OSC Releases the First Decision on the Minimum Tender Requirement Governing Take-Over Bids
On February 24, 2021, the Ontario Securities Commission (“OSC”) released its long-awaited reasons for decision in In the Matter of Optiva Inc, (“Re. Optiva”). Re. Optiva is the first case to address the mandatory minimum tender requirement of the take-over bid rules adopted by Canadian securities regulators in 2016.
In its reasons for decision, the OSC refused to grant an exemption from the minimum tender requirement to ESW Capital LLC (“ESW”).a Texas-based private equity firm that was proposing to bid for all of the issued and outstanding shares of Optiva Inc. (“Optiva”), a TSX-traded telecommunications software company. The OSC’s reasons have important implications for Canada’s capital markets participants and in particular for the take-over bid regime. Specifically, the OSC confirmed that:
- The minimum tender requirement is a core component of the take-over bid regime and exemptions to this requirement will only be justified in clear and exceptional circumstances;
- The OSC’s primary consideration in considering whether to grant an exemption from the minimum tender requirement will be whether an exemption will foster shareholder choice;
- The fact that significant minority shareholders act as a “control block” to block a bid is not sufficient, on its own, to justify an exemption from the minimum tender requirement;
- The remedy for a bidder seeking to overcome minority shareholders who hold a blocking position is to improve the offer, not seek an exemption.
Paul Steep and Anu Koshal of McCarthy Tétrault LLP acted for EdgePoint Investment Group Inc. (“EdgePoint”), a large minority shareholder of Optiva, in successfully resisting ESW’s application.
The Minimum Tender Requirement
In 2016, following a lengthy consultation process, the Canadian Securities Administrators (“CSA”) implemented several reforms designed to modernize the laws governing take-over bids in Canada and rebalance the dynamics among Canadian targets, target boards, target shareholders and prospective bidders. One of the cornerstones of these reforms was the adoption of the minimum tender requirement in section 2.29.1(c) of National Instrument 62-104. This rule provides that a bidder cannot take up securities deposited under a take-over bid unless more than 50% of the outstanding securities of the class owned or controlled by investors other than the bidder and its joint actors tender their securities. Simply put, this means that a bid cannot succeed unless a majority of the non-bidder shareholders agree to tender their shares.
At the time, the CSA stated that the purpose of this new rule was to allow for “collective action by security holders in response to a take-over bid in a manner that is comparable to a vote on the bid.” During the consultation process leading to the adoption of the new rule, several commentators supported the minimum tender requirement on the grounds that it will increase the transparency and integrity of the take-over bid regime. Other commentators, expressed concern that the new rule would give large minority shareholders leverage with which to block a bid. In response to this concern, the CSA noted that this was an intended benefit, not a detriment, to the new rule. The rule was designed to encourage target shareholders to work collectively and use their leverage to improve the quality of the bid. The CSA recognized the potential for enhanced leverage for large minority holders but concluded that this could be adequately addressed through exemptive relief (without providing guidance on the circumstances in which they would be likely to grant exemptive relief).
This debate, between the pros and cons of the new rule, was central to the decision in Re Optiva.
ESW’s Proposed Bid for Optiva
ESW’s proposed bid for Optiva came in the context of a long-running battle between its three largest shareholders: ESW, which owned 28.4% of Optiva’s subordinate voting shares; mutual funds managed by EdgePoint, which owned 18.1%; and Maple Rock Capital Partners Inc. (“Maple Rock”), which owned 22.4%.
In 2016, ESW, which owned 13% of Optiva’s subordinate voting shares, took control of Optiva by investing USD $83.2 million in exchange for 800,000 series A preferred shares and warrants. In 2019, EdgePoint and Maple Rock, which held minority positions in Optiva, became concerned that ESW was managing Optiva in a manner that benefitted ESW as opposed to all stakeholders. EdgePoint and Maple Rock each began to take steps to limit ESW’s control of the company. These steps culminated in June 2020, when EdgePoint agreed to pay USD $55 million and Maple Rock agreed to pay up to USD $35 million for 9.75% secured PIK toggle debentures in Optiva. As part of these debenture agreements, Optiva agreed to use the $90 million in proceeds to redeem ESW’s 800,000 series A preferred shares. With this transaction, ESW would lose its preferred shares and its control of the company, though it would remain a significant shareholder.
ESW, however, was not willing to relinquish control. One month later, on July 27, 2020, ESW announced its intention to make an unsolicited offer to acquire any or all of Optiva’s subordinate voting shares not already owned by ESW for CDN $60.00 per share. The offer price represented a 122% premium to the 20-day volume-weighted average price and a 92% premium to the 10-day closing high.. In response to ESW’s announcement, EdgePoint and Maple Rock each announced that they would refuse to tender their shares to the bid. Given that EdgePoint and Maple Rock held an aggregate of 56.6% of the shares not owned by ESW, the minimum tender requirement could not be satisfied and, absent the granting of relief, would effectively block the bid.
In response, ESW applied to the OSC for an exemption from the minimum tender requirement under section 104 of the Securities Act (Ontario) (the so-called “public interest power”) which would allow its bid to proceed as long as a majority of target shareholders other than EdgePoint and Maple Rock tendered to the bid. ESW argued that EdgePoint and Maple Rock were acting as a “control block” to prevent ESW from re-gaining control, and thus preventing other target shareholders from obtaining what it called “an extraordinary premium” for their Optiva shares. This, ESW argued, deprived other target shareholders of shareholder choice and was thus antithetical to the purpose of the take-over bid regime.
The OSC’s Decision
The OSC denied ESW’s application. The Commission noted that the adoption of the minimum tender requirement in 2016 was part of “a material recalibration of bid dynamics designed to facilitate collective shareholder action”. The Commission held that it must be cautious in granting exemptive relief which alters this calibration between the bidder, target shareholders, and control block holders. An exemption will only be justified in the case of “exceptional circumstances or clear improper or abusive conduct by the target, bidder, or control block holders that undermines minority shareholder choice.” There were no such circumstances here.
The OSC noted that this cautious approach – to only intervene in clear and exceptional circumstances – is necessary to promote the integrity and consistency of the bid regime. It provides public companies and shareholders with a “clear and predictable framework” while giving regulators the flexibility to address unique circumstances which offend the purpose of the bid regime.
On the facts of this case, the OSC noted that there were no defensive tactics which compromised shareholder choice, as is often the case in contested take-over bids. There were no tactical share issuances, accumulations, dilutions, or alteration of shareholder control in anticipation of the bid or during the bid. Rather, EdgePoint and Maple Rock acquired their positions well before the bid was proposed. The fact that one or more minority shareholders holds a potential blocking position is “insufficient”, on its own to warrant, an exemption, even when coupled with the announced intention of two large shareholders not to tender to the bid. In short, EdgePoint and Maple Rock were not engaged in any abusive or improper tactics to impede the bid. They were simply exercising their choice, as target shareholders, not to accept ESW’s offer. This did not justify an exemption from the minimum tender requirement.
As the OSC noted:
All shareholders, including significant or control block shareholders, are entitled to decide in their own interests whether and at what price they are willing to exit. Transparency of shareholder views of a bid, as happened here, may enhance informed shareholder choice and may contribute to improved overall bid quality.
The OSC also held that allowing ESW’s bid to proceed without counting EdgePoint’s or Maple Rock’s shares as part of the minimum tender requirement would effectively force EdgePoint and Maple Rock to tender their shares or become trapped in a company with enhanced control by ESW and reduced liquidity. The OSC noted that the minimum tender requirement “was implemented to address the potential for precisely that kind of coercion.”
Finally, the OSC held that preserving the minimum tender requirement in this case was in the public interest as it “holds open the possibility of superior offers”. In other words, if ESW wants its bid to succeed, it needs to make a better offer rather than seek an exemption.
The decision in Re. Optiva gives notice to public companies and activists that exemptions to the minimum tender requirement will not be granted lightly. It also affirms the purpose of the requirement: namely, to encourage collective action among minority shareholders and compel bidders to put their best bid forward.
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