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Securities Law

NIN 96/04 - IDA Committee on Take-Over Bid Time Limits - Request for Submissions [NIN - Rescinded]

Published Date: 1996-01-11
Effective Date: 1996-01-11

In response to interest expressed by the Canadian Securities Administrators and securities market participants, the Investment Dealers Association of Canada (the "IDA") is sponsoring the IDA Committee on Take-Over Bid Time Limits, chaired by Adam Zimmerman, the retired chairman of Noranda Forest Inc., (the "Zimmerman Committee"). The Zimmerman Committee is to investigate whether the statutory minimum deposit period for formal take-over bids and related time limits properly balance the interests of target company shareholders and the interests of acquirors and, if not, to determine what time periods would be more suitable.

The Zimmerman Committee has identified the key issues relating to statutory take-over bid time limits and prepared a Request for Submissions document, attached to this notice, which leads the respondent through a series of specific questions on the subject. Issues on which comments are requested include the following:

(a) fulfillment of target directors fiduciary obligations,

(b) dissemination of information to shareholders,

(c) considerations of the acquiror,

(d) directors circular and recommendation,

(e) shareholder rights plans, and

(f) incidental considerations.

The issues raised by the Request for Submissions are important issues and the Commission encourages market participants to respond to the Request for Submissions.

Submissions should be sent, on or before February 16, 1996 to:

Ian C. W. Russell
Secretary to the Committee
IDA Committee on Take-Over Bid Time Limits
c/o Investment Dealers Association of Canada
Suite 1600
121 King Street West
Toronto, Ontario
M5H 3T9
Fax: (416) 364-0753

Questions may be referred to:

Ian C.W. Russell
Vice President, Capital Markets
Investment Dealers Association of Canada
Phone: (416) 364-6133

DATED at Vancouver, British Columbia, on January 11, 1996.

Douglas M. Hyndman





The statutory 21-day minimum deposit period for formal take-over bids has been the subject of debate in Canada for some time. Indeed, many have suggested that the inadequacies of the current rules have been primarily responsible for the proliferation of shareholder rights plans throughout corporate Canada during the past eight years.

In response to interest expressed by the Canadian Securities Administrators, the Canadian stock exchanges, investment professionals and corporate executives to examine this issue and consider recommendations for reform, the Investment Dealers Association of Canada is sponsoring a committee (the "Committee") to investigate whether the 21-day bid period and related time limits properly balance the interests of shareholders of target companies and the interests of acquirors and, if not, to determine what time periods would be more appropriate. The Committee will also consider the impact of any recommended changes on the procedural rules for implementing other types of business combinations.

The Committee is being chaired by Adam Zimmerman, Retired Chairman of Noranda Forest Inc. Other members of the Committee include:

- Thomas Allen, Q.C., Counsel, Davies, Ward & Beck
- Jamie Anderson, Vice President & Director, RBC Dominion Securities Inc.
- Tullio Cedraschi, President & Chief Executive Officer, CN Investment Division, Canadian National Railway Co.
- Ira Gluskin, President & Chief Investment Officer, Gluskin Scheff & Associates Inc.
- Stephen Holinski, Senior Vice President & Chief Financial Officer, Moore Corporation Limited
- Verne Johnson, President & Chief Executive Officer, ELAN Energy Inc.
- Michael Lang, Partner, Borden & Elliot (the Committee's counsel)
- Tony Melman, Vice President, Onex Corporation
- David Mills, President, Canadian Investor Relations Institute
- Michel Plessis-Bélair, Executive Vice President, Chief Financial Officer & Director, Power Corporation of Canada
- William Reidl, President, Fairvest Securities Corp.
- Norman Robertson, President & Chief Executive Officer, ATCO Enterprises Inc.
- Paul Spafford, Vice President & Director, CIBC Wood Gundy Securities Inc.
- George Taylor, President & Chief Executive Officer, John Labatt Limited
- David Ward, Senior Vice President & Managing Director, Mergers & Acquisitions, Nesbitt Burns Inc.
- Michael Wiggan, President & Chief Executive Officer, Sceptre Investment Counsel Limited

The Committee's objective is to produce an interim report following a process that will involve an examination of the issues in the context of recent take-over contests, including input from corporate executives, investors, acquirors, professional advisers and regulators, as well as consideration of the experience in other jurisdictions. The Committee will publish its interim recommendations for public comment and consider any comments received in preparing its final report.

Request for Submissions

As part of the process described above, the Committee is seeking submissions from interested parties on the issues outlined in this notice. Submissions should be in writing and addressed to:

IDA Committee on Take-over Bid Time Limits
c/o Investment Dealers Association of Canada
Suite 1600
121 King Street West
Toronto, Ontario
M5H 3T9
Attention: Ian C. W. Russell
Secretary to the Committee

Fax: (416) 364-0753

Questions may be referred to: Ian C. W. Russell
Vice President, Capital Markets
Investment Dealers Association of Canada
(416) 364-6133

Submissions should be made by February 16, 1996.

Issues on Which Comments are Requested

(i) Fulfilment of Target Directors' Fiduciary Obligations

The current procedural rules governing take-over bids made by way of take-over bid circular ("circular bids") contained in provincial securities acts and federal corporations legislation are largely based on the recommendations of the Attorney General's Committee on Securities Legislation in Ontario (the Kimber Committee) issued in 1965. These rules were intended to (i) give management of the target company an ample opportunity to inform shareholders of its analysis of a bid, and (ii) provide target company shareholders with a reasonable period of time within which to assess the information required to be provided to them.

With the growth of hostile take-overs and the developing body of jurisprudence on the legal duties of directors when faced with a take-over bid, a further rationale for the minimum bid period has evolved which the original 21-day period was not designed to address: i.e., to provide the target's directors with sufficient time to fulfil their fiduciary duties. Generally, directors have considered it their duty in a take-over context to take all reasonable steps to maximize shareholder value - to obtain the best available transaction for shareholders in the circumstances. This often necessitates embarking on an intensive and time consuming process to solicit bids from other potential acquirors.

Does the 21-day minimum deposit period operate to constrain directors from discharging their legal duties when responding to an unsolicited take-over bid? The Committee particularly would like to know of any situations where the development of an auction for corporate control was seriously impeded by the statutory take-over bid time limits.

If the current minimum deposit period operates as a constraint, what is an adequate length of time for a target's board to assess a take-over bid and explore alternatives for increasing shareholder choice and maximizing shareholder value consistent with the fiduciary obligations of directors in these circumstances?

Should a longer minimum bid period be prescribed for certain types of bids: for example, partial bids, securities exchange bids or securities exchange bids that offer securities for which no established trading market exists? The Committee would like to know whether certain types of bids require a longer period for the target's directors to evaluate and appropriately respond.

If the minimum bid period is extended, should the target's directors and/or shareholders be allowed to consent to or authorize an abridgement of the minimum bid period (e.g., to facilitate a negotiated acquisition or where the target company has already been extensively "shopped") and, if so, under what conditions? What would be the likely impact of such an abridgement power on the development of a control auction? For example, would potential suitors be expected to demand that target boards invoke such an abridgement power as a pre-condition to making competing bids?

If a take-over bid is made by an insider (an "insider bid"), the insider-bidder must obtain an independent valuation of the target company's shares and include a summary of the valuation in its take-over bid circular. However, unless the bid is likely to be considered as hostile, the valuation must be prepared under the supervision of a special committee of the target's independent directors. In practice, this valuation requirement (rightly or wrongly) affords some leverage to the target's independent directors in price negotiations with the insider.

If the minimum bid period is sufficiently extended, should the obligation to furnish a valuation in the case of an insider bid be shifted from the insider-bidder to the target's board of directors?

(ii) Dissemination of Information to Shareholders

In assessing the adequacy of take-over bid time limits for the dissemination of information to the target's shareholders, it is recognized that shareholders are not a homogeneous group. For example, large institutional shareholders are typically better informed and capable of more sophisticated valuation analyses and, thus, may be expected to require less time than retail investors to make decisions in respect of take-over bids. Investment counsellors managing pension and other funds may need more time than other investors to notify custodians and, if necessary, consult with and obtain instructions from their portfolio clients with respect to take-over decisions. Further, an increasing number of securities are held in the book-based system of Canadian clearing agencies and take-over bid time limits must be sufficient to accommodate the delivery of take-over bid disclosure documents to non-registered shareholders of the target company.

Do take-over bid time limits need to be extended to ensure that shareholders have sufficient time to receive and assess the information required to be provided to them, to seek professional advice and/or instructions, as required, or to arrange for the timely deposit of their shares under a bid?

Should National Policy 41 (Shareholder Communication) be amended to mandate the delivery of take-over bid disclosure documents to non-registered shareholders of reporting issuers or do the dynamics of take-over bids (including the activities of arbitragers) make this impractical or unnecessary?

(iii) Considerations of the Acquiror

Although the primary purpose of take-over bid regulation is the protection of the target's shareholders, the procedural rules should not unduly impede potential bidders or disadvantage them vis-à-vis the target's management. From the bidder's perspective, the longer a bid is required to be left open the greater the risk that a competing bid will be made; that hostile management of the target company will embark on a course of action that may impact the bidder's perception of the target's value and, thus, its attractiveness; that market conditions may change thereby adversely affecting transaction values; or that the duration of the control contest will negatively impact both the target's and the bidder's operations. Delay may also result in increased financing costs, both in terms of larger standby charges for undrawn loan facilities and exposure to substantial "sunk" costs (e.g., up-front commitment fees) if the bid is unsuccessful.

How much weight should be given to the foregoing considerations in setting the minimum bid period?

Are the considerations different for different types of acquirors (e.g., financial versus industrial)?

What is a reasonable minimum period of time to require a bidder to leave its bid open for acceptance having regard to these considerations?

(iv) Directors' Circular and Recommendation

The current rules require the directors of a target company to send a directors' circular containing prescribed information to the target's shareholders not later than 10 days after the date of a take-over bid. The directors' circular need not contain the board's recommendation or other decision with respect to the bid; instead, the board may advise shareholders not to tender their shares until further communication is received from the board, in which case the directors must deliver their recommendation or decision not later than 7 days before the expiry of the deposit period of the bid. If the bid is open for the minimum required deposit period, this means that technically the target's directors may have just 14 days to evaluate and respond to the bid under the current rules.

Are the current time limits sufficient to enable directors to properly evaluate an unsolicited take-over bid and formulate a meaningful recommendation to shareholders with respect to such a bid?

If the minimum bid period is extended, when should the board be required to deliver its directors' circular and communicate its recommendation or decision to shareholders in respect of a bid?

Should an extension of the target board's response time merely be proportional to an extension of the minimum bid period or should the operative consideration be to inform the market of the target board's position as soon as possible after the terms of the bid are known?

What is a reasonable period of time to allow shareholders to receive and assess the information contained in the target board's directors' circular or subsequent notice(s) of change thereto?

(v) Shareholder Rights Plans

Canadian corporations have turned to shareholder rights plans as a private solution to deal with the inadequacy of the minimum bid period. While those corporations that have adopted rights plans cite a number of reasons for doing so, the primary justification given for their adoption has been the need to extend the minimum deposit period of an unsolicited bid.

If the minimum deposit period is extended in a way that effectively addresses the inadequacies of the current rules, should rights plans and other process control devices be prohibited or should the appropriateness of their use be left to the courts and securities regulators to determine, based on the facts of each case, under existing legal and administrative remedies?

If rights plans are not to be banned, should the regulatory requirements for their adoption be changed, for example by requiring a shareholder approval level higher than a simple majority where the plan's "permitted bid" criteria go beyond the statutory take-over bid requirements?

If, in the event of an extension of the minimum deposit period, a corporation's board wishes to retain a rights plan in place, should the corporation be required to re-submit the plan for shareholder approval?

Securities regulators have clearly indicated that they will intervene to disarm rights plans that are being used in a manner that is likely to deny or severely limit the ability of shareholders to respond to a bid or competing bid. Given this regulatory position, should a corporation's board and its shareholders be allowed to choose the "rules of engagement" for a take-over of the corporation: for example, to choose between the status quo - the current 21-day bid period plus whatever additional time a rights plan may afford - and an extended minimum bid period but without the option of adopting a rights plan?

(vi) Incidental Considerations

1. Withdrawal Rights. For what periods of time, and under what circumstances, should shareholders have withdrawal rights? Should withdrawal rights be structured to take into account concerns about unreasonably exposing bidders to competing bids or should they extend up until the time that a depositing shareholder's shares are taken up under a bid?

2. Competing Bids. What is the appropriate treatment of competing bids? Should the procedural rules be structured so as to encourage competing bids or otherwise achieve neutrality between an initial bidder and competing offerors, or should the "first off the mark" always enjoy a timing advantage? If the target's board and/or shareholders are allowed to shorten the minimum bid period, should the abridged period apply to all competing bids as well?

3. Bid Extensions. Should the minimum 10-day extension period, or the circumstances in which an extension is required, be changed? If so, in what way?

4. Issuer Bids. If the minimum deposit period for take-over bids is extended, should the same extended period apply to issuer bids? For purposes of issuer bid time limits, is it appropriate to distinguish between issuer bids that are initiated in response to a take-over threat and those that are not? If the 21-day period is considered sufficient in the latter case, should the deposit period of an issuer bid be required to match the minimum deposit period applicable to take-over bids if a take-over bid is already in progress or if a competing take-over bid is subsequently made?

5. Jurisdictional Considerations. What are the implications of changes to the take-over bid time limits for Canadian-U.S. cross-border acquisitions? What are the implications for national take-over bids of a lack of provincial and/or federal uniformity in take-over bid time limits? The Committee would also like to know whether those securities commissions having rule-making authority are of the view that changes to their province's take-over bid procedures can be implemented through their rule-making power or whether amended legislation will be necessary.