info-suisse April-May 2009
Law
April 2009

A Primer on Canadian Securities Law

(Barry Webster)

By Barry Webster of LETTE WHITTAKER, Barristers & Solicitors, Toronto

Despite a recent downturn in activity due to the global credit crisis, Canadian public mergers and acquisitions (“M&A”) transactions continue to be announced. This article serves as a general introduction to the Canadian public company M&A framework (a public company being one that is listed on the stock exchange). Current trends in Canadian M&A activity are discussed elsewhere in this publication.

Regulation
Trading in securities, which includes M&A transactions, is regulated in Canada by securities laws enacted by each of the provinces and territories in Canada. These laws are created and enforced by provincial and territorial securities commissions. From time to time, the securities commissions will create multilateral instruments so that certain aspects of securities laws in Canada are effectively harmonized. For example, on February 1, 2008 the securities commissions substantively harmonized the law governing takeover bids, although the new regime is administratively structured differently in Ontario compared to the other jurisdictions.

Notwithstanding various efforts by the securities commissions to harmonize securities laws, past and present federal governments and market participants have strongly attempted to convince the provinces to accept a single securities regulator. Very recently, an expert panel on securities regulation in Canada submitted its final report, which recommended the provinces and territories willingly adopt a comprehensive securities act that would establish a single Canadian securities regulator. The panel has also recommended that if, after a reasonable period of time, a sufficient number of provinces and territories do not participate willingly, the federal government should proceed to offer public market securities participants (issuers and registrants) the opportunity to join a single national regime.

Takeover Bids
The majority of M&A transactions pertaining to public companies proceed by way of either a takeover bid or a plan of arrangement. Generally speaking, a takeover bid is a transaction that involves the acquirer making an offer directly to the target company’s shareholders to acquire their shares. From a securities law perspective, a takeover bid is any acquisition of (or obtaining control or direction over) securities that would result in the acquirer holding twenty per cent or more of the voting or equity securities of any class of a Canadian public issuer. Once a transaction is a takeover bid, a host of highly technical securities rules and regulations must be observed. Arguably, the most important of these is that if an offer is a takeover bid, it must be made to all of the security holders of the class on the same terms and conditions. The offer, however, may be for less than all of the securities and, in that case, each security holder has the right to a pro rata take-up of their shares.

An exemption from the takeover bid rules is available in certain circumstances. The most common is the “private agreement” exemption, whereby purchases may be made by way of private agreement with five or fewer vendors if the purchase price (including brokerage fees and commissions) does not exceed 115 per cent of the market price of the securities. The takeover bid rules provide that the offeror may not enter into any side agreements, which effectively increases the consideration paid to some securities holders, although recent amendments permit certain employment and severance arrangements for management and other employees of the target who are also securities holders.

There are numerous additional detailed rules that apply to takeover bids. These include a requirement that the offeror prepare and mail to the shareholders a circular that must set out prescribed information relating to the transaction and the terms and conditions of the offer. The takeover bid must be filed with the securities commissions but is not subject to a pre-clearance review.

Canadian takeover bids are often highly conditional. One of the most common conditions requires that the bid attain a minimum level of acceptance. This level is frequently set at 66.6% (the threshold approval for certain fundamental corporate transactions) or 90% (the level that generally gives the purchaser the right to acquire the balance of the securities - referred to as the “compulsory acquisition” or “second stage squeeze out”). Another typical condition requires the buyer to have obtained regulatory approval under legislation such as the Competition Act and the Investment Canada Act, if applicable. It is to be noted, however, that a takeover bid cannot be made conditional on financing.

Plans of Arrangement
Friendly acquisitions often take place by way of plan of arrangement rather than takeover bid. A plan of arrangement is a court approved process governed by the corporate law of the target company. Generally speaking, an arrangement allows the parties to undertake a wide variety of corporate steps under the relevant corporate statutes. These steps include: the amalgamation of two or more companies; the division of businesses carried on by a corporation; a transfer of property from one body corporate to another; the exchange of securities between companies; the liquidation of a corporation; and, any combination of the foregoing.

The acquisition process is initiated by an arrangement agreement that sets out the basis for the business combination, following which an application is made to court for approval of the process. The court order will require the calling of a shareholders’ meeting and will specify the approval thresholds (typically, two-thirds of the votes cast) and dissent rights. A detailed meeting circular is then sent to the shareholders, providing the equivalent level of disclosure of a takeover bid circular.

Compared to takeover bids, plans of arrangement are generally considered to offer enhanced flexibility in M&A transactions because they are less rule-driven and allow the parties to achieve their corporate goals through a broad array of methods.

LETTE is an international law group with offices in Canada (Montréal, Toronto), France (Paris), and Germany (Munich, Ulm), and a network of close correspondents around the globe, including Switzerland. Please go to Member Profile Profile in the April/May 2009 issue of our info suisse publication to read in more detail about this SCCC/CCCS member.

SCCC Corporate Members
  • Rolex Canada Ltd.
  • Zurich Canada
  • Habib Canadian Bank  (Subsidiary of Habib Bank AG Zurich)
  • Custom Spring Corporate
  • Lette LLP
  • Swiss Business Hub
  • Roche Canada
  • Swissmar Ltd.
  • Hilti (Canada) Corporation
  • Endress + Hauser Canada Ltd
  • Switzerland Tourism
  • Adecco Employment Services Limited
  • Glencore
  • Lindt & Spruengli (Canada) Inc.