OSC upholds minimum tender requirement, signalling it wants predictability in takeover regulation

An Ontario Securities Commission decision dismissing a request for an exemption from a mandatory 50 per cent minimum tender requirement in a takeover bid signals that some bids will have a tough time getting through the regulatory process, says Alex Gorka, partner with Osler, Hoskin & Harcourt LLP.

Gorka says one of the consequences of the condition, in place since 2016, is that it enhances the leverage of significant shareholders (not necessarily majority shareholders) vis-a-vis the bidder and the target. “It may certainly be harder to make a takeover bid in certain situations because there is this extra minimum tender condition that has to be completed,” he says.

In February, the OSC released reasons for its order, made in September, ruling against a request from ESW Capital Inc. for an exemption to new rules that took effect four years ago. ESW was Optiva’s largest shareholder.

However, the OSC rejected ESW’s request. Gorka says the regulatory body stressed the “essential role of predictability” in takeover bid regulation. So, absent exceptional circumstances or improper or abusive conduct, Gorka says the OSC is unlikely to grant exemptive relief in most cases where the minimum tender requirements are not met.

“In summary, there were no exceptional circumstances or abusive or improper conduct that undermined minority shareholder choice to warrant intervention by the Commission,” the OSC commissioners wrote. “Predictability is an important aspect of takeover bid regulation and the Commission must be cautious in granting exemptive relief that alters the recently recalibrated bid regime.”

“This case signals the OSC wants to stick to the established rules of the regime, and it is not going to be willing to grant exemptions absent something truly exceptional or improper, which it did not find here,” Gorka says.

He adds this is the first test of the OSC’s new minimum tender requirement. However, an earlier decision involving a request to shorten the 105-day minimum tender period in a bid by Aurora Cannabis Inc. to acquire its competitor CanniMed Therapeutics Inc. used the same reasoning.

Aurora sought to shorten the initial deposit period to 35 days, expiring in advance of the various scheduled shareholders’ meetings for approval of CanniMed’s bid to acquire Newstrike Resources.

The OSC wrote in dismissing Aurora’s request: “Given the rebalancing that has occurred as a result of the amendments to the Canadian takeover bid regime, we are reluctant to make piecemeal changes to timing requirements that affect planning by bidders and target companies.”

In the ESW case, the OSC noted that this minimum tender condition could result in bids not being made at all or shareholders unable to respond to a bid. Gorka says that even the “extraordinary premium” ESW offered minority shareholders was insufficient to justify the granting of exemptive relief.

ESW had sought the exemption from the mandatory minimum tender requirement before it would formally launch an unsolicited offer to acquire the outstanding shares of Optiva that it did not already own.

Since May 2016, formal takeover bids under National Instrument 62-104 Takeover Bids and Issuer Bids have been subject to a mandatory minimum tender requirement of more than 50 per cent of the outstanding securities of the class that are subject to the bid, excluding those beneficially owned by the bidder and its joint actors. The goal of those amendments was really to promote fairness to shareholders within the takeover regime, Gorka says.

ESW had offered a 122 per cent premium bid to the 20-day volume-weighted average price and a 92 per cent premium to the 10-day closing high of Optiva shares. However, rival shareholders Maple Rock Capital Partners Inc. and EdgePoint Investment Group Inc., insiders that collectively owned just over 40 per cent of Optiva, were expected to reject ESW’s offer, prompting ESW’s request to the OSC.

Gorka says that under the rules, ESW’s 28 -per-cent share would be subtracted from the total, leaving 72 per cent. Of those remaining shares, a minimum of half of those, or 36 per cent, had to tender to the bid. However, Gorka says Maple Rock and Edgepoint together had in their 40 per cent stake enough to stop any takeover.

“That’s why a discretionary exemption was needed from the OSC to see this deal go through,” says Gorka. ESW had proposed to the OSC that the minimum tender requirement should be a majority of the shares held by shareholders other than ESW, Maple Rock and EdgePoint.

Gorka notes that two major shareholders could block a bid in this instance, but it “can cut” both ways.

“Sometimes a major shareholder might act as a de facto negotiator on behalf of the minority shareholders and get the minority a better deal,” he says. “But in this case, the two shareholders weren’t interested in proceeding, and therefore minority shareholders weren’t able to get the benefit of that 122 per cent premium.”

Gorka notes that ESW agreed in early March to sell all of its Optiva subordinate voting shares in a private transaction to OceanLink Management Ltd., EdgePoint Investment Group Inc., Maple Rock Capital Partners and Meson Capital. ESW has also agreed to terminate all its related party agreements with Optiva and waive specific provisions to acquire shares held directly or indirectly by ESW through the exercising warrants.

The players “obviously came to some sort of deal.”