Take-Over Bid Rules Not Made to Be Broken – OSC Rejects Requested Relief from Minimum Tender Requirement

The Ontario Securities Commission (the OSC) recently released its decision rejecting a request from ESW Capital, LLC (ESW) for relief from the minimum tender requirement under Canadian take-over bid rules (the Relief) in connection with a proposed hostile take-over bid by ESW for Optiva Inc. (Optiva). This represented the first request for exemptive relief from the minimum tender requirement since adoption of the new take-over bid rules in 2016.

KEY TAKEAWAYS

In its decision, the OSC emphasized that:

• The purpose of the take-over bid rules is to provide a clear and predictable framework regarding the take-over bid regime in Canada

• It will not grant exemptive relief from the take-over bid rules unless there are exceptional circumstances or clear improper or abusive conduct that undermines minority shareholder choice

• Having significant minority shareholders holding a blocking position is not, alone, enough for the OSC to grant exemptive relief from the minimum tender requirements

BACKGROUND

On July 27, 2020, ESW announced its intention to make an offer to acquire any and all of the outstanding subordinate voting shares (Subordinate Voting Shares) of Optiva (the Proposed Offer), which was conditional on, among other conditions, ESW obtaining the Relief from the OSC. At the time of the Proposed Offer, ESW held approximately 28 per cent of the Subordinate Voting Shares and two other significant shareholders, Maple Rock Capital Partners (Maple Rock) and EdgePoint Investment Group (EdgePoint) held approximately 22.4 per cent and 18.1 per cent of the Subordinate Voting Shares, respectively.

At the time the Proposed Offer was announced, ESW, Maple Rock and EdgePoint had been in a long-running battle regarding the strategic direction and governance of Optiva. In response to the Proposed Offer, Maple Rock and EdgePoint each announced that it would not tender its shares to the bid, meaning that ESW would be unable to satisfy the requirement under Canadian take-over bid rules that at least 50 per cent of the outstanding securities of the class subject to the bid, excluding any securities owned or controlled by the bidder and its joint actors, be tendered to the bid and not withdrawn before the bidder is permitted to take up any securities in the bid (the Minimum Tender Requirement). Therefore, ESW applied to the OSC for exemptive relief from the Minimum Tender Requirement to permit it to disregard the Subordinate Voting Shares owned by Maple Rock and EdgePoint when calculating whether the Minimum Tender Requirement has been satisfied, allowing ESW to take up Subordinate Voting Shares once a majority of the minority shareholders other than Maple Rock and EdgePoint tendered to the bid.

OSC DECISION

In its decision, the OSC re-affirmed its position in Aurora Cannabis Inc. (Re) (see our Blakes Bulletin: Securities Regulators Tell Aurora and CanniMed to Play by the (New) M&A Rules), a decision relating to an exemption from the 105-day minimum bid period which was adopted at the same time as the Minimum Tender Requirement, that there must be predictability in the take-over bid regime and that the OSC would only intervene in exceptional circumstances or in circumstances where there is clear improper or abusive conduct that undermines minority shareholder choice.

The OSC noted that at the time of the 2016 amendments to the Canadian take-over bid regime, which instituted the Minimum Tender Requirement, the securities regulators were cognizant of a situation where control block holders may have enhanced leverage that may need to be addressed through exemptive relief. The OSC also noted that the securities regulators did not provide guidance at the time as to what factors the securities regulators would consider in granting such relief.

In determining whether the Relief should be granted, the OSC looked at the following factors:

• The nature and circumstances of the bid

• The control dynamics of the target

• The impact of a grant or denial of exemptive relief on shareholders

• The conduct of the control block holders and any special or differing interests or stakes in the outcome of the bid

• The conduct of the target and its board

• The conduct of the bidder

• Any other information indicating the views of the target shareholders with respect to the bid

After consideration of these factors, the OSC denied ESW’s application for the Relief. In particular, the OSC noted, in respect of the shareholder dynamics, that even though Maple Rock and EdgePoint intended to block the Proposed Offer, that alone was not enough to justify granting the Relief. In the OSC’s view, significant and control block shareholders are entitled to act based on their own interests in responding to a take-over bid, and Optiva’s other minority shareholders had acquired or held their shareholdings with knowledge of this control dynamic. ESW was also aware of these dynamics when it announced the Proposed Offer. The OSC further noted that such shareholder dynamics can even contribute to better bids and enhance informed shareholder choice.

While ESW argued that the bid was not coercive and would allow minority shareholders an exit from being stuck in the middle of the ongoing battle between the three significant shareholders, the OSC did not agree. The OSC held that if the Relief were to be granted, it would result in unfair pressure on Optiva’s minority shareholders (including Maple Rock and EdgePoint) to tender to the bid to avoid remaining invested in a company post-bid where ESW could hold a blocking position of slightly less than 50 per cent and with even further reduced liquidity. A decision to tender would be unrelated to the quality of the bid, contrary to the purpose of the Minimum Tender Requirement which was adopted to address the potential for precisely that kind of coercion. In the OSC’s view, avoiding the risk of pressure to tender for reasons unrelated to the quality of the bid outweighed the risk of limiting shareholders’ choice to tender.

The OSC also did not find that Maple Rock or EdgePoint had engaged in any improper conduct or misused their blocking positions to impede the Proposed Offer. Rather, Maple Rock and EdgePoint rejected the Proposed Offer based on an inadequate bid price, which was within their rights as shareholders of Optiva.

In addition, the OSC reviewed the conduct of the Optiva board and found no conduct that, whether viewed separately or as a course of conduct, rose to the level of abuse or impropriety in relation to a bid, pointing specifically to steps such as the appointment of a special committee with a robust mandate, the engaging of independent legal and financial advisors and the holding of separate meetings as indicia of proper procedures in the circumstances.

CONCLUSION

This decision by the OSC re-affirms the regulator’s view that exemptions to the Canadian take-over bid rules will only be granted in exceptional circumstances where the integrity of the bid regime is being undermined and relief is in the public interest. While significant shareholders may have the ability to block take-over bids because of the Minimum Tender Requirement, this, in and of itself, is not enough for the OSC to grant exemptive relief from the take-over bid rules. The take-over bid rules were purposely amended to recalibrate the control dynamics between a bidder, the target and control block holders in a hostile take-over bid, and the OSC has signalled that it will be wary where a bidder is seeking to bend or break the rules to tilt the balance back in its favour.

For further information, please contact:

Linda Tu                       416-863-2175
Richard Turner            416-863-4026

or any other member of our Mergers & Acquisitions or Securities Litigation groups.