CANADA Law and Practice Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
required to be updated within five business days of any changes to the holdings of an insider (a director, officer or 10%+ equity holder of the issuer). The use of derivatives and options to increase economic expo - sure is a key consideration when determining whether a private equity firm has triggered a public disclosure obligation. 7.3 Mandatory Offer Thresholds Subject to limited exemptions, the threshold for trig - gering Canadian takeover bid rules is the acquisition of a “bright line” 20% test. If a purchaser acquires 20% or more of a class of voting securities of the target, whether alone or working in conjunction with other parties (a purchasing group), the purchaser will be required to offer to purchase the shares of all of the registered shareholders of the same class, unless an exemption is available. 7.4 Consideration Both cash and share deals (or a combination thereof) can be used as consideration. However, the issuance of shares is most common where the purchaser is a public entity itself, as valuation is facilitated with pub - lic share prices. As such, private equity transactions tend to be cash deals. It should be noted that there has been a growing use of earn-out provisions in an effort to bridge valuation gaps between buyers and vendors. For public com - pany take-private deals, these can take the form of contingent value rights (CVRs – securities that provide for shareholders’ right to receive certain additional benefits/payments upon the occurrence of specific events, such as earning thresholds, etc, over a period of time). 7.5 Conditions in Takeovers Takeover bids in Canada can be subject to condition - ality but cannot be conditional on financing. Unlike the UK, for instance, conditions beyond regulatory approvals may be negotiated. Other privatisation structures can be presented to shareholders at a meeting, and if the requisite approv - als are obtained (two-thirds, as well as any “majority of minority” that may be required), the transaction may proceed in accordance with the terms of the negoti -
ated agreement. In some cases, this is done pursuant to a court-sanctioned plan of arrangement (similar to the UK scheme), while in other cases it is completed by an amalgamation. A number of privatisations completed by private equity-backed buyers in Canada are for issuers that have not conducted lengthy strategic processes and where the shareholders have a general appetite to exit quickly. In such cases, the purchasers may succeed in obtaining more favourable (and more certain) protec - tions, including reverse break fees, “force the vote” provisions, non-solicitations and the right to match any unsolicited superior offer. However, in more com - petitive processes where the public target is known to be “in play”, the seller may push to have protections of its own. 7.6 Acquiring Less Than 100% In Canada, there is a 50% minimum tender require - ment for all formal bids. Bids must be open for a mini - mum of 105 days (subject to the target’s ability to shorten the period under certain circumstances). If at the expiry of the initial bid period the minimum tender requirements and all other conditions of the bid have been satisfied or waived, the purchaser must extend the period for at least ten days to allow additional shareholders to tender. At the expiration of the bid period, the purchaser takes up the shares and pays the tendering shareholders. If 90% of the shares have been tendered and taken up, the shareholders of the remaining 10% can be forced to tender their shares through statutory mechanical “squeeze-out” provi - sions. Where fewer than 90% but more than two-thirds of the shares (or 75% in the case of some British Columbia corporations) have been taken up, the purchaser must proceed to a second-stage “squeeze-out” transaction to purchase the remainder, which generally requires the approval of two-thirds (or 75% in the case of some British Columbia corporations) of the shareholders and possibly a majority of the minority shareholders. 7.7 Irrevocable Commitments It is common (and nearly always a prerequisite in the case of private equity-backed privatisations) to obtain lock-ups from principal shareholders, if accessible.
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