Spotlight On: Crossing the 20% Threshold

Acquiring up to 20% of the shares of a public company requires careful planning

Stakebuilding investors in Canadian public companies have two key ownership thresholds to look out for: 10% and 20%. For more information about what it takes to cross the 10% threshold, the implications of doing so, how to determine your securityholding percentage, and more, see our previous Spotlight blog.

The Importance of 20%: Take-over Bid Territory

Any offer by an investor to acquire outstanding voting or equity securities of a class of a reporting issuer made to one or more persons in Canada that would result in the investor, together with any of its joint actors, having beneficial ownership of and/or or control or direction over 20% or more of the outstanding securities of that class constitutes a take-over bid that requires an offer to be made to all securityholders, unless the offer is a step in a voting transaction (such as a plan of arrangement) or an exemption from the take-over bid requirement is available.

Any securities (including unissued securities) of the class that the investor is deemed to beneficially own are included in the number of outstanding securities for purposes of determining whether the 20% ownership threshold has been crossed.

Acquisitions of convertible securities or securities of an entity that itself holds securities in a reporting issuer therefore should be carefully planned as they may constitute indirect acquisitions to which the take-over bid requirement may apply.

Once an investor has beneficial ownership of, and/or control or direction over, 20% or more of the outstanding securities of a class, any further acquisitions of outstanding securities of that class by the investor or any joint actor also may constitute a take-over bid.

The take-over bid requirement does not apply to a private placement of newly issued securities from the issuer or the conversion or exercise of an outstanding security (such as a convertible debenture or warrant) into newly issued securities of the issuer, even if that leaves the investor with beneficial ownership of and/or control or direction over 20% or more of the securities of the issuer.  However, any further acquisitions would then be subject to the take-over bid requirement.

Key Exemptions to the Take-over Bid Requirement

Certain exemptions are available to the take-over bid requirement that allow investors to acquire more than 20% or to continue acquiring securities once having crossed the 20% threshold without being required to make an offer to all securityholders. The most common exemptions are as follows:

Private agreement exemption

Privately negotiated acquisitions of securities by an investor from not more than five people are exempt from the take-over bid requirement subject to certain conditions, including that the value of the consideration paid for any of the securities is not greater than 115% of the market price (including brokerage fees or commissions) or value (if there is no published market for the securities) of the securities at the date of the acquisition.

If the investor knows or ought to know after reasonable inquiry that a seller acquired the securities from one or more other people to rely on the exemption or a seller is acting as a nominee or other legal representative (except in the case of certain trusts or estates) for one or more other people having a direct beneficial interest in the securities, each of those other people must be included in determining if the exemption is satisfied.

Normal course purchase exemption

An investor’s acquisition of securities of an issuer is exempt from the take-over bid requirement if:

• the acquisition is for not more than 5% of the outstanding securities;
• the aggregate number of securities acquired in reliance on this exemption by the investor and any joint actor within any period of 12 months, together with acquisitions otherwise made by the investor and any joint actor within the same 12-month period, does not exceed 5% of the securities of outstanding at the beginning of the 12-month period;
• there is a published market for the securities that are the subject of the acquisition; and
• the value of the consideration paid for any of the securities acquired is not in excess of the market price at the date of acquisition plus reasonable brokerage fees or commissions actually paid.

Control Person Rules

Canadian securities laws generally define a “control person” as any person or company, or combination of persons or companies acting in concert, that holds a sufficient number of voting rights attaching to voting securities of an issuer to affect materially the control of the issuer.

A person or company, or combination of persons or companies acting in concert, that holds more than 20% of the voting rights attached to voting securities of the issuer is deemed, in absence of evidence to the contrary, to hold a sufficient number of voting rights to affect materially the control of the issuer.

Therefore, once an investor acquires 20% or more of the voting rights of an issuer, they will be deemed to be a control person of the issuer.  Whether an investor who holds less than 20% may also be considered a control person will depend on the particular facts and circumstances of each case.

Canadian securities laws impose certain obligations on control persons, including restrictions on the resale of securities by a control person, referred to as a “control distribution” or “control block distribution”.  Any resale of securities from the holding of a control person is considered a distribution and requires the filing of a prospectus to qualify the distribution of the securities, unless an exemption from the prospectus requirement is available.

Prospectus exemptions

A general prospectus exemption is available for a control distribution if, among other things:

• the issuer has been a reporting issuer in Canada and the investor has held the securities for at least four months before the sale, and the investor has no reasonable grounds to believe the issuer is in default of securities legislation;
• no unusual effort is made to prepare the market for the sale and no extraordinary commissions or consideration is paid;
• the investor gives the market notice at least seven days before the first sale that is part of a distribution and completes the sales within 30 days, subject to renewing the notice; and
• the investor files SEDI insider reports on the issuer’s SEDI profile within three days after each sale.

A separate prospectus exemption is available for a control block distribution by an investor that is an eligible institutional investor if, among other things:

• the investor is filing AMRs and generally satisfies the exemption for eligible institutional investors from the requirement to file SEDI insider reports;
• the sale is made in the investor’s ordinary course of business or investment activities;
• the securities would not be subject to a hold period, if the sale was not a control block distribution;
• no unusual effort is made to prepare the market for the sale and no extraordinary commissions or consideration is paid; and
• the investor files on the issuer’s SEDAR profile within 10 days after the sale a letter describing the details of the sale.

Early Warning and Insider Reporting

As discussed in our previous Spotlight blog, if an investor has crossed the 10% ownership threshold they will be subject to early warning and insider reporting requirements, unless certain exemptions are available.

Further acquisitions by the investor between 10% and 20% or acquisitions above 20% in reliance on one of the take-over bid exemptions may therefore need to be disclosed publicly, which would alert issuers and other market participants about an investor’s further accumulation of securities. Any changes in intentions with respect to the issuer from those disclosed in a previously filed early warning report also may need to be disclosed, even absent an acquisition of securities.

Once an investor has crossed the 20% ownership threshold, the “one business day moratorium” on further acquisitions after filing an early warning report no longer applies to the investor and its joint actors.

Shareholder Rights Plans

If an investor has crossed the 10% ownership threshold in the securities of a reporting issuer and continues to acquire securities up to 20%, they should be mindful of whether the issuer has a shareholder rights plan in place. The ownership threshold in a typical shareholder-approved shareholder rights plan is 20%, although the plan should be carefully reviewed to determine how beneficial ownership is calculated.

If an issuer has a shareholder rights plan in place, an investor may be prevented from acquiring securities above the specified ownership threshold in reliance on an exemption from the take-over bid requirement, discussed above, without triggering the plan.

MI 61-101

As discussed in our previous Spotlight blog, if an investor has crossed the 10% ownership threshold in the securities of a reporting issuer, Multilateral Instrument 61-101 may impose requirements on any further acquisitions of securities up to and beyond 20%.

Key Take-Aways

Many of the key considerations for a stakebuilding investor approaching the 20% ownership threshold will be similar to those for the 10% threshold. Approaching and crossing these thresholds is best done with the benefit of careful legal and tax planning.