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NOTICE OF PROPOSED CHANGES TO
PROPOSED RULE 61-501 AND
PROPOSED COMPANION POLICY 61-501CP
UNDER THE SECURITIES ACT
INSIDER BIDS, ISSUER BIDS, GOING PRIVATE
TRANSACTIONS AND
RELATED PARTY TRANSACTIONS
Substance and Purpose of the Proposed Rule and
Proposed Companion Policy
Introduction
On January 22, 1999, the Commission republished proposed
Rule 61-501 (the "January proposed Rule") and proposed
Companion Policy 61-501CP (the "January proposed
Companion Policy") at (1999), 22 OSCB 493. The Notice that
accompanied the January proposed Rule and the January
proposed Companion Policy (the "January Notice") requested
comment on both the January proposed Rule and the January
proposed Companion Policy. Proposed Rule 61-501 and
proposed Companion Policy 61-501CP were published
originally for comment on May 31, 1996 at (1996), 19 OSCB
2981.
In response to the January 22, 1999 publication, the
Commission received five submissions on the January
proposed Rule and the January proposed Companion Policy.
On May 14, 1999, Commission staff at (1999), 22 OSCB 2941
requested comment on four specific aspects of the January
proposed Rule and the January proposed Companion Policy.
The Commission received six submissions in response to that
request for comments.
A list of commenters is contained in Appendix A of this Notice,
and a summary of their comments and the Commission's
response to those comments are contained in Appendix B of
this Notice. As a result of comments received, staff's
recommendations and further deliberations of the
Commission, the Commission has amended the January
proposed Rule and the January proposed Companion Policy
and is republishing the proposed Rule and proposed
Companion Policy for comment. The republished versions of
these instruments are referred to in this Notice as the
"proposed Rule" and the "proposed Companion Policy".
This Notice summarizes changes of a substantive nature that
have been made to the January proposed Rule and the
January proposed Companion Policy. Certain changes that
are of a purely technical nature or designed to improve the
clarity of the proposed Rule and proposed Companion Policy
are not summarized in this Notice, but are generally referred
to in footnotes in the proposed Rule and proposed Companion
Policy.
Terms used in the proposed Companion Policy that are
defined or interpreted in the proposed Rule or in definition
instruments in force in Ontario and not otherwise defined in the
proposed Companion Policy should be read in accordance
with the proposed Rule and the definition instruments unless
the context otherwise requires.
The Commission is also publishing for comment with the
proposed Rule and proposed Companion Policy proposed
amendments to certain by-laws of the Investment Dealers
Association of Canada (the "IDA") establishing valuation
disclosure standards for insider bids, issuer bids, going private
transactions and related party transactions. Subsection 5.1(2)
of the proposed Companion Policy refers to the disclosure
standards of the IDA as generally representing a reasonable
approach to meeting the applicable legal requirements. The
proposed amendments to the IDA by-laws being published
with this Notice are substantially similar to the proposed
disclosure standards of the IDA published with the 1996
version of the proposed Rule and proposed Companion Policy
at (1996), 19 OSCB 3036.
Substance and Purpose
The substance and purpose of the proposed Rule and the
proposed Companion Policy are to reformulate OSC Policy
Statement No. 9.1 ("Policy 9.1") with respect to the regulation
of insider bids, issuer bids, going private transactions and
related party transactions. The protections afforded by Policy
9.1, including independent valuations, majority of minority
approval and enhanced disclosure, also form the basis of the
proposed Rule and the proposed Companion Policy. The
proposed Companion Policy sets out the Commission's views
on certain matters relating to the subject matter of the
proposed Rule. The January proposed Rule and January
proposed Companion Policy have been revised to incorporate
certain changes in response to comments received by the
Commission.
For additional information concerning the background of the
proposed Rule and the proposed Companion Policy, reference
should be made to Appendix B of this Notice, the January
Notice and the Notice accompanying the 1996 publication.
Summary of Changes to the January Proposed Rule
Changes of a substantive nature that have been made to the
January proposed Rule are summarized here.
Definitions of Interested Party and Going Private
Transaction
The January proposed Rule defined "interested party" to
mean, for a going private transaction, a related party of the
issuer that is the subject of the going private transaction, if the
related party would
(i) be entitled to receive, directly or indirectly,
consequent upon the transaction
(A) a consideration that is not identical
to that paid to all other beneficial
owners in Canada of affected
securities of the same class, or
(B) consideration of greater value than
that paid to all other beneficial
owners of affected securities of the
same class, or
(ii) upon completion of the transaction,
beneficially own, or exercise control or
direction over, participating securities of a
class other than affected securities.
The Commission has modified clause (i)(A) to clarify that the
reference to consideration is on a per security basis and
applies to both the amount and type of consideration. The
Commission has made a similar modification to clause (e)(i)(A)
of the definition of going private transaction in the January
proposed Rule and clause 8.2(a)(i)(A) of the January proposed
Rule dealing with approval in multi-step transactions.
The Commission has also added commentary on the
interpretation of the words "consideration of greater value" in
section 2.13 of the proposed Companion Policy.
Definition of Market Capitalization
The Commission has deleted paragraph (c) of the definition of
market capitalization in the January proposed Rule, which
provided that in certain circumstances, market capitalization
was the amount of shareholders' equity attributable to
outstanding securities of a class on an issuer's most recent
audited balance sheet. The Commission has added a catch-all provision that provides that, if paragraphs (a) and (b) do not
apply, the issuer's board of directors may determine market
capitalization.
Definition of Prior Valuation
The definition of "prior valuation" in the January proposed Rule
excluded certain valuations, appraisals and reports from the
definition. In response to comments received regarding the
appropriate exclusions from "prior valuation", the Commission
also has added an exclusion from the definition for an
unsolicited report concerning the issuer or its securities
prepared by a person or company that has no material non-public information concerning the issuer or its securities.
The Commission also has amended paragraph (b) of the
definition in the January proposed Rule (paragraph (c) of the
proposed Rule) so that an internal valuation that is not made
available to, or prepared with the participation of the issuer's
board of directors or any director or senior officer of an
interested party other than the issuer will not constitute a prior
valuation.
The Commission also has amended subparagraph (c)(ii) of the
definition in the January proposed Rule (subparagraph (d)(ii)
of the proposed Rule) to refer to clients of an affiliated entity or
associate of the analyst's employer.
The Commission also has added a new paragraph (e) to the
definition so that it also exempts a valuation prepared in
connection with a transaction under which a person or
company became an issuer insider.
Valuations for Insider Bids
The Commission has deleted subsection 2.3(3) of the January
proposed Rule, which provided that the offeror shall determine
who the valuator should be and supervise the preparation of
the formal valuation if the insider bid is being made without the
prior knowledge of all of the independent directors of the
offeree issuer or if the offeror has a reasonable basis for
concluding that the insider bid is being regarded as a hostile
bid by a majority of the independent directors. The
Commission is of the view that in all circumstances it should
be the independent committee of the target company in an
insider bid that determines who the valuator should be and
supervises the preparation of a formal valuation. The
Commission has indicated in the proposed Companion Policy
that relief would be considered where the independent
committee of the target company is not acting in a timely
manner.
Application to Going Private Transactions and Related
Party Transactions
In light of the creation of the Canadian Venture Exchange, the
Commission has deleted the references to quotations on the
Canadian Dealing Network in paragraphs 4.1(2)(a), 5.1(2)(a)
and 5.1(2)(j) of the January proposed Rule. The Commission
intends to consider the appropriate treatment of Canadian
Venture Exchange issuers that are not reporting issuers as
part of its ongoing consideration of the exchange
reconfiguration process.
Exemption from Valuation Requirement for Previous Arm's
Length Negotiations
The Commission has added commentary in the proposed
Companion Policy to clarify that the arm's length negotiations
upon which the exemption is premised must be between the
selling securityholder and the party with whom it is negotiating
and has added commentary regarding situations where it
would not normally consider persons or companies to be
acting at arm's length.
The Commission has also added commentary in the Proposed
Companion Policy regarding the interpretation of certain
conditions to the exemption.
In the January proposed Rule, the arm's length test was based
upon one selling securityholder beneficially owning or
exercising control and direction over five percent of the
outstanding securities of the issuer and one or more selling
securityholders beneficially owning or exercising control and
direction over at least 20 percent of the outstanding securities
not held by the offeror or persons or companies acting jointly
or in concert with the offeror. The Commission has raised the
five percent component of the test to 10 percent, except where
the offeror owns 80 percent or more of the outstanding
securities that are the subject of the insider bid or going private
transaction. The Commission is of the view that the 10
percent threshold will provide a better reflection of support for
the value negotiated.
The Commission has also modified the paragraph to clarify
that the offeror can rely on prior negotiations by another
person or company and has modified the 20 percent
component of the test to provide that it can be satisfied in one
or more transactions.
Exemption from Valuation Requirement for Auction
The exemption in the January proposed Rule turned on full
access to the issuer being given to all offerors and persons or
companies in the case of an insider bid or a going private
transaction. The Commission has changed the test in the
proposed Rule from "full access" to "equal access". The
Commission has added, in addition to the reference in this
exemption to outstanding formal bids, references to going
private transactions and transactions that would be going
private transactions except that they come within the exception
in paragraph (e) of the definition of going private transaction.
Exemption from Valuation Requirement for Second Step
Going Private Transactions
The Commission has modified this exemption in paragraph 4
of section 4.5 of the proposed Rule so that it can be used by
an affiliated entity of the offeror, provided that if securities of
the offeror formed all or part of the consideration under the
take-over bid, the same consideration must be offered under
the going private transaction.
One of the conditions in the January proposed Rule for an
exemption from the valuation requirement for second step
going private transactions was that if tax consequences of
tendering to the formal bid were reasonably expected to be
different from the tax consequences arising from the
subsequent going private transaction, the disclosure document
for the formal bid had to describe the tax consequences of
both the formal bid and the subsequent going private
transaction. The Commission has revised this so that the tax
consequences must only be described if known or reasonably
foreseeable and, if not known or reasonably foreseeable,
securityholders must be advised that the tax consequences
may be different. A similar modification has been made to
subparagraph (e)(vii) of section 8.2 of the proposed Rule
dealing with minority approval of multi-step transactions.
Disclosure for Insider Bids, Issuer Bids, Going Private
Transactions and Related Party Transactions
The Commission has added provisions to the proposed Rule
requiring disclosure of the background to a current offer or
transaction in the required disclosure document for a take-over
bid, issuer bid, going private transaction and related party
transaction.
Related Party Transactions - Exclusions
The Commission has moved the exclusion in paragraph
5.1(2)(k) of the January proposed Rule to a separate
subsection 5.1(3) of the proposed Rule. The Commission has
modified the exclusion to provide that it is available only for the
person or company subject to the conflict of interest provisions
of the relevant statute. The effect of this is that the proposed
Rule applies to the person or company that is party to or is
involved in the transaction that is not subject to the conflict of
interest provisions.
Exemption from Valuation Requirement for Financial
Hardship
The Commission has added as a condition to the exemption
in paragraph 8 of section 5.6 of the proposed Rule a
requirement that the board of directors of the issuer, acting in
good faith, must determine, and at least two-thirds of the
independent directors of the issuer, acting in good faith, must
determine, that (a) the issuer is insolvent or in serious financial
difficulty; and (b) the transaction is designed to improve the
financial position of the issuer.
Valuator - Independence
Subsection 6.1(4) of the January proposed Rule provided that
a valuator that is paid jointly by the issuer and one or more
interested parties to a transaction to prepare a formal valuation
for a transaction is not, by virtue of that fact alone, not
independent. In the proposed Rule, the Commission has
clarified that the payment need not be joint. If a related party
has paid all of the valuator's fees, the valuator for the
transaction is not, by virtue of that fact alone, not independent.
Valuation of Non-cash Consideration
The January proposed Rule set out conditions under which a
formal valuation of non-cash consideration is not required. In
the proposed Rule, the Commission has added, as one such
condition, a requirement that the valuator be of the opinion that
a valuation of the non-cash consideration is not required.
Minority Approval
The Commission has broadened paragraph 8.1(3)(b) of the
proposed Rule, so that the votes attached to shares owned by
an interested party will not be excluded if the interested party
is being treated identically to all other holders in Canada of
affected securities and does not receive, directly or indirectly,
as a consequence of the transaction, consideration of greater
value than that received by all other holders of affected
securities.
Summary of Changes to the January Proposed
Companion Policy
Valuations for Insider Bids
The Commission has added commentary to the proposed
Companion Policy to provide that, if an independent committee
of the offeree issuer is not acting in a timely manner in having
a formal valuation prepared, the offeror may seek relief from
the requirement that it obtain a valuation. The Commission
also has added commentary to the proposed Companion
Policy regarding the ability of an independent committee to
apply for relief from the valuation requirements in limited
circumstances.
Independence of Valuator
The Commission has amended paragraph (b) of section 5.2 of
the January proposed Companion Policy, which set out areas
of concern regarding the independence of a valuator. The
Commission has deleted material involvement in an
evaluation, appraisal or review of the financial condition of the
issuer in certain circumstances and acting as lead or co-lead
underwriter of a distribution of securities by the issuer in
certain circumstances as being areas of serious concern. In
those instances, independence continues to be a question of
fact.
Valuation and Minority Approval Exemptions for Related
Party Transactions
The Commission has added commentary in section 6.1 of the
proposed Companion Policy regarding the ability of issuers in
certain circumstances to rely on one or more exemptions in the
proposed Rule in connection with a series of transactions
between the issuer and a related party.
Comments
Interested parties are invited to make written submissions with
respect to the proposed Rule and the proposed Companion
Policy. Submissions received by January 10, 2000 will be
considered.
Submissions should be made in duplicate to:
c/o John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
A diskette containing the submissions (in DOS or Windows
format, preferably WordPerfect) should also be submitted. As
the Act requires that a summary of written comments received
during the comment period be published, confidentiality of
submissions cannot be maintained.
Questions may be referred to:
Stan Magidson
Director, Take-over/Issuer Bids,
Mergers & Acquisitions
Corporate Finance Branch
Ontario Securities Commission
(416) 593-8124
Proposed Rule, Proposed Companion Policy and
Proposed Amendments to IDA By-laws
The text of the proposed Rule, proposed Companion Policy
and proposed amendments to the IDA By-laws follow. The
proposed Rule and proposed Companion Policy contain
footnotes that are not part of the proposed Rule and proposed
Companion Policy but have been included to provide
background and explanation.
DATED: December 10, 1999
APPENDIX A
LIST OF COMMENTERS ON PROPOSED RULE
AND PROPOSED COMPANION POLICY
1. Simon Romano by letter dated March 26, 1999.
2. Toronto Society of Financial Analysts by letter dated
April 21, 1999.
3. RBC Dominion Securities Inc. by letter dated April 23,
1999.
4. Canadian Bar Association (Ontario), Securities
Subcommittee, Business Law Section by letter dated
April 30, 1999.
5. Osler, Hoskin & Harcourt by letter dated May 18,
1999.
6. Nicholas Dietrich by letter dated May 31, 1999.
7. Davies, Ward & Beck (Jean-Paul Bisnaire) by letter
dated May 31, 1999.
8. James E. A. Turner by letter dated June 2, 1999.
9. Philip Anisman by letter dated June 3, 1999.
10. René Sorell by letter dated June 4, 1999.
11. John Stransman by letter dated June 8, 1999.
APPENDIX B
SUMMARY OF WRITTEN COMMENTS RECEIVED
ON THE JANUARY PROPOSED RULE AND THE
JANUARY PROPOSED COMPANION POLICY AND
RESPONSES OF THE COMMISSION
The Commission received 11 submissions with respect to the
January proposed Rule and the January proposed Companion
Policy.
The Commission has considered the submissions received
and thanks the commenters for providing their views.
The following is a summary of the comments received,
together with the Commission's responses. Unless otherwise
provided, references to section numbers are to section
numbers in the January proposed Rule and the January
proposed Companion Policy.
A. SUPPLEMENTARY REQUEST FOR COMMENTS
The comments received on the four specific topics addressed
in the May 14, 1999 request for comments are as follows:
Question 1:
Do you agree that the Commission is correct in no longer
seeking to regulate as a going private transaction a transaction
in which shareholders do not receive a participating security of
"equivalent value" in a continuing issuer but all shareholders,
including any related party, are treated equally?
Comments
Five of the six commenters addressed this question. Four of
the five agreed with the position taken by the Commission in
the January proposed Rule, which is to regulate conflict of
interest situations and de-emphasize the "expropriation" theory
of going private transactions. One of the commenters
suggested that Commission staff clarify with the Director under
the Canada Business Corporations Act (the "CBCA") that the
Director will not amend the CBCA policy or seek to intervene
in one-step arm's length squeeze out transactions.
One commenter did not agree with the position taken in the
proposed Rule. The commenter preferred the approach under
Policy 9.1 whereby a transaction was not a "going private
transaction" if shareholders received participating securities of
equivalent value in the issuer or a successor entity. The
commenter stated that under Policy 9.1, issuers faced the
paradoxical problem of paying for financial advice to support
reliance on an exemption from a rule which if followed in the
first place would have given rise to a requirement to get much
the same advice. The new definition of going private
transaction introduces an unwarranted rigidity in that the
related party must receive not only consideration that is
identical in form to that received by all other beneficial owners
but also must be able to demonstrate that the consideration it
is receiving is of no greater value than that paid to all other
beneficial owners. The old uncertainty about value therefore
remains. If the related party is a control person, the
commenter does not know how the test can ever be satisfied
since, as a practical matter, the control block will always be
worth more than the non-control block security. The
commenter found the rationale provided in footnote 35 to the
January proposed Rule unconvincing and thought it carried
forward the mischief of the quasi-going private transaction
approach that was criticized by the community.
Response
The Commission continues to believe that the approach taken
in the January proposed Rule is the correct one and that going
private transactions should only be regulated in a conflict
situation where related parties are not being treated identically
to all shareholders. In most cases, it should be apparent
whether the related party is being treated identically to all other
shareholders. To facilitate the determination, the Commission
has modified the first part of the definition to make it clear that
the test applies on a per security basis. The "greater value"
test is necessary because of concerns relating to the receipt
by the related party of a collateral benefit of the type
addressed in subsection 97(2) of the Act.
Commission staff has advised staff of the Director under the
CBCA of the position taken in the proposed Rule.
Question 2
Do you agree that a major shareholder that enters into a hard
and irrevocable lock-up agreement to support a going private
transaction but receives identical consideration to that
received by other shareholders should be entitled to vote its
shares as part of the minority in respect of the going private
transaction in all cases? What about a soft lock-up?
Comments
All six commenters addressed this question. Five of the six
commenters were of the view that a major shareholder that
enters into a lock-up agreement (whether hard or soft) to
support a going private transaction but receives identical
consideration to that received by other shareholders should be
entitled to vote its shares as part of the minority in respect of
the going private transaction. The commenters were of the
view that permitting such shareholders to vote results in bids
being made that might not otherwise be made at all. One
commenter indicated that he would require that: (i) the locked-up shareholder must have had full knowledge and access to
information concerning the issuer and its securities; and (ii) no
factors peculiar to the locked-up shareholder, including non-financial factors, have had the effect of reducing the price that
would otherwise have been considered acceptable by the
selling shareholder.
One commenter indicated that seeking to make a distinction
between "hard" and "soft" lock-up agreements, or
arrangements that do not amount to lock-up agreements at all,
is a route that will involve Commission staff in the murky world
of assessing the quantum of break fees and topping
agreement sharing provisions, the "firmness" of fiduciary outs
and no-shop provisions, the valuation of asset options and the
like.
A sixth commenter opposed allowing locked-up shares to be
counted. That commenter was of the view that counting the
votes of a majority shareholder that enters into a lock-up
agreement has the effect of permitting that shareholder to
force the minority to sell at a price determined by the majority
shareholder. Given the multiplicity of motivations that may
lead a majority shareholder to enter into a transaction, the
commenter believed that the position originally adopted with
respect to Policy 9.1 and still followed by the Quebec
Securities Commission is the correct one.
A seventh commenter that responded to the January request
for comments also endorsed the treatment in the January
proposed Rule of lock-up agreements and was of the view that
it represents a positive development that will ensure that the
focus of analysis is on whether the locked-up party is receiving
preferential treatment relative to other shareholders. The
commenter noted that the January proposed Rule is designed
to distinguish situations where a locked-up party may not be
evaluating the merits of a transaction on the same footing as
other shareholders. The commenter was of the view that this
is a sounder approach than an approach rooted in concerns
about whether the locked-up party has had an opportunity to
negotiate with respect to the price being offered. The fact that
a party initiates or is involved in the process that gives rise to
the proposed transaction is not, on its own, sufficient reason
to exclude that party from a majority of the minority vote. The
commenter was of the view that if additional safeguards are
desirable, these should not turn on whether the lock-up
agreement is soft rather than hard. Instead they should be
rooted in concerns about whether shareholders voting on the
offer are similarly situated with respect to what they will receive
under the terms of the offer.
Response
While the Commission recognizes that allowing locked-up
shares to be counted may end or preclude an auction, the
Commission continues to believe that the approach taken in
the January proposed Rule is the correct one and that locked-up shares should be counted, subject to the qualification that
the locked-up shareholder (i) did not receive a consideration
per security that is not identical in amount and type to that paid
to all other beneficial owners in Canada of affected securities
of the same class, (ii) did not receive consideration of greater
value than that paid to all other beneficial owners of affected
securities of the same class, and (iii) upon completion of the
transaction, did not beneficially own, or exercise control or
direction over, participating securities of a class other than
affected securities. The Commission does not propose to
distinguish between hard and soft lock-up agreements. In
respect of the comment that there be a requirement that the
locked-up shareholder have full knowledge and access to
information and there have been no factors peculiar to the
locked-up shareholder that had the effect of reducing the price,
the Commission believes those factors go more properly to
whether a valuation exemption should be available than the
question of whether locked-up shares should be counted.
Question 3:
Is there a better mechanism that can be used in insider bids to
reduce the dependency that an insider has on the conduct of
the Special Committee of the target company in the
preparation of the requisite valuation?
Comments
Five of the six commenters addressed this question.
One commenter indicated that he did not have a suggestion
for a better mechanism. However, it seemed to that
commenter that the Commission and court decisions over the
past several years have imposed upon special committees a
standard of conduct that is sufficiently high to protect minority
shareholders in insider bid transactions.
Another commenter was of the view that if the special
committee is unwilling to obtain a valuation within a reasonable
period of time after being requested to do so by the insider,
that the insider be permitted to commence its bid without a
valuation. In such case, the bid would have to be open long
enough to permit a valuation to be obtained and the special
committee would be obliged to do so.
Another commenter was of the view that the existing
mechanism has worked reasonably well and that a
discretionary exemption may be available in other
circumstances. The existing mechanism makes most sense
in circumstances in which there is a controlling or a significant
shareholder. In that situation, issuers assume that the formal
valuation should be prepared under the supervision of the
special committee and that valuation is usually prepared in a
timely manner. The exceptions provided for in the January
proposed Rule deal with most of the circumstances where the
requirement should not apply. In addition, the valuation
exemption for lack of knowledge and access is also available
to a "technical" insider.
Another commenter noted that delays in the preparation of the
valuation effectively lengthen the deposit period, and operate
as an extra defensive tactic uniquely available in the context of
insider bids. If the Commission is unwilling to revisit the
position taken in the January proposed Rule, explicit language
should be inserted in the insider bid provisions of the Rule
mandating the earliest possible preparation of the valuation,
and allowing a bidder to apply to the Commission for relief
where there is unreasonable delay. In circumstances where
the insider's holding exceeds 33 percent and effectively
represents a blocking position enabling the insider to inhibit
competitive bids, the valuation should provide not only a range
that ignores the "minority discount" but also the range giving
effect to the minority discount.
The commenter also noted another unresolved issue
presented by the use of valuations. Where a valuation
produces a range of values for the company that exceeds the
price offered for the shares of the company by any actual bid,
can the valuation be said to be "wrong"? After all, the
valuation is intended to be a proxy for fair market valuation that
actually will be assigned to the company either by a single bid
on the table or by the highest bid produced by any auction
process that results. In our system it is a paradox that the
valuation, which is a mere estimate of what the market will
produce, tends to overshadow the price assigned to a target
company by the marketplace.
Another commenter saw no reason why if a bidder wishes, it
should not have the option of launching its bid without an
independent valuation on the basis that the independent
directors are required to include it in the directors' circular. In
those circumstances, one might consider whether the bidder
should be required to have a minimum 35 or 45 day bid period
and to bear the costs of the valuation.
Response
The Commission believes the mechanism in the January
proposed Rule generally works well. A bidder is required to
provide a valuation in its take-over bid circular in order to allow
shareholders of the target corporation to properly assess the
offer. The valuation is prepared under the supervision of the
target board.
The Commission, however, has decided to delete subsection
2.3(3) of the January proposed Rule. That subsection allowed
an offeror to determine who the valuator should be and
supervise the preparation of a valuation in certain
circumstances. The Commission is of the view that a "formal
valuation", which must be prepared in accordance with the
provisions of Part 6 of the proposed Rule, generally cannot be
properly prepared by an offeror without access to, and
cooperation of, the offeree issuer. As a result, in all
circumstances under the proposed Rule, unless a
discretionary exemption is granted, it must be the independent
committee of the target company in an insider bid that
determines who the valuator should be and supervises the
preparation of a formal valuation.
The Commission considered allowing a bidder to mail its
circular without a valuation if it kept its bid open for a specified
period of time longer than 21 days and the target board
included a valuation in its circular. Ultimately, the Commission
decided this was inappropriate because any period of time
chosen by the Commission may be too short a period for the
board to have a valuation prepared or be unnecessarily long.
The Commission has added commentary to the proposed
Companion Policy to the effect that, if an independent
committee of the offeree issuer is not acting in a timely manner
in having a formal valuation prepared, the offeror may seek
relief from the requirement that the offeror obtain a valuation.
The Commission has also added commentary to the proposed
Companion Policy regarding the ability of an independent
committee to apply for relief from the valuation requirements
in limited circumstances.
The Commission disagrees with the comment that a valuation
should provide a range that gives effect to a minority discount.
The Commission believes it is unnecessary for the purpose of
the valuation exercise. The Commission also accepts that
there may be situations where a valuation is higher than an
actual offer. A valuation is only an opinion, albeit one the
Commission wants disseminated. Persons or companies are
free to reach their own views on values. If a valuation is higher
than an actual offer, that is not to say the valuation is
necessarily wrong, only that a person or company has not
chosen to offer what the valuator believes the entity is worth on
an en bloc basis.
Question 4:
Should the Commission mandate the use of special
committees in the context of going private transactions, related
party transactions and issuer bids, in addition to insider bids?
Comments
Five of the six commenters addressed this question. One
commenter was of the view that while the use of special
committees in the context of those transactions might be
desirable, the commenter wondered whether as an alternative
to legislative mandate, allowing the common law to develop
with respect to directors' fiduciary duties might be more
appropriate.
Three commenters who responded to this question did not
believe that the Commission should mandate the use of
special committees and were of the view that the January
proposed Rule is appropriately drafted in this regard. One
commenter noted that, in practice, the conflict of interest
provisions of corporate law and corporate practice generally
will mandate the use of what are de facto special committees
in most of these transactions since the directors representing
an interested party are not allowed to vote. One commenter
suggested that, in an accompanying policy, it may be made
clear that it is expected that the "interested party" will not
participate in the process to be followed by the board of the
issuer, without mandating the need for a special committee per
se.
A fifth commenter noted that the January proposed
Companion Policy contains very strong language in
subsections 6.1(6) and (7) that comes close to mandating the
use of special committees. While the use of such committees
unquestionably promotes the perception that interested parties
have been removed from the deliberations of the committee
itself and that an independent view is being brought to bear,
recent court cases including especially the Schneider decision
suggest that the language in subsection 6.1(7) may go too far.
In particular, non-independent persons were allowed to
participate in the deliberation and proceedings of the special
committee. The non-independent persons included senior
management as well as control people. The important thing
for the court was that ultimate responsibility resided with the
special committee even though the special committee
communicated information and elicited the views of non-independent parties.
A seventh commenter that responded to the January request
for comments strongly supported the fact that the January
proposed Rule did not mandate the use of an independent
committee except with respect to supervising valuations for
certain insider bids. The commenter agreed that the board of
directors is the appropriate forum to determine whether to form
an independent committee in the circumstances of a particular
transaction.
Response
The Commission does not propose to change the provisions
of the January proposed Rule relating to special committees.
The Commission disagrees with the commenter that
subsections 6.1(6) and (7) of the January proposed
Companion Policy mandate the use of special committees.
While the Commission believes that the statements in those
subsections regarding the composition and function of special
committees are consistent with recent case law, the
Commission has modified subsection 6.1(7) of the January
proposed Companion Policy (subsection 7.1(7) of the
proposed Companion Policy) to clarify that non-independent
board members and other persons may act in accordance with
instructions received from the special committee and that in
the Commission's view, non-independent persons should not
be present at or participate in the decision-making
deliberations of the special committee.
B. GENERAL COMMENTS
1. Harmonization Issues
Comments
One commenter referred to a May 1998 submission of the
Canadian Counsel of Financial Analysts (the "CCFA")
regarding going private transactions. That submission
supported the development of uniform rules under provincial
securities rules or policies relating to going private
transactions, given the current overlapping jurisdictions of the
CBCA and provincial and corporate regulations and securities
rules and policies. The CCFA submission stated that, under
our present multijurisdictional system, corporations that are not
reporting issuers in Ontario or Quebec or incorporated in
Ontario generally are exempt from corporate or securities
policies on going private transactions. The CCFA was of the
view that going private transactions are neither inherently good
nor bad, provided that sufficient disclosure is made.
Another commenter was of the view that the Commission
should use its best efforts to harmonize the proposed Rule and
proposed Companion Policy with changes to Policy Q-27 of
the Commission des valeurs mobilières du Québec ("CVMQ")
wherever possible.
Another commenter noted that a significant number of
transactions that would be subject to the Rule also would be
subject to the requirements of Policy Q-27. Accordingly, to the
extent that the provisions of Policy Q-27 and the Rule are
inconsistent, issuers will have to comply with varying
regulatory regimes. The commenter urged the Commission to
consult with the CVMQ in this respect. If harmonization is not
possible, the commenter suggested that the Commission
should advise the issuers of the circumstances when
exemptive relief may be made available to harmonize the Rule
with Policy Q-27.
A further commenter suggested that the Commission use its
efforts to influence the CVMQ to abandon its continued
hostility to allowing shareholders who enter into
"understandings" with proponents of going private transactions
to be counted as part of the minority.
Response
The Commission believes that harmonization is desirable. The
Canadian Securities Administrators are continuing to discuss
harmonized regulation, but ultimately it is up to each individual
province to decide what areas it wants to regulate and how it
wishes to regulate in those areas.
2. Rule versus Alternative Approaches
The notice accompanying the 1996 proposed Rule requested
comments on whether its approach in regulating related party
transactions by way of a comprehensive rule or through one of
two alternative approaches was most appropriate. The first
alternative would involve a rule with a scope restricted to
specific types of related party transactions that have given rise
to numerous complaints in the past ("quasi-going private
transactions", as defined in the 1996 proposed Rule, and
dispositions to a related party of a substantial part of an
issuer's property) and also would include a companion policy
warning of the Commission's concerns and ability to intervene
on a public interest basis. The second alternative would
restrict regulation of related party transactions to the type of
policy suggested under the first alternative. The January
proposed Rule maintained the status quo and regulated
related party transactions by way of a comprehensive rule.
Comment
One commenter noted that there appeared to be substantial
support for the alternative approaches summarized in the
notice to the 1996 proposed Rule and challenged the
Commission's decision to regulate broadly through a rule. The
commenter described the approach of the January proposed
Rule to related party transactions as an "extremely broad,
vague, complex and long instrument, the costs of which, in the
commenter's view, likely outweigh the benefits". The
commenter noted that Policy 9.1, when first adopted, was very
useful in focusing attention on non-arm's length transactions
and the need for fairness. The commenter suggested that this
process has occurred and submitted that the Commission
could relax its approach at this time. The commenter felt that
similar arguments might support the ability of independent
directors to waive valuation and/or minority approval
requirements.
The commenter felt that the Commission's approach does not
properly take into account several issues.
First, the Commission is mandated in paragraph 2.1 6 of the
Act to have regard to the "fundamental principle" that business
and regulatory costs and other restrictions on the business
and investment activities of market participants should be
proportionate to the significance of the regulatory objectives
sought to be realized. The commenter noted that a test based
on "undue impediment" is very different than proportionality.
Second, the Commission is required to consider the
anticipated costs and benefits in proposing rules. The
commenter noted that such an extraordinary regulatory
approach should be carefully reviewed from a cost
perspective. The commenter believed that every transaction
with even a trace of non-arm's lengthedness would be
rendered potentially invalid by the January proposed Rule.
The commenter suggested that a saving provision such as that
contained in subsection 16(3) of the CBCA may be necessary
to protect third parties, such as financiers.
Third, the commenter noted that recent published studies
show that corporate concentration is diminishing in Canadian
public companies, presumably because of the need for capital
in an increasingly complex and globalized world. These
studies, along with academic criticism, also weigh against a
rule-based approach.
Fourth, the commenter suggested that more detailed rules
than our U.S. neighbours may contribute to the increasingly
common phenomena of Canadian companies seeking to go
public and raise capital south of the border.
Finally, the commenter noted that Policy 9.1 has been
effectively unenforceable except potentially through the
Commission's general powers. The commenter suggested
that, since there have been very few serious concerns with
related party transactions in this regulatory context, a rule-making approach is not necessary.
Response
The Commission disagrees with the commenter and is of the
view that the proposed Rule as drafted is the appropriate
manner in which to regulate related party transactions. In
taking the approach reflected in the proposed Rule and
proposed Companion Policy, the Commission had due regard
to the comments received (many of which supported the
approach taken), the purpose and principles section of the Act
and the costs and benefits involved. The Commission is of the
view that the business and regulatory costs and other
restrictions on the business and investment activities of market
participants imposed by the proposed Rule are proportionate
to the significance of the regulatory objectives sought to be
realized.
The Commission finds unconvincing the commenter's
argument that nobody is complying with Policy 9.1, yet there
are few concerns. To the Commission's knowledge the
majority of market participants are complying with Policy 9.1.
The Commission is not prepared to accept the commenter's
suggestion regarding the inclusion of a saving provision in the
proposed Rule. If the Commission were to add a saving
provision, it would not be unique to the proposed Rule. The
Commission is not prepared to adopt a saving provision
without a thorough review of the policy implications of doing
so, its ability to do so, and whether a saving provision should
more appropriately be the purview of legislation. In any event,
the Commission is not convinced that a breach of the
proposed Rule would necessarily render a transaction invalid.
The effect of a breach of the proposed Rule would require
case by case consideration.
As discussed in the notice accompanying the January
proposed Rule, the Commission is not prepared to allow
independent directors to waive the valuation or minority
approval requirements.
3. Beneficial Ownership, Control or
Direction
Comment
One commenter noted that the concepts of beneficial
ownership, control or direction that appear in the January
proposed Rule cause substantial problems for institutional
investors. The commenter noted that this has been recognized
by the Commission in the context of its proposed rule relating
to the early warning system. The commenter was of the view
that aggregation relief should apply to all, or most, uses of
these terms, if such uses persist.
Response
Aggregation relief usually is most helpful in the context of
passive investors. In the context of insider bids, proposed
National Instrument 62-103 The Early Warning System and
Related Take-over Bid and Insider Reporting Issues provides
aggregation relief. In the context of issuer bids and going
private transactions, aggregation relief generally is
inappropriate, since an issuer is undertaking the transaction.
In any event, if securityholders become related parties
because of aggregation, no consequence should flow from this
in a going private transaction if these securityholders are being
treated identically to all other securityholders. In respect of
related party transactions that are not otherwise exempt under
the proposed Rule, those are generally large transactions
involving persons or companies that clearly meet the definition
of "related party" and are not passive investors.
Accordingly, it is very remote that there would be a situation
where aggregation relief would be appropriate. The
Commission is not aware of any situations under Policy 9.1
where aggregation has been a problem.
4. Fees
Comment
One commenter was of the view that the Commission should
substantially reduce the fees it charges and proposes to
charge in respect of take-over bids and transactions subject to
proposed Rule 61-501. The commenter further suggested
that, as only fees are authorized, the Re Eurig decision
suggests that the Commission's approach may be
constitutionally invalid.
Response
On August 3, 1999, the Commission implemented a 10
percent across-the-board reduction in all fees which it charges
to capital market participants. The Commission also is
currently engaged in the development and implementation of
a completely re-engineered fee schedule.
The Commission is of the view that its fees are valid.
5. Status of Policy 9.1
Comment
One commenter was of the view that, by proposing to rescind
Policy 9.1, the Commission was suggesting that Policy 9.1 is
currently in force. The commenter suggested that as it was
not grandfathered in the rule-making process, and as it is
legislative in nature, it would appear to be of no force and
effect at the present time.
Response
As the proposed Rule is replacing Policy 9.1 in its entirety,
Policy 9.1 needs to be rescinded to eliminate any confusion as
to the Policy's ongoing applicability.
6. Valuation Disclosure
Comment
One commenter disagreed with the Commission's decision to
withhold from a board of directors the discretion to determine
what information should be disclosed to a valuator. The
commenter was of the view that this decision fails properly to
consider the adverse effects that disclosure of competitively
sensitive information could have and suggested that some
discretion would be appropriate in this context.
Response
The Commission continues to be of the view that a board of
directors should not have the discretion to determine what
information should be disclosed to a valuator. This could
severely limit the benefit to shareholders that a valuation
provides.
7. Timing of Valuations in Insider Bids
Comment
One commenter noted that the Commission has recognized
that a former director may be prevented by fiduciary
obligations from using information obtained as a director for
valuation purposes in the context of an insider bid without
consent. The commenter further noted that this may also
apply to a current director.
Response
The Commission agrees with the commenter, but does not
believe it is necessary to provide for this in the proposed Rule
or discuss this in the proposed Companion Policy. This
concern is one of the reasons the proposed Rule requires an
independent committee to supervise the preparation of a
valuation in the case of an insider bid.
C. SPECIFIC COMMENTS
8. Subsection 1.1(1) of the January Proposed Rule -
Definition of Bona Fide Lender
Comment
One commenter was of the view that the definition of "bona
fide lender" should be based on a decision to realize, not
merely a legal entitlement, as in the U.S. approach to early
warning requirements.
Response
The definition of "bona fide lender" was revised in the January
proposed Rule to be consistent with proposed National
Instrument 62-103 The Early Warning System and Related
Take-Over Bid and Insider Reporting Issues (1998), 21 OSCB
5649. In any event, for the purposes of Rule 61-501, the
Commission believes that legal entitlement is the appropriate
test and that a test based upon a decision to realize would be
too subjective.
9. Subsection 1.1(1) of the January Proposed Rule -
Definition of Fair Market Value
Comment
One commenter did not understand why the January proposed
Rule referred to "maximum" monetary consideration in the
definition of "fair market value". The commenter had thought
that there was a fairly universally accepted definition of fair
market value, which is the amount that a willing buyer would
pay to a willing seller with neither party under a compulsion to
act. The commenter found the insertion of the term
"maximum" confusing. Since the willingness of sellers as well
as buyers is always part of the equation, one might as well
qualify the definition by the word "minimum". The commenter
did not understand how one rationalizes the concept of
"maximum" when there is a valuation range.
Response
The Commission agrees with the commenter and has deleted
the word "maximum".
10. Subsection 1.1(1) of the January Proposed Rule -
Definition of Freely Tradeable
Comment
One commenter suggested that the definition of "freely
tradeable" should be adjusted, since privately placed securities
that have been held for the applicable time referred to in
subsection 72(4) of the Act, among others, could still be
subject to a prospectus requirement due to the need to meet
the "ordinary course" requirements even though no further
hold period applies. The commenter noted that section 2.2 of
the January proposed Companion Policy would require a
corresponding adjustment.
Response
A sale of privately placed securities that have been held for the
applicable time referred to in subsection 72(4) of the Act and
that otherwise satisfies the conditions in subsection 72(4) of
the Act is not deemed to be a "distribution", and would not be
subject to a prospectus requirement. The Commission has
modified the definition of "freely tradeable" to clarify that the
"no unusual effort" and "no extraordinary commission"
provisions of subsection 72(4) do not apply in determining
whether the securities are freely tradeable.
11. Subsection 1.1(1) of the January Proposed Rule -
Definition of Hold
Comment
One commenter noted that the term "hold" is not defined,
unlike the term "holder".
Response
The term hold appears in the phrase "hold securities sufficient
to affect materially the control of a person or company", the
interpretation of which is addressed in subsection 1.1(2) of the
proposed Rule. The term "hold" also appears in the de minimis
exceptions from the application of the going private transaction
and related party transaction requirements in paragraphs
4.1(2)(c) and 5.1(2)(c) of the proposed Rule. In subsection
1.1(2), the test is beneficial ownership, control or direction. In
paragraphs 4.1(2)(c) and 5.1(2)(c), the test is beneficial
ownership. Accordingly, the Commission is of the view that a
separate definition is not necessary.
12. Subsection 1.1(1) of the January Proposed Rule -
Definition of Interested Party
Comments
One commenter suggested that, in subparagraph (c)(i) of the
definition of "interested party" and similar provisions, the
Commission should clarify that the "identical/not greater value
test" relates only to a related party in its capacity as a
securityholder, so that other appropriate consideration (such
as that referred to in paragraph 104(2)(a) of the Act) is not
prohibited.
Another commenter recommended retaining the current
language in Policy 9.1 requiring the test to be on a "per
security" basis. The commenter noted that it is quite likely that
an interested party could receive greater aggregate
consideration than other securityholders if the interested party
holds more securities than do other securityholders.
Response
The Commission does not propose to add a "securityholder
capacity" concept to the definition since doing so would defeat
the purpose of the definition and allow consideration of greater
value to be provided to securityholders by providing it to them
in another capacity. The wording in the definition was
purposely chosen to correspond to the language in subsection
97(2) of the Act since market participants are familiar with the
collateral benefit test and the related jurisprudence.
The Commission has modified the language in clause (c)(i)(A)
of the definition of interested party in the January proposed
Rule, clause (e)(i)(A) of the definition of going private
transaction in the January proposed Rule and clause
8.2(a)(i)(A) of the January proposed Rule, which deals with
approval in multi-step transactions, to refer to consideration on
a per security basis.
13. Subsection 1.1(1) of the January Proposed Rule -
Definition of Market Capitalization
Comment
One commenter noted that the definition of "market
capitalization" contains a number of limitations under each
head, which suggested to the commenter that there may well
be cases that are not caught by any of the heads. The
commenter provided the example of a situation where there is
no published market and, as a result of an amalgamation,
merger or other transaction, the issuer has no audited balance
sheet. The commenter suggested that a catch-all provision
therefore appears to be necessary, contrary to footnote 22 of
the January proposed Rule.
Response
The Commission agrees with the commenter and has added
back a catch-all provision allowing the board of directors to
determine market capitalization. The Commission has decided
to delete paragraph (c) of the definition, which allowed market
capitalization in certain circumstances to be based on
shareholders' equity since the Commission is of the view that
this would not necessarily make for a representative test in
determining whether the value of a transaction exceeded 25
percent of market capitalization.
14. Subsection 1.1(1) of the January
Proposed Rule - Definition of Minority
Approval
Comment
One commenter strongly supported the requirement in Part 8
to have all shareholders vote regarding the bid or transaction
with a simple majority of the minority required to approve the
going private transaction or related party transaction.
Response
The Commission proposes to maintain a simple majority
requirement for minority approval for both going private
transactions and related party transactions.
15. Subsection 1.1(1) of the January Proposed Rule -
Definition of Participating Security
Comment
One commenter recommended that the language of
subsection 182(1) of the Regulation to the Act, which requires
that a participating security carry a residual right to participate
in earnings or assets "to an unlimited degree", be carried
forward into the definition of participating security.
Response
The Commission notes that there is no substantial difference
between the commenter's suggested wording and the
definition in the January proposed Rule, but is concerned that
the commenter's wording would be more likely to lead to
avoidance.
16. Subsection 1.1(1) of the January
Proposed Rule - Definition of Prior
Valuation
Comment
One commenter recommended that the exemptions from the
definition of "prior valuation" be extended to prior drafts not
leading to a final report, since significant difficulties could be
encountered in obtaining from a valuator the right to use and
disclose such reports.
The commenter suggested that subparagraph (c)(ii) of the
definition of "prior valuation" also should refer to clients of an
affiliated or associated entity of the analyst's employer.
A second commenter also noted that the definition of "prior
valuation" excludes any draft or preliminary report of a
valuation or appraisal prepared for the issuer by an
independent valuator, which draft or report has resulted in a
valuation or appraisal by that valuator. The commenter
submitted that any draft or preliminary report, whether or not
it has resulted in a valuation or appraisal, should be excluded
from the definition of "prior valuation". The commenter
expressed concern that to require a disclosure of certain draft
valuations will hamper issuers in obtaining valuation advice in
circumstances other than in contemplation of a proposed
transaction governed by the Rule.
A third commenter believed that certain other situations should
be exempt from the definition in addition to those already
enumerated in the January proposed Rule. By not exempting
these other situations, the commenter believed they would be
considered to be prior valuations by default because they have
not been specifically exempted. Specifically, the commenter
was of the view that an exemption should be made for any
report prepared for an issuer or interested party that either was
prepared on an unsolicited basis or prepared without the
benefit of non-public information regarding the issuer or
interested party. This would eliminate from the definition of
prior valuation the many business development presentations
companies receive from investment bankers. The commenter
was of the view that it would be unfair to burden companies
with documents that could be considered "prior valuations" if
such documents were prepared on an unsolicited basis.
Excluding such reports also would emphasize that a proper
valuation cannot be completed unless the valuator has access
to non-public information, as has been the practice under
Policy 9.1. Any valuation not reflecting non-public information
could be highly misleading and unhelpful to minority
shareholders particularly given the reliance of most valuations
on long term forecasts that are almost never in the public
domain.
A fourth commenter reiterated a point it made in connection
with the 1996 draft. The commenter noted that any
involvement of a director or a senior officer of the issuer in the
preparation of the valuation would make the internal valuation
exclusion in the definition unavailable. The commenter
thought this would be unduly restrictive. The commenter was
of the view that disclosure of prior valuations is of dubious
significance in most circumstances and saw no reason to
expose an issuer's working materials to public scrutiny merely
because a director or senior officer has had some involvement
in some of those materials. The effect would be a penalty on
issuers that produce a certain type of work product and the
commenter submitted that this is poor public policy.
A fifth commenter noted that the definition of a "prior valuation"
excepts only a report of a "market analyst or financial analyst"
prepared by or for someone other than the issuer or an
interested party. The commenter suggested the categories
generally contemplated by those terms should be made
broader. In addition, the commenter suggested that any report
prepared by someone other than the issuer or someone acting
on behalf of the issuer or an interested party that is not based
on publicly disclosed information should not be considered a
prior valuation for purposes of the Rule unless it is in respect
of an asset that alone, or together with other assets that are
the subject of the valuation, is material to the issuer and the
value of its securities. As an example, a lender to an issuer
might well prepare a valuation or appraisal of the issuer's
securities or assets in the course of determining whether to
provide a loan to the issuer. It would not appear appropriate
that the issuer track down and attempt to obtain such a
valuation. The commenter also recommended that the
Companion Policy clarify that "material" as it applies to such
asset or assets means an asset, alone or in aggregate with
other assets that have been the subject of the prior valuation
that constitutes 25 percent of the market capitalization of the
issuer.
Response
The Commission does not propose to extend the exemption for
prior drafts, as doing so would facilitate avoidance.
The Commission has amended subparagraph (c)(ii) (now
(d)(ii) in the proposed Rule) of the definition of prior valuation
to refer to clients of an affiliated entity or associate of the
analyst's employer.
The Commission also has added an exclusion from the
definition for an unsolicited report concerning the issuer or its
securities prepared by a person or company that has no
material non-public information concerning the issuer or its
securities. The Commission does not believe it necessary to
modify this exemption in the manner suggested by the fifth
commenter.
In respect of the fourth commenter's comments, the
Commission has amended the exemption so that an internal
valuation that is not made available to, or prepared with the
participation of, the issuer's board of directors or any director
or senior officer of an interested party (except a director or
senior officer of the issuer in the case of an issuer bid) will not
constitute a prior valuation.
Finally, the definition currently excludes a valuation or
appraisal prepared by an interested party for the purpose of
determining the price at which to propose certain transactions,
if the valuation is not made available to any independent
directors of the issuer. The Commission has extended this
exemption to valuations prepared by a third party in connection
with transactions that resulted in the third party becoming an
issuer insider.
17. Subsection 1.1(1) of the January Proposed Rule -
Definition of Related Party
Comment
One commenter questioned whether the terms "arrangement"
and "understanding" in paragraph (f) of the definition of
"related party" are too vague.
Another commenter was of the view that paragraph (f) of the
definition of "related party" should be conformed to the
language used for Item 10 of Form 30 of the Regulation to the
Act and should read "a person or company which performs
management functions of the issuer or the interested party to
any substantial degree other than the directors or senior
officers of the issuer or interested party under an agreement
...".
Response
The Commission disagrees with the first commenter and
believes that the words are not too vague. In respect of the
second comment, the Commission has added the words "to
any substantial degree" in paragraph (f) of the definition of
"related party".
18. Subsection 1.1(3) of the January Proposed Rule -
Definition of Going Private Transaction
The January proposed Rule amended the definition of "going
private transaction" to make it applicable only where the
transaction is with or involves a related party of the issuer, if
the related party (i) is not treated identically to all other
beneficial owners in Canada of affected securities, (ii)
receives, directly or indirectly, consideration of greater value
than that paid to all other beneficial owners of affected
securities, or (iii) upon completion of the transaction,
beneficially owns, or exercises control or direction over,
directly or indirectly, participating securities of a class other
than the class of securities subject to the going private
transaction.
Comments
One commenter suggested that two changes are required to
the "going private transaction" definition. First, the commenter
was of the view that affiliated entities of the related party
should be excluded from both (i) the identical treatment, and
(ii) the no greater value requirement, since often they will be
shareholders. Secondly, the commenter was of the view that
this should only apply to shareholders "in Canada", since non-Canadian (particularly U.S.) shareholders will not infrequently
receive different consideration that may on occasion be of
nominally greater value (value being an imprecise and
subjective matter). The commenter surmised that the
Commission appeared to be concerned that including the
words "in Canada" may enable a non-Canadian related party
to obtain better value. The commenter believed that this
concern is not well founded as the value received by the
related party, whether Canadian or non-Canadian, would
simply be measured against that received by Canadian
shareholders.
Another commenter noted that the definition of "going private
transaction" provides for an exclusion in subparagraph (e)(ii)
of the definition where the related party "does not beneficially
own or exercise control or direction over participating
securities of a class other than affected securities". The
commenter noted that the reference to "class other than
affected securities" would appear to provide that where a
related party retains securities of a class of "affected
securities" upon completion of a transaction such transaction
would not be a "going private transaction". The commenter
had difficulty in determining circumstances where a related
party would continue to hold securities of a class of affected
securities for the purposes of subparagraph (e)(ii) if it was
being treated identically to other holders of securities of a
class of affected securities for the purposes of subparagraph
(e)(i). Accordingly, the commenter submitted that the
exclusion in subparagraph (e)(ii) may be unnecessary.
While a third commenter agreed with the approach to going
private transactions reflected in the exclusion from the
definition embedded in paragraph (e) of the definition, the
commenter found the drafting, involving as it does double
negatives, confusing. The commenter believed the drafting
would be somewhat easier to follow if subparagraph (e)(i) were
drafted as follows:
"a transaction in which the related party
(i) is entitled to receive, directly or
indirectly, upon completion of the
transaction only consideration that
is identical in amount and type per
security to that paid to all other
beneficial owners in Canada of
affected securities of the same
class."
The commenter was of the view that it is counter-intuitive to
stipulate that the consideration will be identical and then to
suggest that it may be of greater value than that with which it
is identical.
Response
The Commission has added affiliated entities of the related
party to paragraph (e) so that affiliated entities of the related
party also must be treated identically and not receive
consideration of greater value.
The Commission is further of the view that it is insufficient to
measure value against Canadian securityholders only. The
first commenter is incorrect in surmising that the Commission
appeared to be concerned that including the words "in
Canada" in clause (e)(i)(B) may enable a non-Canadian
related party to obtain better value. Clause (e)(i)(B) results in
a transaction being a going private transaction if a related
party, wherever situated, receives consideration of greater
value than that paid to other beneficial owners. Limiting clause
(e)(i)(B) to Canada potentially would allow greater
consideration to be paid to Canadian shareholders.
In respect of the second commenter's comment, subparagraph
(e)(ii) of the definition is necessary since the Commission is of
the view that, where there are two or more classes of
participating securities and a related party continues to hold
any participating securities, whether or not affected securities,
the transaction should be a going private transaction. For
example if an issuer has multiple voting shares and
subordinate voting shares and a related party holds multiple
voting shares and no subordinate voting shares and the
transaction is designed to eliminate the subordinate voting
shares, the transaction should be a going private transaction
for purposes of the Rule.
In respect of the third commenter's comment, the Commission
limited "identical" consideration to Canada since it may be
necessary to provide different consideration to securityholders
outside of Canada. That is why the "greater value" test is also
necessary. The Commission believes that clause (e)(i)(B) is
necessary to address the situation where, on the face of the
transaction, identical consideration is being provided but a
securityholder is receiving a collateral benefit. The wording in
the definition was chosen to correspond to the language in
subsection 97(2) of the Act since market participants are
familiar with the collateral benefit test and the related
jurisprudence. Accordingly, the Commission is not prepared
to accept the third commenter's drafting suggestion.
19. Subsection 1.1(3) of the January
Proposed Rule - Definition of Insider Bid
Comment
One commenter thought that the comment in footnote 40 of
the January proposed Rule, which suggested that an offer may
be both an issuer bid and a take-over bid, seemed strange.
Response
The definition of insider bid in the 1996 proposed Rule
excluded issuer bids unless paragraph 1.2(2)(b) applied. The
exclusion was deleted in the January proposed Rule, as being
unnecessary. To the extent that a take-over bid should be
characterized as an issuer bid, that result can be achieved
through the indirect bid rules in the Act. The purpose of
footnote 40 was not to state that an offer can be both an issuer
bid and a take-over bid.
20. Subsection 1.1(3) of the January Proposed Rule -
Definition of Related Party Transaction
The Commission added new paragraphs (b) and (e) to the
definition of related party transaction in the January proposed
Rule to cover an issuer's joint purchase or sale of an asset
with a related party from or to a third party where the
consideration paid or received by the issuer is greater or less
than, as the case may be, the proportion of the asset
purchased or sold by the issuer.
The Commission has also clarified in paragraphs (h) and (k)
that a related party transaction includes an amendment to the
terms of a security or guarantee.
Comments
One commenter was of the view that the new "joint
transaction" provisions in paragraphs (b) and (e) of the
definition of "related party transaction" raise difficulties in
assessing the 25 percent exemption. The commenter
questioned whether it would apply simply to the inequality, or
to the entire transaction. The commenter suggested that there
may be very good reasons for such a situation, including
variations in representations, warranties, indemnities,
covenants, liabilities assumed, etc. The commenter was not
convinced that these additions are wise.
The commenter felt that specific references to amendments in
revised paragraphs (h) and (k) may suggest that amendments
to other transactions, such as a purchase transaction, would
not be related party transactions. The commenter further
questioned whether the 25 percent test would apply to the
value of the amendment alone, or the whole package.
The commenter was further of the view that paragraph (m) of
the definition of "related party transaction" uses the term
"related party" in several places where the term "issuer" seems
more appropriate. The commenter also suggested that
paragraph (m) of the definition should refer not just to the
exception in paragraph (e) of the definition of "going private
transaction", but also to paragraphs (a) through (d) of the
definition of going private transaction. The commenter noted
that in particular paragraph (d) should be included, since a
dissolution may be viewed as a merger.
Another commenter was of the view that paragraph (f) of the
definition of "related party transaction" should be amended to
read "proposes to lease or leases property to or from the
related party".
Response
The Commission believes that in applying the 25 percent test
to a "joint transaction", the calculation must be based on the
whole transaction insofar as it involves the interested party, not
just the inequality amount. While there may be good reasons
for an inequality situation covered by the "joint transaction"
provisions in paragraphs (b) and (e) of the definition of "related
party transaction", ultimately, if there is an inequality and no
exemption is available, the transaction should be put to the
shareholders or relief can be sought. The Commission
believes that in determining proportionate contributions for the
purposes of paragraphs (b) and (e) of the definition of related
party transaction, assumption of debt can be taken into
account.
The Commission disagrees that the reference to amendments
in paragraphs (h) and (k) of the definition of "related party
transaction" would suggest that amendments to transactions
described in the other paragraphs of the definition would not
be caught. The lead-in words to the definition include other
related transactions which would catch amendments to related
party transactions. The word amendment was used in
paragraphs (h) and (k) because of the particular types of
transactions described in those paragraphs.
In respect of whether the 25 percent test should apply to the
value of the amendment alone, or the whole package, again
the Commission notes that the lead-in words to the definition
include other related transactions. As a result, if the value of
a transaction was under 25 percent of market capitalization
and the issuer and interested party then amended the
transaction to increase the value to over 25 percent of market
capitalization, the Commission would normally consider the
two transactions to be one related party transaction. In
situations where an issuer does not believe that this is the
appropriate result, it may apply for discretionary relief.
Paragraph (m) of the definition applies to a situation where a
transaction is a related party transaction for the upstream
issuer and a going private transaction for the downstream
issuer. The reference to "related party" in the definition is to
the downstream issuer for whom the transaction is a going
private transaction. Accordingly, the reference to the related
party, and not the issuer, in paragraph (m) of the definition of
"related party transaction" is correct.
In respect of paragraph (m), the Commission does not refer to
any exceptions other than paragraph (e) of the definition of
"going private transactions" because it is not of the view that
the occurrence of any of the other exceptions should result in
the transaction being a related party transaction for the issuer.
The Commission does not propose to make the suggested
change regarding proposed leases. None of the other
paragraphs in the definition includes proposed transactions.
21. Subsections 1.1(1) and (3) - Interpretation of
"involved" in Definitions
Comment
One commenter was of the view that the use of the words "or
is involved in" in paragraph (d) of the definition of "interested
party" is far too broad, given the definition of "related party".
The commenter noted that, among others, directors and
officers with nominal shareholdings, even if treated identically
to all other shareholders would appear to be caught as
interested parties. The commenter made a similar comment
with respect to the use of the term "involving" in the definitions
of "going private transaction" and "related party transaction".
The commenter did not find that section 2.8 of the January
proposed Companion Policy assisted appreciably in removing
this uncertainty. The commenter suggested that the word
"materially" might assist, as might unequal treatment concepts.
Response
The Commission intentionally used the words "involved in"
because "between" would have been too limiting. In the
context of going private transactions, if directors and officers
are treated identically to all other shareholders, they will not be
caught as interested parties. In the context of related party
transactions, the Commission has amended paragraph
8.1(3)(b) of the proposed Rule so that shares held by an
interested party, e.g. a director or senior officer of the issuer,
are not excluded if the director or senior officer is treated
identically to other shareholders and does not receive
consideration of greater value.
22. Section 1.2 of the January Proposed
Rule - Application of Part XX of the Act
Subsection 1.2(2) of the January proposed Rule provided that
for the purposes of the definition of related party and
subsection 1.1(2), section 90 of the Act applies in determining
beneficial ownership of securities. Subsection 1.1(2) provides
an interpretation for what constitutes "affect materially the
control" for the purposes of the proposed Rule.
Comments
One commenter noted that paragraph 1.2(1)(b) should refer to
"acting jointly or in concert", instead of "acting jointly and in
concert".
The commenter was of the view that the reference to
subsection 1.1(2) had the effect of broadening the concepts of:
(i) a related party (even beyond a 10 percent holder); (ii) the
presumption of affecting materially control; and (iii) "control",
as applicable in certain cases in subsection 1.5(3) of the
January proposed Rule. The commenter was of the view that
the application of subsection 1.1(2) should be limited to insider
bids and issuer bids.
Response
The Commission agrees with the commenter that paragraph
1.2(1)(b) should use "or" instead of "and".
The Commission is of the view that it is appropriate for section
90 of the Act to apply in determining whether a person or
company is a related party and to apply to subsection 1.1(2).
The Commission sees no reason why the application of
subsection 1.1(2) should be limited to insider bids and issuer
bids. The Commission does not believe that the paragraph is
by its terms applicable to subsection 1.5(3).
23. Section 1.3 of the January Proposed
Rule - Liquidity Test
The Commission had modified the interpretation of "liquid
market" in section 1.3 of the January proposed Rule to add an
aggregate trading price test of $15,000,000 and a market
value test of $75,000,000.
Comments
One commenter noted that the liquidity test set out in section
1.3 of the January proposed Rule suggests that a market
capitalization of $75,000,000 would be the minimum to meet
the definition of a liquid market. The commenter suggested
that, with the volatility in today's markets, many companies
may meet these requirements for one year and may not the
succeeding year. The commenter noted that this has been
particularly true of resource companies, which populate the
Canadian markets. The commenter suggested that to protect
the rights of all shareholders, the liquidity requirements should
be lowered, particularly since many issuer bids would be
initiated when the company's share price is relatively low and
thus, potentially undervalued.
Another commenter noted that subparagraph 1.3(1)(a)(ii) leads
in with the words "at all times", but clauses (B), (C) and (D)
refer to a period, not all times therein. The commenter further
felt that paragraph 1.3(1)(b) should apply if "any of" the tests
set out in paragraph (a) are not met.
Response
In accordance with subparagraph (a)(iii) of subsection 1.3(1)
of the January proposed Rule, the market value of a class of
securities on the published market on which that class is
principally traded needs to have been at least $75,000,000
only for the calendar month preceding the calendar month in
which the transaction is agreed to, in the case of a related
party transaction, or in which the transaction is announced, in
the case of an insider bid, issuer bid, or going private
transaction. Companies need not meet this requirement for
the entire 12 month period before the date the transaction is
agreed to. The Commission recognizes the volatility that
exists in Canadian markets and is of the view that the
proposed liquidity test is the appropriate objective measure
and that to lower the test would be counter-productive to
shareholders. The Commission notes that the proposed Rule
still contains an alternative test in paragraph (b) of subsection
1.3(1) of the January proposed Rule, allowing for a liquidity
opinion in circumstances when the test set out in paragraph (a)
is not met.
The Commission is of the view that the $75,000,000 test
needs to be met in order to provide a valuation exemption. If
an issuer cannot meet this test or the alternative test in
paragraph 1.3(1)(b), the issuer cannot rely on a liquid market
valuation exemption.
The Commission agrees with the comment regarding the lead-in words and has revised paragraph 1.3(1)(a) to reflect that
only the test in clause (A) needs to be have been satisfied at
all times during the period of 12 months before the date the
transaction is agreed to. The Commission also has changed
the word "price" in clause 1.3(1)(a)(ii)(D) to "value based on
price" to accord more closely with trading terminology.
The Commission has modified paragraph 1.3(1)(b) slightly to
clarify that it applies if the test set out in paragraph (a) is not
met.
24. Paragraph 1.3(2)(b) of the January
Proposed Rule - Market Value of a Class
of Securities
Comment
One commenter noted that paragraph 1.3(2)(b) of the January
proposed Rule relies on closing prices for part of the
calculation of market value of a class of securities but further
noted that closing prices may not exist.
Response
The Commission agrees with the commenter and has modified
the calculation in a manner similar to that provided for in
section 183 of the Regulation to the Act.
25. Section 1.5 of the January Proposed Rule -
Subsidiary Entity and Affiliated Entity
Comment
One commenter found the use of the phrases "first mentioned"
and "second mentioned" confusing in subsection 1.5(3) of the
January proposed Rule, which interprets the terms "subsidiary
entity" and "affiliated entity". The commenter suggested
alternative language.
Response
The Commission has added clarifying language and has
deleted the phrase "second-mentioned".
26. Subsection 2.3(3) of the January
Proposed Rule - Appointment and
Supervision of Valuators for Insider Bids
Subsection 2.3(3) of the January proposed Rule provided that
the offeror shall determine who the valuator should be and
supervise the preparation of the valuation if the insider bid is
being made without the knowledge of all of the independent
directors of the offeree issuer or if the insider bid is being
regarded as hostile.
Comments
One commenter suggested that subsection 3 of subsection 2.3
of the January proposed Rule should say "may" rather than
"shall", as an insider offeror could still lack access in reality,
despite being deemed to have access under subsection 2.4(2)
of the January proposed Rule.
The commenter suggested that paragraph 2 of section 2.4, the
valuation exemption for lack of knowledge and access, should
relate to actual access and recognize the fiduciary
responsibilities of target directors.
Response
As indicated previously, the Commission has decided to delete
subsection 2.3(3) of the January proposed Rule.
The Commission believes that the exemption in paragraph 2
of section 2.4 turns on actual access and not the potential for
access. The Commission does not believe it would be
appropriate to make the inability to use information because of
a director's fiduciary duties grounds for an automatic
exemption. The Commission has revised paragraph 2 of
section 2.4 to refer to access to material non-public
information.
27. Paragraph 2.2(3)(b) of the January
Proposed Rule - Disclosure of Prior
Offers for Insider Bids
Comments
One commenter suggested that the Commission should retain
the "bona fide" concept in paragraph 2.2(3)(b) of the January
proposed Rule, so as not to require an issuer to discuss
frivolous offers.
The commenter noted that paragraph 2.3(3)(b) of the January
proposed Rule referred to the undefined term, "hostile bid", but
that target directors rarely refer to a bid as other than
"unsolicited".
Response
The Commission has added the modifier "bona fide" before the
words "prior offer" in paragraph 2.2(3)(c) of the proposed Rule.
The Commission has deleted subsection 2.3(3).
28. Paragraph 3 of Section 2.4 and Paragraph 2 of
Section 4.5 of the January Proposed Rule -
Valuation Exemption Based on Previous Arm's
Length Negotiations
The valuation exemption based on previous arm's length
negotiations is available for insider bids and going private
transactions under the January proposed Rule and requires
the consideration for the particular type of transaction to be
equal in value to and in the same form as consideration
agreed to in arm's length negotiations with one or more selling
securityholders, one of whom beneficially owns or exercises
control or direction over at least five percent of the outstanding
securities of the class of offeree securities and one or more of
whom beneficially own, or exercise control or direction over, in
the aggregate, at least 20 percent of the outstanding securities
of the class of offeree securities beneficially owned, or over
which control or direction is exercised, by persons or
companies other than the interested party and persons or
companies acting jointly or in concert with the interested party.
Comment
One commenter was of the view that the five percent and 20
percent test may be inappropriate because, while a five
percent holder clearly has a substantial stake and can
therefore reasonably be presumed willing to protect its
interests, the 20 percent requirement produces a wide variety
of results, given that it is 20 percent of whatever percentage of
the outstanding securities are not held by the offeror or those
acting jointly or in concert with the offeror.
The commenter questioned why the exemption was not made
available for issuer bids and related party transactions.
The commenter also questioned whether the reference in
subparagraph 2.4(3)(b)(i) of the January proposed Rule to
"outstanding securities" was to the time of the previous
negotiation or currently.
The commenter further questioned whether the reference in
paragraph 2.4(3)(e) of the January proposed Rule to "offeror's"
knowledge was to the offeror at that time or the current offeror.
The commenter also noted that if the latter was intended, there
may be an issue of the current offeror not then existing.
Response
The Commission recognizes that there will be a variety of
results under the 20 percent branch of the test. The
Commission is not prepared to change the test to 20 percent
of the outstanding securities as it would preclude an offeror
that owns more than 80 percent of the securities and locks up
a certain percentage of shares from carrying out a transaction
to acquire the minority's holdings without a valuation.
However, the Commission has reconsidered whether the five
percent test is appropriate and determined that, in most
circumstances, it is not. The test should be based on the
locked-up shareholder having a significant shareholding in the
issuer. Accordingly, the Commission has determined that the
threshold should be raised to 10 percent. That threshold
coupled with the 20 percent test should result in the locked-up
shareholder having a significant shareholding in the issuer for
negotiations with it to constitute a proxy for value. The
Commission has left the threshold at five percent where the
offeror owns 80 percent or more of the securities. The
Commission has also modified the paragraph to clarify that the
offeror can rely on prior negotiations by another person or
company and has modified the 20 percent component of the
test to provide that it can be satisfied in one or more
transactions.
The Commission did not extend this exemption to issuer bids
because it does not believe it is appropriate for an issuer, as
opposed to a third party offeror, to have a valuation exemption
based on negotiations with a selling securityholder. The
Commission did not extend the exemption to related party
transactions as it is generally not necessary, given the
availability of other exemptions in the January proposed Rule.
For a more detailed explanation of the Commission's reasons,
reference can be made to item 40 of Part B of Appendix B to
the Notice accompanying the January proposed Rule.
The Commission has clarified the reference to "outstanding
securities" in subsection 2.4(2) of the proposed Rule.
With respect to the identity of the offeror in paragraph
2.4(3)(d), the exemption is drafted on the basis that the offeror
in the insider bid does not have to be the same person or
company that was party to the previous negotiations.
29. Paragraph 4 of Section 2.4 of the January
Proposed Rule - Valuation Exemption for
Auction - Insider Bids
Comments
One commenter was of the view that the auction exemption for
insider bids should be extended to include not just the situation
where there are outstanding formal bids, but also where there
are outstanding going private transactions, similar to
paragraph 3 of section 4.5 of the January proposed Rule, the
auction exemption for going private transactions.
The commenter queried whether "outstanding" refers to the
announcement or the actual making of the bid.
The commenter also noted that until the January proposed
Rule, only equal access to the offeree issuer was required, not
full access. The commenter suggested that a board should be
able to deny access to all, if it considers that appropriate. The
commenter applied the same comment to the auction
exemption for going private transactions in paragraph
4.5(3)(b).
Another commenter noted that the "auction" exemption in
paragraph 4 of section 2.4 of the January proposed Rule
provides that "at the time the bid is made, full access to the
offeree issuer has been given not only to the offeror in the
insider bid but also to the other offerors". The commenter
noted that access may be offered to offerors generally but a
standstill provision may be required as the price of the access.
In such cases, some offerors may choose access and others
may not. In such a case, the commenter believes that equal
access has been provided because it has been offered
whether or not it has been accepted. The commenter
suggested that the preferable drafting may be to provide that
"the insider has not had access to confidential business
information of the issuer on terms preferable to those made
available to the other offerors". The commenter noted that the
same point would arise in respect of the auction exemption
from the valuation requirement in section 4.5 of the January
proposed Rule, dealing with going private transactions.
Response
The Commission has added to paragraph 4 of section 2.4 of
the proposed Rule references to going private transactions
and transactions that would be going private transactions
except that they come within the exception in paragraph (e) of
the definition of going private transaction.
The outstanding formal bids in question are bids that have
been made.
The Commission has reconsidered the question of access and
determined that equal access would be more appropriate. In
originally proposing full access, the Commission was
concerned that an auction cannot be a proxy for value unless
all parties have full access to relevant information. However,
the Commission is also concerned that if full access is the test
and it was not provided to one or more bidders that did not
have to provide a valuation, a subsequent bidder that had to
provide a valuation would be at a severe time disadvantage.
Ultimately, the Commission determined that that latter factor
was more important and has decided to adopt a test based on
"equal access" and has revised paragraph 4 of section 2.4
accordingly.
30. Section 3.4 of the January Proposed Rule - Issuer
Bid Valuation Exemptions
Comment
One commenter reiterated a point that it made in connection
with the 1996 draft. Just as the Commission has adopted an
exemption applicable to bids for non-participating securities
that are not convertible or exchangeable for participating
securities, the commenter also believed that the exemption
should be available where there is a conversion feature but it
is seriously and consistently out of the money. Realistically,
such securities are not convertible. The commenter did not
think the drafting problems would be insuperable in
recognizing this exemption. For example, convertible or
exchangeable securities could qualify for the exemption where
over a period of one or two years in the past, conversion would
have consistently entailed the loss of value of at least 10
percent.
Response
The Commission remains concerned that conversion features
have value even though they are far out of the money and that
it would be difficult to define in the proposed Rule when a
security has been out of the money long enough or if there are
other factors that would suggest that the securities likely would
remain out of the money.
31. Paragraph 3.4(1)3 of the January Proposed Rule -
Liquid Market Exemption
Comment
One commenter was of the view that the wording in this
exemption appears to make the obtaining of a liquidity opinion
optional. The commenter failed to see why boards of directors
should have the right to determine liquidity on their own
without getting an expert opinion.
Response
Paragraph 3.4(1)3 of the proposed Rule provides a valuation
exemption if a liquid market exists and certain other conditions
are satisfied, including that it is reasonable to conclude that,
following completion of the bid, there will be a market that is
not materially less liquid than the market that existed before
the bid. Under paragraph 1.3(1)(a) of the proposed Rule, a
liquid market is considered to exist if certain volume tests are
satisfied or under paragraph 1.3(1)(b) if a liquidity opinion is
obtained. The Commission is of the view that, if the conditions
in paragraph 1.3(1)(a) are met, an issuer is not required to
obtain a liquidity opinion. Of course it is always open to a
board of directors to obtain an opinion if the board so desires.
32. Paragraphs 4.1(2)(c) and 5.1(2)(c) of the
January Proposed Rule - De Minimis
Ontario Holdings
Comment
One commenter questioned whether the two percent de
minimis Ontario holdings exceptions for going private
transactions and related party transactions should instead
refer to 10 percent, as in Rule 45-503 Trades to Employees,
Executives and Consultants.
Response
The Commission chooses its de minimis test according to what
it believes is appropriate in the context. No one percentage is
appropriate in all cases. In Rule 45-503, the Commission
determined 10 percent to be appropriate. In Rule 56-501
Restricted Shares, the Commission determined two percent to
be appropriate. In the context of the proposed Rule, the
Commission has determined that two percent is the
appropriate threshold at or below which the Rule should not
apply.
33. Paragraph 4.2(2)(d) of the January Proposed Rule
- Going Private Transactions
Comment
One commenter was of the view that the language in
paragraph 4.2(2)(d) of the January proposed Rule concerning
meetings and information circulars should be more tightly
drafted so as to provide guidance as to what constitutes a
"prior offer", perhaps by including the words "bona fide" prior
to "prior offer". The term "prior offer", without further
description or definition, could catch immaterial or confidential
matters.
Response
The Commission has added a reference to "bona fide" before
the word "offer". The Commission is of the view that an
exception should not be made for confidential offers. As for
materiality, the paragraph currently refers to related or relevant
matters.
34. Section 4.5 of the January Proposed Rule -
Exemptions from Formal Valuation Requirement
Comments
One commenter was of the view that the references in
subparagraphs 4.5 2(b)(i) and (ii) of the January proposed
Rule to "other transaction" also should refer to the "going
private transaction", as the commenter believed that
paragraph 4.5 2(b) of the January proposed Rule is meant to
parallel subparagraphs 4.5 2(a)(i) and (ii). The commenter
was of the view that, as drafted, subparagraphs 4.5 2(b)(i) and
(ii) of the January proposed Rule, by using only the language
"the other transaction", appear to refer back only to
subparagraph 4.5 2(a)(ii).
The commenter also suggested deleting the word "reasonably"
in subparagraph 4.5 2(c) after the word "transaction" as there
is reference to "reasonable" inquiry as well.
The commenter recommended deleting in paragraph 4.5 2(d)
the words "and to the knowledge of the person or company
proposing the going private transaction, after reasonable
inquiry, no selling securityholder knew". This requirement is a
change from the requirements of Policy 9.1 and the
commenter did not believe it is appropriate. The commenter
noted that presumably anything the seller knows may well
have affected the price.
The commenter referred to the requirement in paragraph 4.5
3(b) that "full" access to the issuer has been given. The
commenter suggested that this is too high a standard. In
Policy 9.1, the requirement is simply that the offeror has had
"equal" access and the commenter recommended retaining
this standard.
The commenter was of the view that paragraph 4.5 4(e) does
not reflect current practice and would prove very onerous to
comply with. There are a number of ways to structure a
subsequent going private transaction and if the offeror had not
clearly determined very early in the offer stage which going
private structure it intended to employ, the tax consequences
of all such structures would need to be discussed. The
commenter believed it is unclear how this would constitute
disclosure of value to a shareholder. The commenter
recommended deleting this provision.
Another commenter noted that in subparagraph 4(a) of section
4.5, the second step transaction may be effected by an
affiliated entity of the original bidder.
The commenter also suggested that the condition that the
going private transaction take place no later than 120 days
after the date of expiry of the formal bid, should instead apply
at the date of sending the circular.
The commenter expressed concern over subparagraph 4(d) of
section 4.5 of the January proposed Rule, since that
subparagraph requires the consideration in the going private
transaction to be in the same form as the consideration paid
in the formal bid. The commenter noted that for tax reasons,
often different forms of consideration are available as a route
to cash, such as redeemable preferred shares.
Concerning subparagraph 4(e) of the January proposed Rule,
the commenter suggested that it should be clarified that
subsequent changes in tax laws will not invalidate reliance on
this exemption. A similar comment applies to subparagraph
8.2(e)(vi). The commenter further noted that an "if" should be
added to the beginning of both subparagraph 4(e) | 
