On February 23, 2021, the Ontario Securities Commission (OSC) released its reasons in ESW Capital, LLC, 2021 ONSEC 7 (the ESW Decision), in which the OSC considered the availability of an exemption from the minimum tender requirement for takeover bids. The ESW Decision dismissed the proposed bidder’s application for exemptive relief, but provided important clarifications on the analytical framework applicable to this type of application.
The 2016 Changes to the Canadian Takeover Bid Regime
In 2016, the Canadian Securities Administrators (CSA) made sweeping changes to the takeover bid process which are reflected in National Instrument 62-104 – Take-Over Bids and Issuer Bids (National Instrument 62-104). According to the CSA, the main goal was to rebalance the dynamics between hostile bidders and target boards by facilitating the ability of shareholders to make voluntary, informed and coordinated tender decisions and providing target boards with additional time to respond to hostile bids. Among the changes introduced by the 2016 reforms is the requirement that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered and not withdrawn before the bidder can take up any securities under the bid (the Minimum Tender Requirement). The purpose of the Minimum Tender Requirement is to ensure that a bidder does not acquire control of a target company in a transaction that lacks the support of independent security holders owning a majority of the securities that are the subject of the bid.
Although Ontario securities legislation allows for exemptions from the Minimum Tender Requirement, neither the Ontario Securities Act, nor National Instrument 62-104 provides any guidance as to the circumstances in which such relief could be granted.
Factual Background to the ESW Decision
The applicant, who held approximately 28% of the target’s outstanding shares, announced its intention to launch a takeover bid to acquire all the issued and outstanding securities of the issuer that it did not already own for a price that, which, according to the ESW Decision, represented a 122% premium to the 20-day volume-weighted average price and a 92% premium to the 10-day closing high. This was shortly followed by announcements by two shareholders of the target, holding in aggregate approximately 40% of the outstanding shares (the Opposing Shareholders), of their intentions to reject the proposed takeover bid.
In order to satisfy the Minimum Tender Requirement, the applicant needed more than 36% of the target’s outstanding shares to be tendered (representing 50% of the number of outstanding shares not already owned by the bidder). However, this threshold could not have been reached in light of the intention expressed by the Opposing Shareholders (holding in aggregate 40% of the outstanding shares) to reject the applicant’s offer, because only 32% of the total number of outstanding shares would have been available for tender to the proposed bid. In order to proceed with the intended bid, the applicant sought exemptive relief to exclude the shareholdings of the Opposing Shareholders from the calculation of the Minimum Tender Requirement.
Impact of the ESW Decision
While the OSC confirmed its discretion to grant exemptive relief in the public interest, it cautioned against intervention in the takeover bid process “absent exceptional circumstances or clear improper or abusive conduct by the target, bidder or control block holders that undermines minority shareholder choice”. The OSC also expressed caution that the granting of exemptive relief would “alter the recalibrated control dynamics between the bidder, the target and control block holders”, in light of the 2016 reforms to the Canadian takeover bid regime. In this case, the OSC was particularly attuned to the real risk that non-control block shareholders would feel pressure to tender to a takeover bid in order to avoid remaining invested in a company with reduced liquidity and a shareholder holding an enhanced control position – precisely the kind of coercion the minimum tender requirement was intended to address.
Although the OSC refused to grant the exemptive relief sought, it provided a framework of consideration of the public interest in takeover bid situations, based on the following non-exhaustive list of factors:
- the nature and circumstances of the bid;
- the control dynamics of the target (both pre-existing control dynamics and any changes to the control dynamics);
- 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 stake in the outcome of the bid;
- the conduct of the target and its board;
- the conduct of the bidder; and
- any other information indicating the views of the target shareholders with respect to the bid.
On the facts of the case, the OSC found that there was no bad faith or improper motivation behind the applicant’s proposed offer and no intention or attempt to entrench its control over the target. While the parties had been involved in a hostile battle over the target’s governance and strategic direction, the Opposing Shareholders had acquired their position before the applicant announced its proposed offer and there were no tactical share issuances, accumulations, dilutions, or alterations of shareholder control in anticipation of the bid or during the bid. The OSC noted that the existence of certain shareholders, with board control or influence, who are able to block a bid, is not sufficient on its own to warrant intervention. This is still true even when shareholders announce their intention not to tender, since increased transparency of shareholder views may enhance the bid process. The OSC also found no evidence that the two Opposing Shareholders acted in concert to impede the applicant’s proposed offer, or that they had any agreement or understanding to not tender to the proposed bid. Rather, each considered the offer price to be inadequate and acted in furtherance of their own duties to their investors. Therefore, the OSC did not have any basis to infer that the Opposing Shareholders misused their control position to unfairly impede the applicant’s proposed bid or that they exercised any influence over the target’s board over its response to the proposed bid.
The OSC therefore recognized that it was appropriate, in this case, to preserve the Minimum Tender Requirement to keep open the possibility of superior offers and protect against coercion. The ESW Decision underscores that the OSC will be cautious when considering whether or not to grant exemptive relief from the requirements related to takeover bids, and such relief will not be granted lightly, especially in circumstances where the relief will alter the dynamics of the recently recalibrated takeover bid regime.
 CSA Notice 62-306 Update on Proposed Instrument 62-105 Security Holder Rights Plans and AMF Consultation Paper An Alternative Approach to Securities Regulators’ Intervention in Defensive Tactics of September 11, 2014.
 “Important amendments to Canadian take-over bid regime”, Norton Rose Fulbright Publication, February 2016.