Significant legal requirements may arise under corporate and securities laws when acquiring or investing in a Canadian company or business in Canada. In a proposed acquisition, the ownership structure of the target business will have a significant impact on the degree of regulation that will apply. A target business that is a publicly-traded entity will be subject to a significantly greater degree of regulation than a privately-held entity. Whether the business is organized as a corporation or partnership, or a unit or division of a corporation or partnership, will also impact the degree of regulation to which the proposed acquisition will be subject.

Public Company Acquisitions

Acquisitions of control of (or investments in) publicly-traded entities in Canada are subject to regulation under applicable securities laws and the rules of the stock exchange on which the target’s securities are listed. Publicly-traded entities must also comply with applicable corporate, trust or partnership laws, incorporating statutes and judicial decisions.

Reporting Obligations

A buyer of publicly-traded securities is required to report the acquisition of beneficial ownership or power to control or direct 10 percent or more of the target entity’s outstanding voting or equity securities calculated on a partially-diluted class basis. Promptly upon reaching the 10-percent threshold, a buyer must issue a news release followed by, within two days, the filing of an early warning report, which must disclose the purpose of the investment. Any increase of more than two percent, or any material change in the purpose of the investment, must also be reported in the same manner. In addition, upon reaching the 10-percent threshold, the buyer will also be deemed to be an insider of the entity. Insiders are required to publicly file reports disclosing their interest in such securities.

Take-Over Bids

An offer made by a person that would result in such person beneficially owning 20 percent or more of a class of a corporation’s outstanding voting or equity securities, (if accepted) constitutes a take-over bid and must comply with applicable securities laws. Generally, these laws require that a take-over bid offer be made on the same terms and for identical consideration to all holders of securities of the class subject to the take-over bid. A bidder is required to prepare and mail the offer and a take-over bid circular describing the offer to the target’s securityholders. Provided certain conditions are satisfied, Canadian securities laws provide limited exceptions from the take-over bid rules, including the acquisition of:

• up to five percent of a class of securities per year in the public market; and
• an unlimited number of securities by private agreement with five or fewer sellers at a price of no more than 115 percent of the trading price of the securities.

A potential buyer may send an unsolicited (hostile) offer directly to securityholders of the target without obtaining the support of the target’s board of directors. In a negotiated (friendly) transaction, the target enters into a support agreement with the buyer pursuant to which the target agrees not to solicit other offers, subject to a fiduciary out allowing the target to accept a superior proposal in certain prescribed circumstances.

Typically a target that accepts a superior proposal is required to pay a break fee ranging from two to four percent of the total consideration offered under the bid. Most bids are conditional on at least 66 2/3 percent of the securities being deposited to ensure the acquisition of 100 percent of the target’s securities through a second-step transaction (described below). A Canadian take-over bid cannot be conditional on obtaining financing for the acquisition.

A buyer who acquires at least 66 2/3 percent of the securities of a target through a take-over bid can use a second-step squeeze-out transaction to acquire all the remaining securities. of the target This may be achieved by way of a second-step amalgamation, arrangement or other transaction. A buyer who acquires 90 percent or more of the securities sought can compulsorily acquire the remaining securities by providing a prescribed notice and depositing the purchase price with a depository.

Arrangements, Amalgamations and Asset Sales

Alternatively, a buyer may acquire all of the outstanding securities of a target corporation through an arrangement or amalgamation, or the assets of a target through an asset sale under applicable Canadian federal, provincial or territorial corporate laws. An arrangement, amalgamation or sale of all or substantially all of a corporation’s assets requires the approval of at least 66 2/3 percent of the votes cast at a special meeting called to consider the proposed transaction. The buyer will require the cooperation and support of the target under a definitive agreement that typically includes non-solicitation, fiduciary-out and break-fee provisions similar to those in a support agreement for a friendly take-over bid.

Private Company Acquisitions

In transactions where the target business is a privately-held entity, the buyer will have to comply with the target’s incorporating statute, articles of incorporation, by-laws, any shareholders agreement, partnership agreement and any applicable partnership legislation, as applicable. The buyer may also have to comply with take-over bid rules (described above) if the target has more than 50 securityholders and no exemption from these rules is available. Absent regulatory approvals and any applicable industry-specific regulations, there may be few other applicable legal requirements.

The terms and conditions under which an investment or acquisition is made in a privately-held entity will largely depend on the business deal struck. A purchase agreement typically includes post-closing price adjustment mechanisms, representations and warranties, ordinary course covenants and indemnity provisions for any post-closing claims for breach of a representation or warranty.

The structure of the transaction will likely have significant legal implications. Tax considerations often drive the structure of a transaction. Other factors may also be relevant. For instance, when the target is a stand-alone unit within a corporation’s organization and the buyer is not interested in buying other units owned by the corporation, there may be no other alternative than to proceed by way of an asset sale.

Other Considerations

Certain sectors, such as media, telecommunications and banking, are subject to additional regulations and oversight which may restrict foreign ownership. Further, investments in (or acquisitions of) a Canadian business may be subject to the Investment Canada Act and/or the Competition Act.

Conclusion

Depending on the ownership structure of the target business, a buyer of a Canadian business may have to comply with significant requirements under applicable Canadian corporate and securities laws. For publicly-listed entities, a buyer will have reporting obligations upon acquiring 10 percent or more of the target’s voting or equity securities. The buyer also will generally have to make an offer for all of the target’s securities of that class if it offers to purchase 20 percent or more of the target’s voting or equity securities (including securities it already owns), unless an exemption from these requirements is available. While acquisitions of privately-held entities tend to be subject to fewer regulations, a buyer will have to comply with corporate law requirements and, in some limited circumstances, significant securities law requirements.

Bennett Jones Mergers & Acquisitions Group

The Bennett Jones Mergers & Acquisitions Group has worked on some of the most complex take-over bids, mergers, acquisitions, divestitures and corporate reorganizations in Canadian business history. With clients operating in a wide range of jurisdictions and industries, we have ranked among the top firms in Canada in handling the highest number and dollar volume of deals both domestically and internationally. Our lawyers are dedicated to providing clients with innovative strategies to best achieve their objectives. In recent years, we have been lead counsel in over $90 billion worth of transactions. We are also known for our “firsts” – having devised many Canadian original bids, takeover strategies and expansion efforts, including the first major “permitted bid” transaction, the first and only bid for a public company prior to the date of its listing on a stock exchange, the first and only successful “just say no” defence in the retail sector and the (then) largest cross-border oil and gas stock merger ever.