Canada Squeeze-out Guide IBA Corporate and M&A Law Committee 2014

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1 Canada Squeeze-out Guide IBA Corporate and M&A Law Committee 2014 Contact Jeffrey R. Lloyd Bob Wooder Blake, Cassels & Graydon LLP

2 Contents Page INTRODUCTION AND BACKGROUND 2 COMPULSORY ACQUISITION 2 AMALGAMATION SQUEEZE-OUT 4 Page 1

3 INTRODUCTION AND BACKGROUND This guide summarizes the principal methods by which a party wishing to acquire a Canadian public company can squeeze-out minority shareholders that remain following a successful take-over bid for the company. By way of background, it is helpful to discuss briefly the principal methods by which Canadian public companies are typically acquired. In transactions that are supported by the target company, the most common acquisition technique is a statutory plan of arrangement. 1 Under a plan of arrangement, the acquisition is required to be approved by a court and by the target company s shareholders. Subject to those approvals being obtained and any other closing conditions being satisfied, every share of the target company is exchanged at closing for the consideration offered under the plan, which is typically cash or securities of the purchaser, or a combination of the two. As a result, where an acquisition is completed by way of a plan of arrangement (or another shareholder-approved transaction, such as a statutory amalgamation), the purchaser is able to acquire all of the outstanding shares of the target company in one step, with the result that no minority shareholders remain, and a subsequent squeeze-out transaction is not required. The other principal method of acquiring a Canadian public company is by way of a take-over bid for the target company s shares. Unsolicited acquisitions in Canada proceed almost exclusively by way of takeover bid, but acquisitions that are supported by the target company are also commonly made by way of take-over bid. Unlike a plan of arrangement or amalgamation, a take-over bid does not involve a meeting of the target company s shareholders. Instead, it is an offer to purchase the target company s shares that is made by the purchaser directly to each shareholder of the target company. And in contrast to an arrangement, a take-over bid does not enable the purchaser to acquire all of the target s shares at one moment in time in a single step. Instead, following a successful take-over bid, there remain shares that were not tendered to the bid, and hence the necessity for the purchaser (assuming it wishes to acquire all of the target s shares) to squeeze-out the remaining minority shareholders. There are two alternative methods by which squeeze-outs are completed in Canada: (i) under a statutory right of compulsory acquisition; or (ii) pursuant to a shareholder-approved transaction, which is typically an amalgamation squeeze-out. These squeeze-out techniques are discussed below. COMPULSORY ACQUISITION Under Canadian corporations statutes, a party that makes a take-over bid has a right in certain circumstances to acquire the shares of those shareholders who did not tender their shares to the bid. 2 In order to be eligible to exercise such right, the purchaser s take-over bid must have been accepted within 120 days following the date of the take-over bid by the holders of not less than 90% of the shares to which the take-over bid relates, other than shares held at the date of the take-over bid by or on behalf of the purchaser or its affiliates or associates. 1 The sixth annual Blakes Canadian Public M&A Deal Study (2014) found that 82% of the transactions studied proceeded by way of plan of arrangement or another shareholder-approved structure, with the remaining 18% of such transactions proceeding by way of take-over bid. The Blakes Canadian Public M&A Deal Study examined the 50 largest Canadian target-supported transactions announced between June 1, 2012 and May 31, 2013 with respect recurring and emerging issues in the structuring and negotiation of target-supported public company acquisitions in Canada. The study is available at 2 In Canada, corporations may be incorporated under, and governed by, either the federal Canada Business Corporations Act, or by the corporations legislation of any province or territory of Canada. While the provisions of such statutes relating to compulsory acquisitions are similar, there are some differences between them. The corporations law provisions referred to in this guide are those of the Canada Business Corporations Act. Page 2

4 Process for completing a compulsory acquisition When a purchaser is entitled to exercise compulsory acquisition rights following a successful take-over bid, it may do so by mailing a notice of compulsory acquisition to the remaining minority shareholders within 60 days after the date of termination of the take-over bid. Within 20 days after receiving the notice of compulsory acquisition, each minority shareholder must send to the target company the share certificates representing the shareholder s shares and elect to either transfer such shares to the purchaser on the terms on which the purchaser acquired the shares from the shareholders who accepted the take-over bid, or demand payment of the fair value of the shares. A minority shareholder who does not notify the purchaser within the 20-day period is deemed to have elected to transfer its shares to the purchaser on the same terms on which the purchaser acquired shares under the take-over bid. Within the following 20 days after the purchaser has sent the notice of compulsory acquisition, the purchaser must deliver to the target company the amount of money or other consideration that the purchaser would have been required to deliver to the minority shareholders if the minority shareholders had elected to accept the take-over bid. Once the purchaser has made payment for the shares under the compulsory acquisition, the target company must, within 30 days after the purchaser has sent the notice of compulsory acquisition: (i) issue to the purchaser a share certificate in respect of the shares that were held by the minority shareholders; and (ii) give to each minority shareholder who elected to transfer its shares on the terms of the take-over bid and who sent its share certificate to the target company, the consideration to which such shareholder is entitled. The target company must also send a notice to each minority shareholder who has not sent its share certificate to the target company stating that: (i) the shareholder s shares have been cancelled; (ii) the target company or another designated person holds in trust for the shareholder the money or other consideration to which the shareholder is entitled as consideration for the shares; and (iii) the target company will deliver the consideration to the shareholder without delay after receiving the certificate in respect of such shares. It is at this point in the compulsory acquisition process that the purchaser acquires ownership of all of the shares of the target company. While the process may continue (as described below) as a result of a minority shareholder electing to demand fair value for its shares, such an election will not impact the purchaser s ability to acquire 100% of the target company s shares on a timely basis under the compulsory acquisition provisions. Demand for payment of fair value Where a minority shareholder believes that the consideration that was offered under a take-over bid does not represent the fair value of the target company s shares, the shareholder may respond to the notice of compulsory acquisition by demanding payment of the fair value of its shares, with fair value being determined by the court. In that event, the purchaser may apply to the court to fix the fair value of the shares of such minority shareholder. If the purchaser fails to apply to a court within 20 days of making payment for the shares subject to the compulsory acquisition, the minority shareholder may apply to a court for the same purpose within a further period of 20 days. If neither the purchaser nor the minority shareholder makes an application to a court to fix the fair value of the shares, the minority shareholder is deemed to have elected to transfer its shares to the purchaser on the same terms that the purchaser acquired shares under the take-over bid. On an application to determine the fair value of shares subject to compulsory acquisition, all minority shareholders who have elected to demand payment of fair value for their shares are joined as parties and are bound by the decision of the court. The purchaser must notify each of such minority shareholders of the date, place and consequences of the application and of their right to appear and be heard in person or by counsel. The court may in its discretion appoint one or more appraisers to assist the court in fixing a fair value for the shares of the minority shareholders. It is unusual for minority shareholders to exercise their rights to have the fair value of their shares determined by the court. In the cases where such rights have been exercised, four different methods of valuing the shares for these purposes have been established: Page 3

5 (i) (ii) (iii) (iv) the market value approach (based on the quoted market price on a stock exchange); the asset value approach (based on a valuation of the net assets of the company); the earnings approach (based on the capitalized value of a projected stream of maintainable earnings of the company); or a combination of the three foregoing approaches. The approach taken by the court in a particular case will depend on the circumstances. The case law generally suggests that where publicly-held shares are widely and actively traded, the market value approach may be the best determinant of fair market value. However, where the shares are not listed on an exchange or trading is thin, the case law indicates that the earnings approach may be the most appropriate method of valuation. The case law also suggests that fair value as used in the corporate statutes may differ from the fair market value determined in accordance with one of the four approaches described above, and that it is in the discretion of the court to adjust the fair market value to arrive at a fair value that is equitable in the circumstances. Unfortunately, the case law does not establish any consistent method for determining fair value. AMALGAMATION SQUEEZE OUT As noted above, the right of compulsory acquisition is available to a purchaser who has acquired, within 120 days following the date of the take-over bid, 90% or more of the shares of the class of shares to which the take-over bid relates, other than shares held at the date of the take-over bid by or on behalf of the purchaser or an affiliate or associate of the purchaser. However, when a purchaser acquires fewer than 90% of the shares subject to the take-over bid, the purchaser may nevertheless squeeze-out the remaining minority shareholders through a subsequent shareholder-approved transaction, provided that the subsequent transaction is approved by at least 66 2/3% of the votes cast at a shareholders meeting held to approve the transaction. As a result, take-over bids typically include a condition to the purchaser s obligation to acquire shares under the bid that at least 66 2/3% of the outstanding shares shall have been tendered to the bid. 3 While there are multiple ways to structure a shareholder-approved transaction to squeeze-out minority shareholders following a take-over bid, the most common method is an amalgamation squeeze-out, in which the target company is amalgamated with a wholly-owned subsidiary of the purchaser (which is typically a special purpose acquisition vehicle established for the purpose of making the offer). Upon completion of the amalgamation squeeze-out, the purchaser holds 100% of the amalgamated company and the minority shareholders of the target company effectively receive cash in exchange for their shares. Process for completing an amalgamation squeeze-out In order to implement an amalgamation squeeze-out, a meeting of the shareholders of the target company must be held and holders of at least 66 2/3% of the shares of the target company voting at the meeting must approve the amalgamation. Under Canadian corporate and securities legislation that governs the calling of shareholders meetings, such a meeting can typically be held approximately 45 days after a purchaser has initially taken up shares of the target company under the bid. Unlike the compulsory acquisition process, which is initiated by the purchaser, an amalgamation squeeze-out is initiated by the 3 The sixth annual Blakes Canadian Public M&A Deal Study (2014) found that 89% of the transactions that proceeded by way of take-over bid included a 66 2/3% acceptance condition. Page 4

6 target company, which calls the shareholders meeting and mails an information circular in respect of the meeting to its shareholders. As a practical matter, following the acquisition by a purchaser of control of a target company under a take-over bid, the board of the target company will typically be replaced largely or entirely with nominees of the purchaser, and the new board will then take the steps necessary to hold a shareholders meeting to approve the amalgamation squeeze-out. When a purchaser holds at least 66 2/3% of the outstanding shares of a target company, it will be assured that its vote in favour of the amalgamation will result in the requisite level of shareholder approval being obtained. Following completion of the shareholder vote authorizing the amalgamation, the amalgamation can typically be completed within a day or two, and thereafter the purchaser will own 100% of the corporation resulting from the amalgamation of the target company and the wholly-owned subsidiary of the purchaser. Demand for payment of fair value Under Canadian corporations legislation, an amalgamation gives rise to dissent rights for those shareholders who object to the transaction and provide written notice of such objection at or prior to the shareholders meeting at which the transaction is approved. When a shareholder exercises such dissent rights, it is entitled to demand payment of fair value for its shares. The making of such a demand triggers a process similar to that described above for fair value demands under a compulsory acquisition. As in the case of the compulsory acquisition process, if a dissenting shareholder does not accept the consideration offered by the purchaser, fair value is determined by the court, utilizing the general approach described above in respect of compulsory acquisitions. Importantly, a dissenting shareholder ceases to have any rights as a shareholder, other than its right to be paid fair value, so that the exercise of dissent rights on an amalgamation squeeze-out does not delay the purchaser s ability to complete the amalgamation and thereby effectively acquire 100% of the target company. As in the case of compulsory acquisitions, it is unusual for a minority shareholder to demand payment of fair value for its shares in an amalgamation squeeze-out. Other protections for minority shareholders In addition to being subject to the general corporate and securities law requirements described above, an amalgamation squeeze-out transaction also falls within the ambit of detailed securities rules designed to protect the interests of minority shareholders in going private transactions in which a shareholder s equity participation in a corporation is effectively eliminated. Subject to an available exemption, these rules would require a formal independent valuation of the target company to be prepared and described in the information circular that is sent to shareholders, and would require the transaction to be approved by a majority of the minority (essentially being those shareholders whose equity participation in the corporation will be terminated as a result of the transaction). An exemption from the formal valuation requirement is available for an amalgamation squeeze-out that is a second step transaction following a take-over bid, provided that the following conditions are satisfied: (i) (ii) (iii) (iv) the amalgamation is being effected by the purchaser in respect of shares of the same class for which the take-over bid was made and that were not acquired in the bid; the amalgamation is completed no later than 120 days after the expiry date of the take-over bid; the consideration per share that shareholders are entitled to receive in the amalgamation is at least equal in value to and is in the same form as the consideration received by the shareholders who tendered to the take-over bid; and the take-over bid circular sent to shareholders of the target company in connection with the takeover bid contained certain prescribed disclosure. Page 5

7 Similarly, where an amalgamation squeeze-out is a second step transaction that follows a take-over bid, the purchaser may vote the shares it acquired in the take-over bid as part of the required minority approval for the amalgamation, provided that the conditions described above are satisfied and that: (i) (ii) the shareholder that tendered the shares to the take-over bid was not a joint actor (as defined in the applicable Canadian securities legislation) with the purchaser in respect of the bid; and the shareholder that tendered the shares to the take-over bid was not: (a) a direct or indirect party to any connected transaction (as defined in the applicable Canadian securities legislation) to the bid; or (b) entitled to receive, directly or indirectly, in connection with the bid a collateral benefit or consideration that was not identical to that received by the class of shareholders generally. As a practical matter, take-over bids in Canada are generally structured and effected in a manner that ensures the foregoing conditions are satisfied. This ensures that a purchaser who acquires at least 66 2/3% of the shares of a target company in a take-over bid will hold sufficient shares to provide the requisite approvals for a second step amalgamation squeeze-out without any requirement for there to be a formal independent valuation of the target company s shares. Page 6

United States of America Squeeze-out Guide IBA Corporate and M&A Law Committee 2014

United States of America Squeeze-out Guide IBA Corporate and M&A Law Committee 2014 Contact Harvey J. Cohen, Esq. Dinsmore & Shohl LLP harvey.cohen@dinslaw.com CONTENTS Page INTRODUCTION 2 FEDERAL SECURITIES