Establishing a Toe-Hold / Early Warning
See Chinese version below [中文版参阅下文].
In Canada, it is permissible for a third party considering a take-over bid to purchase up to 9.99% of the target company’s outstanding securities in the market without any requirement to identify itself and its holdings through disclosure. This is in contrast to similar requirements in the United States which arise at the 5% level. Once the third party purchases securities taking it to or over the 10% threshold, it must give notice to the market by issuing a press release no later than the opening of trading on the next business day and filing, within two business days, an “early warning” report in the prescribed form (which must include disclosure of the purpose for the transaction, including plans or future intentions which the purchaser may have with respect to the target company). Note that the initial reporting threshold drops from 10% to 5% where there is already a bid in the market.
The third party could potentially continue purchasing securities up to the 20% level before being required to make a formal take-over bid, although it will be required to report any further acquisitions of 2% or more in a similar manner and, in practice, the stock price typically jumps when the press release is issued at 10%, making further purchases less attractive.
A prospective bidder contemplating the acquisition of a toe-hold will need to consider a range of potential legal and tactical implications, details of which are beyond the scope of this primer. Any accumulation of target company securities by a bidder in advance of a formal take-over bid should be done carefully to avoid the bidder inadvertently being caught by Canadian “pre-bid integration” rules. These rules provide that if a formal bid is launched and, during the 90 days preceding the bid the bidder acquired target securities in any transaction not generally available to all shareholders, then the consideration offered in the formal take-over bid must be at least equal to the highest consideration that was paid on a per share basis under any of the prior transactions.
A bidder will be contractually prohibited from purchasing securities of the target once it signs a confidentiality agreement that includes a standstill provision. Where the strategic decision is taken to acquire a toe-hold, it is usually done before the initial contact with the target company and the negotiation of a confidentiality agreement commences.
A public company that is worried about the possibility of a take-over bid, hostile or otherwise, will monitor trading in its securities for any unusual volume that may indicate that someone is assembling a toe-hold.
A potential purchaser that acquires over 10% of the target company in preparation for a formal take-over bid becomes an “insider” when the 10% threshold is exceeded. Insiders that make take-over offers or propose “related party transactions” can be subject to heightened disclosure and shareholder approval requirements.