Guide to Canadian Public Mergers and Acquisitions

From navigating relevant legislation and regulators to choosing the right deal structure, there are many factors to consider in Canadian M&A deals. Our guide addresses the key challenges and questions businesses may encounter when planning a public M&A deal in the Canadian market.

Table of Contents

1. Relevant Authorities and Legislation
2. Mechanics of Acquisition
3. Friendly or Hostile
4. Information
5. Stakebuilding
6. Deal Protection
7. Bidder Protection
8. Target Defences
9. Other Useful Facts
10. Updates

1. Relevant Authorities and Legislation

1.1 What Regulates M&A?

The acquisition of a “reporting issuer” in Canada (i.e., an entity with public reporting obligations under Canadian securities laws) is largely regulated through securities legislation enacted by each of Canada’s 13 provinces and territories, with the rules being substantially harmonised across the country.

An M&A transaction may also be regulated by:

• Stock exchange rules
• The governing corporate or partnership statute
• The target’s constating documents
• Competition/antitrust legislation
• If the buyer is a non-Canadian, the foreign investment rules under the Investment Canada Act
• Industry-specific legislation if the target is in certain regulated industries (such as aviation, banking, telecommunications or film/media production)

Tax laws typically also play a significant role in the structuring of M&A transactions.

1.2 Are There Different Rules for Different Types of Company?

The statutory plan of arrangement structure discussed below in response to question 2.1 is available if the target is incorporated under Canadian law, as it is a structure provided for by corporate law.

The take-over bid rules discussed below in response to question 2.1 apply to any offer to acquire outstanding voting or equity securities made to anyone in Canada that would result in the bidder holding 20% or more of the class, regardless of the jurisdiction of the target entity, unless an exemption is available. An exemption may be available if the target entity is not a reporting issuer in Canada or if there are a limited number of Canadian beneficial holders of the class of securities subject to the bid.

1.3 Are There Special Rules for Foreign Buyers? 

A non-Canadian investor that directly acquires control of a Canadian business whose financial position exceeds the applicable review threshold cannot close until receipt of approval under the Investment Canada Act. To gain that approval, the investor must demonstrate that the investment is likely to be of “net benefit to Canada.”

Typically, a control acquisition occurs when an investor acquires more than 50% of the voting securities of a corporation or more than 50% of the units in a non-corporate entity. The acquisition of between one-third and one-half of the voting securities of a corporation also creates a rebuttable presumption that control has been acquired. Subject to certain exceptions (such as investments by state-owned enterprises (SOEs)), the acquisition of less than one-third of the voting securities of a corporation or less than a majority of the units in a non-corporate entity does not constitute an acquisition of control.

For Canadian businesses other than businesses operating in the cultural sector (such as film/media production, music, publishing), the applicable review threshold is C$1.386-billion in enterprise value as of the date of writing. A higher C$2.079-billion threshold applies to investors originating from countries with a free trade agreement with Canada (such as the U.S., Mexico, Australia, Japan and EU countries). Where the investor is an SOE, the threshold is C$551-million based on the book value of assets, regardless of the country of origin of the investor. Thresholds for acquisitions of Canadian cultural businesses, regardless of the country of origin of the investor, are as low as C$5-million in asset value, depending on the structure of the transaction. Note that these thresholds are updated annually and can be found here.

If a transaction is subject to review and approval under the Investment Canada Act, the buyer is typically required to commit to binding undertakings to obtain approval. Such undertakings could relate to maintaining a certain level of employment in Canada, preserving a Canadian head office, continuing to rely on Canadian suppliers, committing to a level of investment in the business in Canada, maintaining Canadian charitable contributions, or similar matters to show that the transaction will be a net benefit to Canada.

The government can review an investment of any size by a non-Canadian, even non-controlling investments, on national security grounds. See question 10.1 below for recent developments around national security reviews under the Investment Canada Act.

1.4 Are There Any Special Sector-Related Rules? 

Yes. There is specific legislation that applies to the ownership and control of entities in certain industries, such as aviation, banking, insurance, transportation, telecommunications, book-publishing and film/media production.

1.5 What Are the Principal Sources of Liability? 

Liability in a public M&A transaction can arise in several ways, but most commonly relates to disclosure obligations under securities laws or allegations by shareholders of a breach of fiduciary duty by directors. There are detailed disclosure requirements relating to M&A transactions that must be adhered to by the acquirer and the target to avoid sanctions from securities regulators (including financial penalties or potentially blocking the transaction) and reduce the risk of claims by target shareholders. The risk of liability for a misrepresentation in a disclosure document is heightened for an acquirer if the acquirer’s securities form part of the consideration, as that triggers a requirement to provide prospectus-level disclosure about the acquirer and its business. See question 3.3 below for details of the fiduciary duties of the target board. There are also prohibitions on market manipulation and insider trading that could be a source of liability for the acquirer and/or its representatives.

2. Mechanics of Acquisition 

2.1 What Alternative Means of Acquisition Are There?

Canadian public companies are typically acquired by way of either a plan of arrangement or a take-over bid. “Friendly” M&A transactions are usually structured as plans of arrangement, with take-over bids being principally used for unsupported or “hostile” transactions.

Plan of Arrangement 

A plan of arrangement is a shareholder- and court-approved transaction governed by the corporate legislation in the target’s jurisdiction of incorporation. An arrangement practically requires the target’s involvement and support.

Arrangements have a number of advantages over take-over bids. Most significantly, a plan of arrangement: (i) provides for the acquisition of 100% of the target’s shares in a single step; (ii) can facilitate tax planning and address multiple classes of securities (including options or other compensation securities) as part of the same transaction; and (iii) if securities of the offeror are offered to U.S. shareholders of the target as consideration, can provide an exemption under U.S. securities laws from the requirement to register such securities.

Take-Over Bid 

Unlike plans of arrangement, take-over bids may be made with or without the agreement of the target, as they involve an offer to acquire shares by the bidder directly to target shareholders, who need to take an active step to tender their shares to the offer. If the bid is successful, a “second-step” transaction is required to acquire 100% of the target shares as, inevitably, not all target shares will be deposited to the bid.

Canadian securities legislation contains detailed procedural and substantive requirements applicable to take-over bids governing such things as required disclosure, timing, conditionality, share purchases outside of the bid and rules applicable to deposit, withdrawal and take-up of shares.

2.2 What Advisors Do the Parties Need?

A party seeking to acquire a public company would typically engage legal, financial and tax advisors to assist. A buyer may also engage a solicitation agent to solicit votes or deposits of shares, as applicable. A public relations/government relations advisor may be advisable if the transaction is subject to antitrust and/or Investment Canada Act review or other regulatory approvals, involves a sensitive industry or geography, or is likely to face opposition.

2.3 How Long Does It Take?

Plan of Arrangement

Assuming there are no regulatory approvals required with a longer time horizon, a plan of arrangement transaction can typically be completed in 65–75 days from the date the parties sign the definitive agreement.

Take-Over Bid

A take-over bid must remain open for at least 105 days, unless either (i) the target board waives that minimum in favour of a shorter period (not less than 35 days), or (ii) the target enters into an alternative transaction (in which case, the minimum period decreases to 35 days). A bid must also be extended for at least 10 days following the initial take-up of shares.

Absent any regulatory approvals, a friendly bid can be completed in roughly the same amount of time as a plan of arrangement. However, after the bid is completed, a second-step transaction will be needed to acquire 100% of the shares as, inevitably, not all will be deposited to the bid. This can be done quickly by compulsory acquisition under corporate law if in the bid the bidder acquires 90% or more of the shares that it and its affiliates, associates and joint actors do not already own, and other applicable conditions are satisfied. Otherwise, following the bid, the bidder will have to complete a shareholder-approved transaction, such as a plan of arrangement or amalgamation, to acquire the remaining shares it does not own. If the bidder acquires shares in the bid that, when added to any shares it held prior to the bid, total 66⅔% of the outstanding shares, the bidder will be guaranteed to be able to approve such second-step transaction, but it will typically take 30–60 days to do so.

2.4 What Are the Main Hurdles?

Plan of Arrangement

For a plan of arrangement, the main milestones are: (i) signing the definitive agreement; (ii) obtaining an interim court order that sets out the parameters for shareholder approval and other procedural matters; (iii) mailing the proxy circular; (iv) obtaining target shareholder approval (and acquirer shareholder approval, if required); (v) obtaining a final court order that the transaction is “fair and reasonable”; and (vi) satisfying any other conditions to closing, such as the obtaining of required regulatory approvals.

Take-Over Bid

For a take-over bid, the main milestones are: (i) signing the definitive agreement, for friendly transactions; (ii) mailing the take-over bid circular; (iii) mailing the directors’ circular (which usually includes a recommendation of the target’s directors as to whether shareholders should accept the bid or not); (iv) the first take-up of shares by the bidder after having the conditions to the bid (including that more than 50% (or such higher percentage set by the bidder) of the outstanding shares not owned by the bidder and its joint actors have been deposited and receipt of any required regulatory approvals) satisfied or waived by the bid deadline; (v) completion of the mandatory minimum 10-day extension of the bid following first take-up; and (vi) completion of a compulsory acquisition or second-step transaction.

2.5 How Much Flexibility Is There Over Deal Terms and Price?

Plan of Arrangement 

There is great flexibility in the deal terms in a plan of arrangement. However, minority shareholder protections may apply if, for example, a related party receives different consideration than the main body of shareholders or a collateral benefit as part of the transaction.

Take-Over Bid

In a take-over bid, all holders of the same class of securities must be offered identical consideration. That said, shareholders can be offered a choice between receiving cash or securities or a mix of cash and securities as consideration, so long as all shareholders of the class have identical options. The price that may be offered must be in the same form and at least as high as the highest price paid by the bidder in any private purchases of such shares in the 90 days prior to making the bid (not including purchases on a published market or from the target).

2.6 What Differences Are There Between Offering Cash and Other Consideration? 

If the consideration paid consists, in whole or in part, of securities of the acquirer, prospectus-level disclosure in respect of the acquirer will have to be included in the disclosure document for the transaction. Such required disclosure may include historical and pro forma financial statements for the acquirer and management’s discussion and analysis thereof. For mining and oil & gas issuers, detailed technical reports may also need to be prepared as prescribed in Canadian securities laws and publicly filed. If the acquirer is not already a reporting issuer in Canada, preparing this disclosure can be a significant undertaking and could delay the transaction relative to an all-cash transaction.

Generally, any acquirer who offers its securities as consideration to target shareholders in Canada will also become a Canadian reporting issuer subject to ongoing public reporting requirements (regardless of whether or not the acquirer is listed on an exchange in Canada following the transaction).

2.7 Do the Same Terms Have to Be Offered to All Shareholders? 

See the response to question 2.5 above.

2.8 Are There Obligations to Purchase Other Classes of Target Securities?

An acquirer is not generally required by law to acquire any securities other than those offered for. However, the terms of the target’s securities may contain obligations to offer to acquire a certain class if offering for another class (i.e., coattail provisions for dual-class share structures). The terms of certain debt securities may also mandate that the target make an offer to repurchase such securities at a prescribed price (for example, 101% of the principal amount plus accrued and unpaid interest) following the completion of a change of control transaction.

2.9 Are There Any Limits on Agreeing Terms With Employees?

There are certain restrictions, but terms can be agreed with employees, so long as any enhancement in compensation or benefits conferred on an employee who holds shares is solely in connection with employment and not done to confer additional consideration to such shareholder relative to other shareholders, the particulars are disclosed and certain other conditions are met (including, in certain circumstances, a minority shareholder vote).

2.10 What Role Do Employees, Pension Trustees and Other Stakeholders Play?

In general, there is no requirement in Canada for the acquirer or the target to engage with employees, pension trustees or other stakeholders in the context of an M&A transaction. However, directors of the target company must take the interests of such stakeholders into account when discharging their fiduciary duties.

2.11 What Documentation Is Needed?

Plan of Arrangement

• Arrangement Agreement: The definitive agreement of the parties to complete the arrangement, which includes a “plan of arrangement” that sets out the specific steps for effecting the transaction.
• Voting Support Agreements: Often entered into with key shareholders and/or target directors and management whereby they agree to vote their shares in favour of the transaction.
• Court Documents: Materials must be submitted to court in connection with the interim and final order hearings.
• Proxy Circular: Disclosure document sent to shareholders in connection with the shareholder meeting to approve the transaction.

Take-Over Bid

• Support Agreement: The definitive agreement of the target to support the transaction (only applicable to friendly acquisitions).
• Lock-up Agreements: Often entered into with key shareholders and/or target directors and management whereby they agree to deposit their shares to the bid.
• Take-over Bid Circular: Disclosure document delivered to shareholders by the bidder that sets out prescribed information about the offer and the parties.
• Directors’ Circular: Disclosure document delivered to shareholders by the board of directors of the target, which typically includes the board’s recommendation with respect to the bid.

No regulatory review of the circulars is required prior to being delivered to shareholders. A post-mailing review may be conducted by regulators for transactions where a conflict of interest may exist (for example, where the acquirer is a significant shareholder of the target).

2.12 Are There Any Special Disclosure Requirements? 

See question 2.6 above for the prospectus-level disclosure requirements that apply if securities are offered as all or part of the consideration.

For supported transactions, while not required by law, it is typical for the target to obtain a fairness opinion from one or more financial advisors. In a plan of arrangement, the court will expect the target to have obtained and disclosed at least one such opinion.

In certain prescribed circumstances where a conflict of interest might exist (for example, where the acquirer is a significant shareholder of the target), an independent formal valuation and additional prescribed disclosure may be required.

For take-over bids that are being made to shareholders in the Canadian province of Quebec, the take-over bid circular, directors’ circular and any documents incorporated by reference therein must be translated into the French language. Translation is not required for plans of arrangement.

2.13 What Are the Key Costs? 

The key costs to acquire a Canadian public company, other than the consideration payable, will be: (i) borrowing costs, if debt financing is being relied on; (ii) fees payable to advisors, translators (if applicable) and/or commercial printers; (iii) application fees for regulatory approvals, if applicable; and (iv) any break fee or expense reimbursement payable if the deal is not completed, as agreed between the parties.

2.14 What Consents Are Needed? 

For plans of arrangement, approval of the target’s shareholders and the court is required.

If the acquirer is offering its securities as all or part of the consideration, the acquirer may be required to obtain approval of the transaction from its own shareholders and/or its own stock exchange(s).

If the acquirer is a non-Canadian, approval under the Investment Canada Act may be required. See question 1.3 above.

Antitrust approval may also be required under the Competition Act (Canada) (if certain financial thresholds are met) and/or under other similar laws in other jurisdictions where the parties operate.

If the target operates in certain regulated industries, such as aviation, banking, insurance, transportation, telecommunications or film/media production, approval from the target’s regulators may be necessary.

The parties may also agree in the definitive agreement that certain key contractual consents are conditions precedent to closing.

2.15 What Levels of Approval or Acceptance Are Needed to Obtain Control? 

Plan of Arrangement 

The court establishes the approval threshold for the transaction, which is typically 66⅔% of the votes cast at the shareholder meeting to approve the transaction. In certain prescribed circumstances where a conflict of interest might exist (for example, where the acquirer is a significant shareholder of the target), a majority vote of the minority shareholders (excluding each conflicted party) may also be required.

Take-Over Bid 

To be permitted to acquire any shares under a take-over bid, more than 50% of the shares subject to the bid not owned by the bidder and its joint actors must be deposited. To ensure the bidder can complete a second-step transaction to acquire 100% of the shares, the bidder needs to acquire in the bid the number of shares that, when combined with any shares it already owns, equals 66⅔% of the shares. If in the bid the bidder acquires, within 120 days of the launch of the bid, 90% or more of the shares it and its affiliates, associated and joint actors do not already own, it will likely be able to complete a compulsory acquisition of the remaining shares under corporate law.

2.16 When Does Cash Consideration Need to Be Committed and Available? 

Plan of Arrangement 

For a plan of arrangement, there are no legal requirements that financing commitments be in place prior to closing. Practically, for a target to agree to support a plan of arrangement, an acquirer will need to show evidence that it will be able to fund the cash consideration at closing, especially in a competitive bidding situation. Typically, a target will require a prospective acquirer to provide evidence of cash on hand or commitment papers from a lender concurrently with entering into the definitive agreement.

Take-Over Bid 

For a take-over bid, it is required that the bidder make adequate arrangements before the bid to ensure that the required funds are available. Any financing arrangements may be subject to conditions if, at the time the take-over bid is commenced, the bidder reasonably believes the possibility to be remote that, if the conditions of the bid are satisfied or waived, the bidder will be unable to pay for the securities deposited under the bid due to a financing condition not being satisfied.

3. Friendly or Hostile 

3.1 Is There a Choice? 

Yes. An acquirer can acquire a Canadian public company target without the support of the target’s board or management using the take-over bid structure discussed above.

3.2 Are There Rules About an Approach to the Target? 

Typically, an acquirer would approach a target regarding a potential transaction on a confidential basis. If the target is receptive, the acquirer and the target would typically enter into a non-disclosure agreement, which customarily would include “standstill”, non-solicitation and other restrictions. Absent a leak, public disclosure of such an approach would generally not be required until a definitive agreement is entered into in respect of the acquisition.

3.3 How Relevant Is the Target Board? 

In general, target support is seen as an important factor in maximising the likelihood of success of an acquisition transaction. When faced with a potential transaction, directors of Canadian corporations are provided a significant degree of freedom in determining what is in the best interests of the corporation. Canadian corporate law generally requires directors to, among other things, act honestly and in good faith with a view to the best interests of the corporation (frequently referred to as a “duty of loyalty” or “fiduciary duty”). In determining what is in the best interests of a corporation, directors are expected to consider the impact of their decisions on shareholders and other stakeholders of the corporation. Canadian courts will generally give deference to the business judgment of directors, provided that the directors consider the interests of stakeholders and make a decision that is properly informed and reasonable in light of conflicting interests.

3.4 Does the Choice Affect Process? 

Leaving aside consequences not specific to the jurisdiction (e.g., inability to review non-public information, lack of target support (and likely opposition) when preparing regulatory filings, etc.), choosing to proceed on an unsupported basis has certain structural consequences when seeking to acquire a Canadian public issuer. For example, proceeding without target board support practically necessitates that a bidder structure the transaction as a take-over bid, unlike a supported transaction that could proceed by way of a target shareholder-approved transaction, most commonly a plan of arrangement. In addition, assuming the target is not subject to another take-over bid or alternative acquisition transaction, the initial deposit period for an unsupported take-over bid must be a minimum of 105 days, whereas a target can agree to shorten the initial deposit period for a supported take-over bid to as little as 35 days (in which case any other outstanding or subsequent take-over bids will also be entitled to the shorter minimum deposit period).

4. Information 

4.1 What Information Is Available to a Buyer? 

Prior to getting data room access from a target, detailed information about the target is still available. Canadian public issuers must regularly make certain information about their activities and financial status available to the public (including financial statements). Information regarding significant shareholders (i.e., those holding 10% or more of a target’s voting rights) is also publicly available. Additional information can often be located though public registry searches (e.g., lien, land, litigation and trademark registries). In addition, Canadian corporate statutes generally provide shareholders and creditors of the corporation with certain rights to access the corporation’s security register, constating documents, minutes of meetings and resolutions of shareholders, as well as certain other records prepared by the corporation.

4.2 Is Negotiation Confidential and Is Access Restricted? 

Public disclosure by the target during the negotiation phase could be required if information regarding a potential transaction leaks to the market. However, absent a leak, preliminary discussions and conditional proposals where material terms have not been agreed are not generally viewed as disclosable and, in most cases, public issuers do not announce a transaction until a definitive agreement in respect of the transaction has been entered into. However, any such disclosure determinations are highly fact-specific and need to be carefully considered in the context of a specific transaction.

Non-disclosure agreements entered into between the acquirer and the target typically restrict the acquirer’s ability to approach target shareholders without permission from the target.

4.3 When Is an Announcement Required and What Will Become Public? 

Canadian public issuers are required to promptly disclose any “material changes” in their affairs. Material changes are changes in the business, operations or capital of an issuer that would reasonably be expected to have a significant effect on the market price or value of any of its securities. This concept includes a decision to implement such a change by the board of the issuer, or by senior management if they believe that approval of the board is probable. Upon a material change occurring, the issuer is required to immediately issue a press release disclosing the nature and substance of the change and subsequently publicly file a more detailed prescribed form of report. In addition, where entering into an agreement (such as a definitive acquisition agreement) triggers the material change, the issuer is obligated to publicly file a copy of the agreement, although redaction of certain sensitive information is permissible. As noted above, a target typically announces a transaction only once a definitive agreement is entered into (unless there is a leak).

For a plan of arrangement, the target is obligated to prepare a management information circular. In the case of a take-over bid, a take-over bid circular must be prepared by the bidder and a directors’ circular must be prepared by the target. For both plans of arrangement and take-over bids, the disclosure provided will generally include a description of the background to the transaction, including in the case of a friendly deal, the negotiation process that occurred between the parties, a summary of the definitive acquisition agreement, and a copy and summary of any fairness opinion(s) received by the target board, in addition to certain other prescribed information. These circulars are delivered to shareholders and publicly filed.

4.4 What if the Information Is Wrong or Changes? 

A plan of arrangement will generally provide that if any amendments, modifications or supplements to the plan of arrangement would, if disclosed, reasonably be expected to affect a shareholder’s decision on how to vote, notice of such amendment, modification or supplement would need to be publicly distributed and may require the target to return to the applicable court for direction.

If the terms of a take-over bid are varied or a change has occurred that would reasonably be expected to affect a target shareholder’s decision to accept or reject the bid, typically a press release must be issued and a prescribed form of notice must be publicly filed by the bidder and delivered to those shareholders who received the original take-over bid circular (except for those whose securities have already been taken up). Generally, the bid must remain open for at least 10 days following notification of such variation or change.

5. Stakebuilding 

5.1 Can Shares Be Bought Outside the Offer Process? 

Bidders may acquire target shares before commencing, or announcing their intention to make, a take-over bid, subject to compliance with insider trading rules and any contractual (e.g., standstill) obligations. Once a bidder has publicly announced its intention to make a take-over bid, it may not purchase target shares outside the bid until the third business day after it has commenced its bid, and thereafter only up to 5% of the shares under prescribed circumstances. Canada’s regulation of take-over bids includes “pre-bid integration rules,” which are designed to ensure that all of the holders of the target shares subject to the bid are treated equally in the context of a take-over bid. The rules “integrate” pre-bid purchases by the bidder (other than qualifying purchases made over a stock exchange or from the target) by requiring, among other things, that consideration offered under any subsequent bid by the bidder be at least equal to the consideration paid in any such purchases made within the 90 days preceding the bid.

The 5% restriction and integration rules do not apply in the context of a plan of arrangement transaction, but if an acquirer owns 10% or more of the target’s shares, certain minority shareholder protections may be triggered (including an independent formal valuation and/or a “majority of minority” vote in which the acquirer’s shares will be excluded).

5.2 Can Derivatives Be Bought Outside the Offer Process? 

Bidders may acquire derivatives relating to target shares before commencing, or announcing their intention to make, a take-over bid, subject to compliance with insider trading rules and any contractual (e.g., standstill) obligations. However, the Canadian securities regulators have published guidance indicating their view that a bidder that is a party to an equity swap or similar derivative arrangement relating to target shares may, under certain circumstances, have deemed beneficial ownership, or control or direction, over the referenced shares. This deeming could occur where the investor has the ability, formally or informally, to obtain the voting or equity securities or to direct the voting of voting securities held by any counterparties to the transaction.

In addition, case law has stated that there are circumstances where the use of derivatives to allow an acquirer to gain economic exposure to a target in excess of the ownership disclosure thresholds described in the response to question 5.3 below without disclosure may be abusive of Canadian capital markets and subject to sanction.

5.3 What Are the Disclosure Triggers for Shares and Derivatives Stakebuilding Before the Offer and During the Offer Period? 

There are two regimes that require public disclosure of a holding in a Canadian public issuer: early warning reporting and insider reporting.

Under the early warning regime, the acquisition of beneficial ownership of, or control or direction over, 10% (reduced to 5% if another take-over bid is outstanding) or more of a class of voting or equity securities of a Canadian public issuer must be promptly disclosed (along with any related derivatives – the derivatives are not used in calculating whether the threshold is reached (unless the acquirer is determined to own or control the underlying shares, see the responses to question 5.2 above), but must be disclosed once the threshold has been exceeded). Subsequent acquisitions or dispositions of 2% or more of the outstanding shares of the class must also be disclosed, and further disclosure is required when ownership levels fall below the 10% reporting threshold.

In addition, upon acquiring beneficial ownership of, or control or direction over, more than 10% of the voting securities of a Canadian public issuer, the acquirer becomes a “reporting insider” of that issuer. As a result, the acquirer is required to publicly report its holding of, as well as any subsequent trades in, securities of the issuer (including any related derivatives) for so long as it remains a reporting insider.

5.4 What Are the Limitations and Consequences? 

Any offer to acquire outstanding voting or equity securities made to anyone in Canada that would result in the bidder and its joint actors holding 20% or more of the voting or equity securities of any class will constitute a take-over bid for Canadian securities law purposes. As a result, unless an exemption from the formal take-over bid requirements is applicable, the offer would be required to be made to all securityholders of the class in Canada on the same terms and conditions.

Issuers may also implement shareholder rights plans (also known as “poison pills”) to prevent acquisitions of control over 20% without a bid being made to all shareholders. Such a plan would make it uneconomic to acquire stakes over the trigger threshold for the plan (typically 20%) other than by way of a bid to all shareholders.

Case law, in the context of a hostile take-over bid, has found that using derivatives to gain economic exposure in excess of the disclosure thresholds described in response to question 5.3 above, without disclosure thereof, can be considered abusive of Canadian capital markets. In such circumstances, the applicable securities regulator required that the minimum tender threshold for such hostile take-over bid be increased from 50% to 55% of the target shares not owned by the acquirer, to account for the fact that the target shares acquired by the swap counterparty to hedge its exposure under the swap would, in the view of the regulator based on the swap counterparty’s relationship with the acquirer, likely be tendered to the bid (even though the acquirer did not have a contractual right to acquire the target shares underlying the swap or cause the swap counterparty to tender the target shares acquired in the hedge to the bid).

6. Deal Protection 

6.1 Are Break Fees Available? 

Break fees are common in Canada. A target company in a supported transaction will typically agree to pay the acquirer a termination fee in certain circumstances where the definitive acquisition agreement is terminated (e.g., where the agreement is terminated to allow the target to enter into an agreement with a third party in respect of a superior offer). There is no bright line limit on the quantum of break fees in Canada, and typically these fees are within the range of 2.5–4.5% of the target’s equity value. Break fees in excess of market norms may subject the target and the target board to regulatory, court and/or shareholder scrutiny (e.g., the fee could be argued to violate the directors’ fiduciary duties).

Reverse break fees payable by the bidder to the target are also a feature of many Canadian deals. These fees are sometimes seen where there is heightened risk to the target of a failed transaction due to, for example, challenging regulatory approvals, required acquirer shareholder approval or, in certain circumstances, where an acquirer fails to comply with its obligations. Reverse break fees are often equal to or a multiple of the break fee for the transaction, depending on the circumstances.

6.2 Can the Target Agree Not to Shop the Company or Its Assets?

Yes. A target in a supported transaction will generally agree not to solicit or consider competing offers, subject to a customary “fiduciary out” exception. This exception recognises the fiduciary duties owed by a target board by permitting the board to consider and accept an unsolicited superior proposal should one arise, subject to the original acquirer’s right to match the proposal and the payment of a break fee. In contrast, so-called “go-shop” provisions allowing the target to shop the business to other potential acquirers for a period following signing the definitive agreement are not often agreed to in Canadian public company deals.

6.3 Can the Target Agree to Issue Shares or Sell Assets?

The Canadian securities regulatory authorities have indicated that certain defensive tactics may come under scrutiny if undertaken during the course of a take-over bid, or immediately before a bid, if the target board has reason to believe that a bid might be imminent, including: (a) the issuance of, or the granting of an option on, or the purchase of, securities representing a significant percentage of the outstanding target securities; and (b) the sale or acquisition of, or granting of an option on, or agreeing to sell or acquire, assets of a material amount. When reviewing such transactions, the regulators consider and balance competing factors, including the extent to which the transaction in question serves a bona fide corporate objective of the target (e.g., did agreeing to issue shares provide necessary funding to keep the target’s business running) and the principle of facilitating shareholder choice in an open and even-handed bidding process (e.g., was the only purpose of the issuance or asset sale to make it more difficult for another bidder to make a competing bid or to coerce shareholders into supporting the transaction).

6.4 What Commitments Are Available to Tie Up a Deal?

Beyond a break fee and non-solicitation provisions (including a right to match a superior offer), acquirers commonly enter into “lock up” or “voting support” agreements with significant target securityholders and target management and directors, whereby such parties agree to support the transaction, including by voting in favour of a plan of arrangement or depositing shares to the offeror’s take-over bid, as applicable, subject to certain conditions.

These agreements can be either (i) “soft” lock-ups, whereby the commitment terminates if the definitive agreement for the transaction is terminated (e.g., by the target to accept a superior proposal), which frees the locked-up shareholder to support a new buyer; or (ii) “hard” lock-ups, whereby the lock-up agreement remains in place for a set period of time, regardless of whether the definitive agreement remains in place, meaning a locked-up shareholder cannot support another buyer (and must vote against/not tender to another transaction) until the time period ends. Most lock-ups are “soft” lock-ups. Receiving “hard” lock-ups is much less typical and often limited to controlling shareholders.

7. Bidder Protection 

7.1 What Deal Conditions Are Permitted and Is Their Invocation Restricted? 

A plan of arrangement must be subject to obtaining required court approvals and shareholder approval (typically by 66⅔% of votes cast, plus any required majority of the minority vote).

The acquisition by a bidder of securities pursuant to a take-over bid must be conditional upon more than 50% of all outstanding target shares of the class subject to the bid owned or held by persons other than the bidder being deposited and not withdrawn.

In addition, a cash take-over bid may not be subject to a financing condition, as discussed in the response to question 2.16 above. Instead, the bidder is required to make adequate arrangements before the bid to ensure that funds required for the cash component of the bid are available to make full payment for all securities that the bidder has offered to acquire. There are no comparable financing rules applicable to plans of arrangement, but the target’s board will generally require that the bidder has adequate funding in place prior to signing a definitive agreement and generally will not accept a financing condition.

Otherwise, aside from the need to address any required regulatory approvals, there are no prescribed restrictions on the nature and extent of the conditions included in a Canadian acquisition transaction. That said, a target will generally want to minimise the conditionality of the transaction, as a failed acquisition of a public target once made public can have negative consequences for the target’s reputation, employee/customer/supplier relationships, etc.

7.2 What Control Does the Bidder Have Over the Target During the Process? 

In Canada, a definitive acquisition agreement will generally include “interim period” covenants, pursuant to which the target company will agree to operate its business in the ordinary course between signing and closing and specifically agree not to take certain actions (such as issue securities, pay dividends, enter into material transactions, settle ongoing litigation). Proposed actions outside the ordinary course will generally require the consent of the acquirer.

In addition, it is not uncommon for such acquisition agreements to include a “material adverse effect” closing condition in favour of the acquirer, which would permit the acquirer not to close where there is a material adverse effect on the target prior to closing. This has a disciplining effect on the target. Although parties will often extensively negotiate the scope of the material adverse effect definition, in practice, an acquirer seeking to rely on this condition is subject to a heavy burden that is likely to be satisfied only in very rare circumstances.

7.3 When Does Control Pass to the Bidder? 

Plan of Arrangement 

Immediately upon the closing of a plan of arrangement, all target shares, including any that were voted against the transaction, will be acquired by the acquirer. Dissent rights are typically available such that shareholders who validly dissent can apply to court following completion of the transaction to be paid fair value for their target shares instead of the deal consideration, but any shares in respect of which dissent rights are exercised are still acquired by the acquirer on closing.

Take-Over Bid 

Under a take-over bid made for all of the target shares, once all conditions to the bid have been satisfied (including the prescribed 50% minimum deposit condition) or waived, control of the target passes to the bidder upon the bidder taking up and paying for the shares deposited during the initial deposit period.

7.4 How Can the Bidder Get 100% Control? 

As noted above, in a plan of arrangement, a bidder acquires all target shares immediately upon closing.

For take-over bids, Canadian corporate legislation generally provides a mechanism permitting a bidder to compulsorily acquire target shares not deposited in a take-over bid where certain conditions are satisfied (including that the bid is accepted by the holders of at least 90% of the target shares, excluding shares held at the date of the bid by the bidder and its affiliates, associates and joint actors). If a compulsory acquisition is not available, a second-step transaction may be undertaken to acquire the non-deposited target shares. Such a transaction can generally be implemented with approval by 66⅔% of the target shares voted at a meeting voting in favour (including shares previously deposited to the bid and acquired by the bidder). In the case of either a compulsory acquisition or a second-step transaction, target shareholders whose shares are being acquired who validly dissent can apply to court to be paid fair value for their target shares instead of the deal consideration.

8. Target Defences 

8.1 What Can the Target Do to Resist Change of Control? 

A target facing an unsolicited take-over bid has a number of response options available to it. The Canadian securities regulators have provided guidance that supports the use of defensive tactics in appropriate circumstances (e.g., where taken by a target board in a genuine attempt to obtain a better bid). That said, Canadian securities regulators are of the view that unrestricted auctions produce the most desirable results in change of control contests. They have also indicated that tactics that could deny or severely limit the ability of target securityholders to decide for themselves whether to accept an offer may result in regulatory intervention. It is generally understood that a “just say no” defence is unlikely to be successful, unless the board can convince target shareholders to reject the hostile transaction.

8.2 Is it a Fair Fight? 

The Canadian take-over bid rules were amended in 2016 with the stated intent to rebalance the dynamics among bidders, target boards and target shareholders by, among other things: (i) facilitating the ability of target shareholders to make voluntary, informed and co-ordinated tender decisions; and (ii) providing the target board with additional time and discretion when responding to a potentially unsolicited take-over bid. Although the hostile take-over bid structure is now less attractive than prior to the amendments, hostile bids have not disappeared and continue to play an important role in the Canadian marketplace.

9. Other Useful Facts 

9.1 What Are the Major Influences on the Success of an Acquisition? 

Typically, the most critical factor in the success of an acquisition is, not surprisingly, the price the acquirer is willing to pay. Other factors that can influence success include, among others: (i) the form of consideration (all cash is often preferable to securities or a mix of cash and securities); (ii) jurisdiction of the acquirer (which can impact whether or not a transaction is subject to Canada’s foreign investment regime and the likelihood of approval if it is); (iii) the nature of the target (if the target operates in a sensitive industry or a sensitive jurisdiction, it can impact the ability to obtain regulatory approvals); (iv) the composition of the target’s shareholder base (if the target has one or a handful of very significant shareholders, their approval may be critical to the success of the transaction); and (v) whether there are competing bidders.

9.2 What Happens if it Fails? 

If an acquirer is unsuccessful in its attempt to acquire a target, the consequences of the failure will depend on its circumstances. For example, after the expiry of a take-over bid, an acquirer is prohibited from acquiring, by way of a transaction that is not generally available to target shareholders, any of the target’s shares that were subject to the bid for 20 business days, except for certain normal course purchases through a stock exchange. No such restrictions exist for plans of arrangement.

If provided for in the definitive agreement for a supported transaction, the acquirer or the target may be entitled to receive a break fee and/or expense reimbursement.

If a supported transaction fails because of a breach of the definitive agreement by either party, litigation is likely, provided it is not precluded by the terms of the agreement in situations where a break fee or expense reimbursement is paid.

9.3 Is the Use of Special Committees Common and When Are They Relevant? 

It is common for the board of a target company to appoint a special committee of the board to consider a going private transaction. The board might decide to address any actual or perceived conflict of interest by determining to appoint a special committee, composed entirely of directors who are not subject any perceived conflict of interest. In other instances, a special committee is used for efficiency (e.g., it is easier to assemble a small group of directors for frequent meetings than the entire board).

The formation of a special committee is mandatory when a take-over bid is launched by an insider of the target. While not technically required, in certain other prescribed circumstances where a conflict of interest might exist (e.g., where the acquirer by plan of arrangement is a significant shareholder of the target), Canadian securities regulators have advised that the formation of a special committee is strongly encouraged. In such conflict-of-interest transactions, the circular will be subject to a post-mailing review by Canadian securities regulators. As part of that review, one of the key things the regulators will be looking for is evidence that an appropriate governance structure was put in place by the target during the course of the consideration of the transaction to ensure that the interests of minority shareholders were taken into account, free of influence from interested parties to the transaction. While the regulators concede that a special committee is not required and other governance structures can suffice (such as having conflicted directors recuse themselves from considering or voting on the transaction), pressing on without a special committee in a potential conflict-of-interest scenario will likely draw questions from the regulators.

10. Updates 

10.1 Are There Any Relevant New Law or Practices in M&A in Canada? 

The focus of the Investment Canada Act has been evolving, shifting from a focus on the pre-closing review of investments to determine whether they were of net benefit to Canada, to whether the investment would be injurious to Canada’s national security.

For example, recent amendments to the Investment Canada Act will introduce a new mandatory pre-closing filing requirement for investments in sensitive sectors. Once in force (which is expected in mid-2025), there will be a mandatory and suspensory pre-closing filing obligation for all investments in certain prescribed sectors, including minority investments, where certain other criteria are met (such as where the investor could have access to or direct the use of material non-public technical information and have the power to appoint or nominate a member of the board or senior management).

Investments subject to this new mandatory filing requirement will be subject to a minimum 45-day waiting period. The prescribed business sectors have not yet been defined, but are likely to include sectors such as aerospace, biotechnology, critical minerals, personal data, artificial intelligence, energy generation, storage and transmission, medical technology, quantum science, next generation computing and digital infrastructure, among others.

Once implemented, this new filing regime will have important implications for deal timing (a national security review can take up to 200 days if triggered), regulatory risk allocation and strategy for investments by non-Canadian investors in these sectors, regardless of nationality and whether the investment is an acquisition of control or a minority investment.

For more information, please contact any member of our Mergers & Acquisitions group.