Takeover Bids (Part 2): Exemptions

• Author: Christopher C. Nicholls
• Profession: Faculty of Law, University of Western Ontario
• Pages: 166-194

166

Cha pter 6

tAkeover bids

(pArt 2): exeMptions

a. Int roduC tIon

The def‌inition of “take-over bid” for purposes of the Canadia n take-

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

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

would apply to many transactions where such requirement s would be

unnecess arily and i nappropriately burdensome. Exemption s are there-

fore available in the case of share transactions where legislators and

regulators have decided that, on bal ance, the protections of the formal

takeover bid rules are not necessary. The principal takeover bid rule

exemptions are these:

• normal course purch ase exemption;

• private agreement exemption;

• private (target company) non-reporting i ssuer exemption;

• foreign bid exemption; and

• de minimis exempt ion.

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

application of the takeover bid rules upon application by an interested

party, and provided the regulators are satisf‌ied that granting such an

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

1 Securities Ac t (Ont ario), s. 104(2).

Takeover Bids (Part 2): Exemptions 167

B. norm al Course purChase exemptIon

Once a shareholder has acquired a 20 percent voting or equity i nter-

est 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 mea ning of Multilateral Instr ument 62-104 and the Ont ario

Securities Act. This sweeping coverage was deliberate, intended to avoid

murky interpretation challenges t hat might weaken the protections the

takeover bid rules were intended to provide.

Yet many (perhaps most) purchases of a modest number of secur-

ities do not usually raise the concerns that the statutory takeover bid

rules were intended to address. The ta keover bid rules therefore in-

clude an exemption from the formal bid requirements for a purchase

of a modest number of securities that would otherwise constitute a

takeover bid under the following conditions:2

1. No more than 5 percent of the outstand ing securities of a class of

the target may be purchas ed in any twelve-month period.

2. There must be a published market for the class of securities pur-

chased.

3. The price paid for the securities acquired must not exceed the mar-

ket price at the time of purchase.3

This exemption is referred to as the “norm al course purchase exemp-

tion.” Although the takeover bid rules in Multilateral Inst rument 62-

104 and the Ontario Securities Act Par t XX generally apply only to the

purchase of outstanding s ecurities, rather than to purchases from the

issuing company itself of newly-issued treasury secur ities, it has been

observed that the 5 percent annual limit now found in Multilateral In-

strument 62-104, section 4.1 (b) and in Ontario Securities Act, section

100 2 is calculated by adding the number of outstanding securities sub-

ject to the bid to the number of securities acquired in all other “acqui-

sitions otherwise made” by the offeror and anyone acting jointly or in

concert with the offeror. This broad language would appear to include

not only purchases of outstanding securities, but also purcha ses of se-

2 Multilatera l Instrument 62-104 [MI 62-104], s. 4.1; Securities Act (Ontario), s. 100.

3 “Market price” is def‌ine d for this purpose in MI 62-104, s. 1.11 and OSC Rule

62-504, s. 1.3. In the usual cas e, market price will mean t he simple average of

the closing pr ice for the twenty business d ays preceding the acquis ition. There

are specia l rules in cases where t his calculation can not be applied or where the

security t rades on more than one published m arket. For further discu ssion of

“market pr ice” in the context of the private agre ement exemption, see Section

C(5), below in this chapter.