Law and Government Division
25 January 2000
TABLE OF CONTENTS
PRIVATE CORPORATIONS EXEMPTION
MINIMUM BID PERIOD
bid can be described as "an offer to all or most shareholders to purchase shares of a
corporation, where the offeror, if successful, will obtain enough shares to control the
target corporation."(1) The Canada Business
Corporations Act (CBCA) defines a take-over bid as follows:
. . . an
offer, other than an exempt offer, made by an offeror to shareholders at approximately the
same time to acquire shares that, if combined with shares already beneficially owned or
controlled, directly or indirectly, by the offeror or an affiliate or an associate of the
offeror on the date of the take-over bid, would exceed ten percent of any class of issued
shares of an offeree corporation and includes every offer, other than an exempt offer, by
an issuer to repurchase its own shares.(2)
bid provisions of the CBCA were first enacted as part of the Canada Corporations Act
and subsequently transferred to the CBCA in 1975.(3)
Their principal objective is to protect the rights and interests of the parties involved
in a take-over bid -- the offeror, shareholders and the target corporation by:
bid provisions of the CBCA apply to all CBCA corporations whose shares are publicly traded
or that have more than 15 shareholders. Because provincial securities laws also apply to
take-over bids, a publicly traded CBCA corporation that is the target of a take-over bid
may have to comply with both the CBCA and provincial securities laws.(5)
1996, Industry Canada released the Discussion Paper Canada Business Corporations Act,
Discussion Paper, Take-over Bids. This examined three broad issues: (1) repealing the
CBCA take-over bid provisions; (2) amending the CBCA take-over bid provisions; and (3)
outlining arguments for and against the repeal of the CBCA take-over bid provisions, the
Discussion Paper recommended that they be retained and updated.
This note will
examine a number of the proposals set out in the Discussion Paper for amending the CBCA
take-over bid provisions.
TAKE-OVER BID THRESHOLD
take-over bid provisions of the CBCA apply if an offeror, after making a bid for shares of
the target corporation, would control or own more than 10% of any class of its shares.
Provincial securities statutes have an ownership threshold of 20% before their take-over
bid provisions apply. Noting that bidders normally must acquire at least 20% of the
publicly traded shares of a corporation in order to gain control over the corporation,(6) the Discussion Paper recommended that the CBCA threshold
be increased from 10% to 20%.(7)
Senate Committee on Banking, Trade and Commerce considered the CBCA take-over bid
threshold during its hearings on corporate governance in 1996. Witnesses who commented on
the issue favoured changing the threshold to 20%. One of the principal arguments for doing
so was that the federal and provincial requirements would be harmonized as a result. With
this in mind, the Committee recommended that the threshold be increased from 10% to 20%.(8)
PRIVATE AGREEMENT EXEMPTION
The CBCA sets
out certain exemptions from the take-over bid requirements. One of these exemptions
applies to private agreements, whereby an offer to purchase shares by way of separate
agreements is made to fewer than 15 shareholders.
Paper outlined the following three issues relating to the private agreement exemption:
Paper went on to propose that the maximum number of shareholders allowable under the
private agreement exemption be reduced from 15 to five. The rationale for this proposal
was that, if an offer must be made to 15 shareholders, the corporation is likely to be
fairly widely held and the minority shareholders should be protected by the take-over bid
offeror knows, or ought to know, that the shareholder with whom he or she is dealing has
either acquired the shares from other persons so that the offeror can use the private
agreement exemption, or is holding the shares on behalf of such persons as a trustee or
other legal representative, the Discussion Paper also proposed that those persons should
be included in the calculation of the number of shareholders. Such a proposal would ensure
that spirit of the legislation was maintained.(11)
Discussion Paper recommended that the CBCA should limit to 15% the premium over market
price that may be paid under the exemption.(12)
PRIVATE CORPORATIONS EXEMPTION
Section 194 of
the CBCA provides an exemption to the take-over bid provisions for offers to purchase
shares of a corporation that has fewer than 15 shareholders. The Discussion Paper proposed
that the "private corporations" exemption in the CBCA be harmonized with the
requirements of most provincial securities laws. Thus, a CBCA corporation would be exempt
from the take-over bid rules if it met the following requirements:
EXTENDING THE MINIMUM BID PERIOD
bid provisions of the CBCA distinguish between a "bid for all shares" and a
"bid for less than all shares." In both situations, an offeree must have at
least 21 days after the date of the bid within which to tender the shares to an offeror.
In a "bid for all shares" there is no limit on the maximum time permitted after
a take-over bid for the deposit of shares; in a "bid for less than all shares"
the shares must be deposited within 35 days of the date of the bid. The minimum number of
days that must expire before an offeror can take up shares tendered pursuant to a bid also
differs: in a "bid for all shares" an offeror must wait 10 days after the date
of the take-over bid; in a partial bid, the waiting period is 21 days.(14)
Paper suggests that the relatively brief periods provided in the CBCA may not give
corporations and their directors sufficient time to consider a take-over bid, make
recommendations to shareholders and seek competing bids, if necessary.(15)
Paper proposed that the minimum bid and deposit periods be extended and that the time
distinctions in the CBCA between a "bid for all the shares" and a "bid for
less than all shares" be eliminated. The Paper went on to propose that the CBCA
take-over bid time limits be changed to the following:
Senate Committee on Banking, Trade and Commerce considered the minimum bid period during
its hearings on corporate governance in 1996. The Committee recommended that the CBCA be
amended to extend the minimum bid period for a take-over bid to 45 days. The Committee
also recommended that this period be prescribed by regulation.(17) This would make future changes easier and facilitate harmonization
with the provinces, where desirable.
206(2) of the CBCA, an offeror who acquires 90% of the outstanding shares of a particular
class of shares has the right to acquire the remaining 10%. This compels non-tendering
shareholders to sell their shares and permits the majority shareholder to "take the
corporation private." The CBCA does not, however, address the situation where the
offeror decides not to take up the remaining shares. In this case, some shareholders may
be left in an extreme minority position, with little or no market for their shares and
virtually no influence over corporate decisions. Some business corporations statutes
permit shareholders in certain circumstances to compel a corporation to purchase their
Paper proposed that the CBCA be amended so that, if a majority shareholder owned or
controlled more than 90% of the shares of the corporation, minority shareholders would
have the right to require the corporation to purchase their shares.(18)
would benefit minority shareholders but could have important financial implications for
the corporations compelled to buy out the minority.
(1) Industry Canada, Canada Business Corporations Act, Discussion
Paper, Take-over Bids, February 1996, p. 2.
Canada Business Corporations Act, R.S.C. 1985, as amended, s. 194.
Discussion Paper (1996), p. 4.
Ibid., p. 3-4.
Ibid., p. 4.
Ibid., p. 13.
Senate of Canada, Standing Senate Committee on Banking, Trade and Commerce, Corporate
Governance, August 1996, p. 70.
Ibid., p. 21-22.
Ibid., p. 23.
Ibid., p. 24.
Ibid., p. 31.
Ibid., p. 31-32.
Corporate Governance (1996) p. 74.
Discussion Paper (1996), p. 40.