover law

from otherwise comparable U.S. federal “tender offer” legislation.

In the United States, the Will iams Act2 (which refers to sections

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

many provisions and protections th at are similar to those found in

Canadian t akeover bid legislation. In the case of the U.S. rules, these

provisions are trig gered when a share acquisition is made by way of

a “tender offer.” Yet, the U.S. legislation does not actually def‌ine the

term tender offer. To leave undef‌ined what is arguably the most pivotal

concept in the legislation may well str ike a Canadian reader as peculi ar.

Many leading Americ an commentators have also puzzled over thi s de-

liberate legislative omi ssion.3 In 1979, the U.S. Securitie s and Exchange

Commission did propose a rule t hat would have def‌ined the term tender

offer,4 but this attempt was ultimately abandoned. Why did Congress

choose not to def‌ine a phrase upon which so much of the Willi ams Act

depended? It may well have been thought that a bright-line test might

have pulled more transactions into the Williams Act orbit than either

Congress desired or the business community could tolerate.

There is an additional wri nkle in the fabric of U.S. takeover bid

regulation. The principal source of secur ities regulation for publicly

traded corporations in t he United States is federal,5 wherea s corporate

law is exclusively a state matter. Thus, there have been many import ant

U.S. state corporate law developments relating to busines s combina-

tions and control share acquisitions that signif‌icantly affect the way i n

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

of the U.S. regime here, although in the material t hat follows it will be

useful from time to time to draw insights and comparisons from the

rich Amer ican exp erience.

2 These provision s are referred to collectively a s the “Williams Act” a fter the

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

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

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

everyth ing in 14(d)– (f ) turning on the exi stence of a ‘tender offer,’ that term is

def‌ined by neither st atute nor rule.”

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

Acquisitions, 2d ed. (West bury, NY: Found ation Press, 1995) at 981.

5 As Roberta Rom ano of the Yale Law School has noted, alt hough there certainly

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 fed eral securities law h as oc-

cupied the secur ities f‌ield and that state l aw development has been margi nal.”

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

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

Mergers And Acquisitions106

The regulation of takeover bids in Canad a has a lengthy history.

Philip Anisman h as chronicled this hi story in some depth.6 Only a few

of the more recent highlights wil l be touched on here. At one time, ma ny

decades ago, Canada had a Code of Procedure on “Takeover Bids” de-

veloped by self-regulatory organiz ations.7 Since 1966, however, securities

legislation in Ontar io, Canada’s largest province, has included detailed

takeover bid rules, and other Can adian provinces have followed suit.

Prior to 2001, the federal business corporation statute, the Canada

Business Corporati ons Act (“CBCA”), also contained its own takeover bid

provisions. These rules applied, of course, only to t akeovers of corpo-

rations incorporated under the CBCA. With the repeal of those provi-

sions, however, provincial securities regu lation is now the sole source of

Canadian formal takeover bid legislation. A perceived need for greater

consistency and har monization of takeover bid regulation across Can-

ada has prompted signif‌ica nt co-operative efforts amongst Canada’s

securities regulators. In April 2006 the Canadian Securities Ad minis-

trators, the umbrella organi zation to which all of Canada’s provincial

and territorial s ecurities regulators belong, released for comment pro-

posed National Instr ument 62-104.8 In 2008, a successor to t his instru-

ment, Multilateral Instr ument 62-104, was adopted in every province

and territory in Canada except Ontario. Although Ontar io chose not to

adopt Multilateral Instrument 62-104, concurrent amendments to the

takeover bid provisions in Ontario’s Securities Act and related OSC Rule

have led to essential n ational uniformity in t akeover regulation.

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

on takeover bids originally set out in Ontario’s Securities Act wer e “de-

rived from the United Kingdom ‘City Code on Takeovers and Mergers’

of March 27, 1968 and its predece ssors.”9 The common ancestry of Can-

ada’s current takeover rules and t he most recent version of the City

6 Philip Anisman, Takeover Bid L egislation in Canada: A Comparat ive Analysis

(Toronto: CCH Canadian Limit ed, 1974).

7 Ibid. at 4. This code of procedure, “A Recommended C ode of Procedure to be ap-

plied in connect ion with Takeover Bids” was produced in 1963 wit h input from

various indu stry groups, including t he Investment Dealers As sociation of Can-

ada and Cana dian stock exchanges. Howeve r, th e Kimber Committee, wr iting

in 1965, indicated that t his voluntary code “appea rs not to have been followed

in many cas es.” Se e Report of the Attorney Ge neral’s Committee on Securities

Legislation in O ntario (J.R. Kimber, Cha ir) (Toronto: Minist ry of the Attorney

General, Mar ch 1965) at 3.06 [Kimber R eport].

8 (20 06), 29 OSCB 3533 [Proposed NI 62-104].

9 Robert W.V. Dickerson, John L. Ho ward, & Leon Getz, Proposals for a New

Business Corporatio ns Law for Canada, vol. 1, Commentary (Ottawa: Infor mation

Canada, 1971) at para. 427.