Chapter 12.2 Flashcards
Securities Legislation and Takeovers
What role does securities legislation play in takeovers?
Securities legislation determines what can be done and when during a takeover, and many takeovers are nullified by regulators based on these rules.
What is an example of a takeover nullified by regulators?
The proposed merger between NYSE Euronext and Deutsche Bourse was rejected by European regulators
What are three common reasons authorities may reject a takeover?
- Concerns related to national security
- Concerns about sensitive industries critical to the nation (this is why there are foreign ownership restrictions for Canadian banks)
- Anti-trust concerns in situations where an amalgamation of 2+ businesses would create an entity that would too narrowly restrict competition
Why are there foreign ownership restrictions on Canadian banks?
Because banks are considered part of a “sensitive” industry critical to the nation.
What is the net benefit rule in Canada regarding foreign takeovers?
s of 2019, foreign takeovers of Canadian private sector companies worth over $1.5 billion are reviewed under the net benefit rule, with a lower threshold of $379 million for state-owned or influenced enterprises.
Why has the implementation of the net benefit rule raised concerns in Canada?
Because of uncertainty in how precisely the rule is applied, especially following the 2010 rejection of BHP Billiton’s proposed takeover of Potash Corporation of Saskatchewan Inc.
Why is securities legislation relevant to all potential takeovers?
Because it governs the exchange of shares by the target company’s shareholders and protects their right to receive full value for their shares.
What is the main thing to remember about securities law and discussing new issues of securities?
This is a provincial responsibility and there’s slight differences between provinces
Who administers the Ontario Securities Act, and why is it often used as a reference?
The Ontario Securities Commission (OSC) administers it. It’s used as a reference because it includes many features common to all Canadian jurisdictions, despite provincial differences.
What are the 5 critical shareholder percentages that investors have to be aware of?
10 percent: early warning
20 percent: takeover bid
50.1 percent: control
66.7 percent: amalgamation
90 percent: minority squeeze-out
What does the 10% ownership threshold trigger under Canadian securities law?
It triggers the “early warning” threshold (which is set at 5% in the U.S.) level of shareholding by any one owner, where the shareholder must report their holdings to the OSC.
What is the purpose of the 10% early warning threshold?
Lets company know who owns its shares and whether a significant block has been bought by a potential acquirer
What happens when a shareholder reaches 20% ownership in a company?
They can’t buy any more shares in the open market without making a takeover bid
What level of ownership gives a shareholder control of a company?
50.1% ownership level gives company control so that it can call a special meeting of the shareholders (5% ownership is required to attend the meetings) and change the membership of the board of directors (BOD)
What is notable about board governance in Canada once a shareholder gains majority control?
In Canada, but not in the U.S., members of the BOD can be removed without cause, so majority shareholder can change management and take control of the firm’s affairs
What level of shareholder approval is required for an amalgamation in Canada?
Firm can seek to hold a special meeting of shareholders to vote on an amalgamation, which needs support from owners of 66.7% of the shares
Amalgamation can be disputed by a majority of the minority shareholders
What is the 90% ownership threshold in a takeover?
It allows the acquirer to force the remaining minority shareholders to sell their shares at the takeover price
Why does Canadian law allow firms to force minority of shareholders to sell their shares at takeover price a at 90% ownership?
Prevents a small minority from frustrating a bid that has been accepted by the majority of shareholders. Otherwise, a few dissidents could wreak havoc by refusing to sell a small number of shares
How do firms typically begin a takeover attempt without triggering early disclosure rules?
They first acquire less than 10% of the target’s shares to avoid the early warning threshold.
After staying below the 10% early warning level, what is the next step firms often take in a takeover?
They continue acquiring shares in the open market up to the 20% level—this is known as “obtaining a toehold.”
What is a “toehold” in takeover activity?
A toehold refers to a firm acquiring less than 10% of a target’s shares to avoid triggering the early warning requirement, then buying up to 20% on the open market without paying a premium.
Why do firms acquire a toehold before launching a takeover bid?
To acquire the shares at the market price without paying a premium
What happens once a shareholder or group acquires 20% of a target company’s shares?
Buying any more shares requires a takeover bid, which is an offer to purchase outstanding voting shares that, together with the offeror’s shares, equal 50% or more of the target’s shares
Why does the definition of a takeover bid apply to individuals working alone or “working in concert with others”?
Otherwise, a company could buy 20% itself and then get friendly parties or another subsidiary to buy two more blocks of 20% and thereby effect a takeover without making a takeover bid
