On August 11, 2019, Quebec’s financial markets administrative tribunal (TAMF), by a majority decision, invoked its public interest jurisdiction to cease trade Mach Group Inc.’s offer (Mach Offer) to acquire 19.5 per cent of the outstanding class B voting shares of Transat A.T. Inc. (Transat) at a price of C$14 per share. TAMF determined the offer was abusive to Transat shareholders and capital markets and barred Mach Group Inc. (Mach) from using any proxies it may obtain to vote shares tendered to it in connection with its offer.
While the Mach Offer had been structured as a “mini tender” that was not subject to Canadian take-over bid rules, the TAMF’s decision confirms that securities regulators will use their public interest power to block such offers where they are found to be abusive of investors.
Similar issues to those raised by the Mach Offer had previously arisen in connection with a mini tender in 2014 by Orange Capital for unit of Partners REIT. Like the Mach Offer, the Orange Capital offer was for less than 20 per cent of outstanding units and thus not subject to the take-over bid rules. And like the Mach Offer, the Orange Capital offer purported to give Orange Capital voting power over all tendered shares regardless of whether they were acquired by Orange Capital. In the Orange Capital case, the offeror voluntarily varied the terms of its offer in response to a complaint to the Ontario Securities Commission and no hearing in the matter was held. Thus, the TAMF decision represents the first formal consideration by a securities regulator of the tactical use of a mini tender to obtain voting control over tendered shares.
Mach made its offer shortly after Air Canada and Transat announced that Air Canada had agreed to acquire all of the issued and outstanding shares of Transat for C$13 per share by way of a plan of arrangement (Arrangement), subject to shareholder and court approvals as well as other customary conditions.
The Mach Offer was conditioned upon depositing shareholders providing proxies to Mach representatives in order to vote the tendered shares against the Arrangement and assign to the Mach representatives the power to exercise the tendering shareholders’ dissent rights in connection with the Arrangement. Air Canada could terminate the Arrangement if Transat shareholders holding 10 per cent of its shares exercised their dissent rights in connection with the Arrangement.
Because the Mach Offer was for less than 20 per cent of the outstanding shares, it was not a take-over bid subject to National Instrument 62-104 – Take-Over Bids and Issuer Bids (NI 62-104 or the take-over bid regime). Such Offers are often dubbed “mini tenders”.
Although the Mach Offer provided for a pro rata take-up in the event that more than 19.5 per cent of the class B voting shares were tendered, the terms of the Mach Offer purported to give Mach the right to vote and exercise dissent rights for all shares tendered. In other words, there was no pro rata condition associated with Mach’s exercise of voting or dissent rights. Additionally, Mach had the ability to withdraw its offer and not purchase tendered shares notwithstanding that it exercised the proxies and voted the tendered shares against the Arrangement, and notwithstanding that it exercised the dissent rights assigned to it.
Transat applied to the TAMF for an order blocking the Mach Offer, alleging that its terms made it “abusive, coercive and misleading” and contrary to the public interest.
Both the majority and the minority of the members of the tribunal considered that the TAMF had broad power to intervene, even in the absence of a breach of the law, to protect the public interest. However, the majority and minority differed with respect to such intervention being warranted in the circumstances.
After reviewing in depth the objectives underlying securities legislation and seminal case law about the principles and basis upon which public interest jurisdiction may be asserted, the majority stated:
It is in this context that the undersigned must assess whether it is in the public interest to intervene with respect to the offer, having regard as to how it is structured, designed and disclosed to the public and, above all, whether the proposed transaction is abusive and coercive towards investors, and having regard to the efficiency of the financial markets. [English translation]
The majority focused on three main factors in assessing whether the cease trade of the Mach Offer was justified:
- The timeframe within which shareholders had to decide
- The structure of the Mach Offer
- The disclosure of the offer.
The majority found that the tender period under the Mach Offer of 11 calendar days (seven business days) was insufficient, making the offer coercive. In making such finding, the majority noted that while NI 62-104 did not apply, the minimum period of 35 days for tendering shares was indicative of the time that is usually required for an investor to make a free and informed decision with respect to a take-over bid, and that the Mach Offer, while not a take-over bid, nonetheless entails the same decision on the part of shareholders, i.e., whether or not to tender his or her shares.
The majority also noted that the Mach Offer was complex insofar as it had multiple aspects involving not only a tender of shares, but also a proxy solicitation, an assignment of dissent rights and a level of interaction with the Arrangement, reinforcing the need for adequate time to make an informed decision.
Questionable Offer Structure
The majority noted that the structure of the Mach Offer was unprecedented in Canada and unusual, taking the view that novel structures that are not covered by existing legislation should be scrutinized more carefully to counter a legal void that may result in potential abuse. The majority found the following aspects of the structure of the Mach Offer to be questionable:
- Mach’s right to obtain a much higher percentage of votes than 19.5 per cent without giving holders the same guarantees to which they would be entitled if the Mach Offer were subject to NI 62-104
- The primary purpose of the Mach Offer was to defeat the Arrangement and the offer price of C$14 was bait to achieve its ends
- Mach had the ability to vote and exercise dissent rights in respect of shares that it would not be required to take up and pay for
- The Mach Offer was not directed to all holders of class B voting shares but only holders on the record date established for determining the right to vote at the special meeting called to approve the Arrangement
- Under this structure, the more holders who participated in the Mach Offer above the 19.5 per cent threshold, the less advantageous such offer would be to such holders due to proration and the more likely it was that the Arrangement would fail, benefiting the offeror
- The elements of the transaction under review must be viewed globally and not in isolation, including the timeframe associated with acceptance of the offer.
Inadequate or Inconsistent Disclosure
While inconsistencies in the disclosure may seem trivial, when combined with a very short timeframe within which to accept the Mach Offer, the majority noted that they could mislead a shareholder who is seeking certainty of return on his or her investment, especially where the offer premium is represented as a sure thing. For example:
- The press release announcing the offer underemphasized the restricted nature of the offer and the fact that it was subject to proration, making it seem a sure thing that depositing shareholders would receive a better outcome than under the Arrangement
- The letter of transmittal stipulated the proxies to be irrevocable, whereas the offer and dissent circular stated the contrary.
The dissenting administrative judge agreed with the majority that NI 62-104 did not apply just because Mach could exercise the votes attaching to a number of shares which could exceed the maximum number of shares that Mach is offering to purchase under its offer (limited to 19.5 per cent of the class B voting shares). The dissent’s key points in considering that the cease trade order was not justified were:
- The take-over bid regime should not serve as inspiration or guidance to assess the Mach Offer when the legislator, the market regulator and the government have deliberately set the threshold for what constitutes a take-over bid at 20 per cent. Put in other words, a cease trade order would de facto introduce new standards in a specific segment of the market that is not regulated.
- The Autorité des marchés financiers (AMF) merely intervened in support of Transat’s cease trade application but did not, as market regulator, at any earlier time proactively seek corrective measures from Mach with respect to its offer, and the TAMF cannot substitute for the AMF as market regulator.
- The deposit period under the Mach Offer was more than sufficient, and in any event, it is better to have some choice than to remove such choice altogether through cease trading the Mach Offer.
- The disclosure was not flawed to the point of being abusive.
Following the TAMF decision, Air Canada raised its offer for Transat from C$13 to C$18 per share and the transaction obtained the overwhelming approval of Transat shareholders at the special meeting called to approve it.
The TAMF decision reminds market participants that securities regulators have broad powers under their public interest jurisdiction and will intervene where novel and complex transaction structures such as the Mach Offer are involved. Although the Mach Offer, as a mini tender, was not subject to the take-over bid rules, Mach was not free to exploit a legal void and impose terms to its offer that were found to be inconsistent with the principles of the take-over bid regime.