The importance of predictability in take-over bid regulation: OSC reasons in Re ESW Capital, LLC

On February 23, the Ontario Securities Commission (OSC) released reasons for its September 2020 decision in Re ESW Capital, LLC. The OSC had denied ESW’s request for an exemption from the minimum tender requirement¹ in National Instrument 62-104 Take-over Bids and Issuer Bids (NI 62-104) in connection with ESW’s proposed take-over bid for the subordinate voting shares (shares) of Optiva Inc. ESW had sought this relief so that its bid could proceed despite the opposition of two significant Optiva shareholders.

This marks the first time that Canadian securities regulators have considered a request for an exemption from this requirement, which was introduced in 2016. The OSC’s decision not to grant the requested relief emphasizes its commitment to the 2016 amendments’ recalibration of bid dynamics to facilitate collective shareholder action and to predictability in take-over bid regulation.

What you need to know

• The decision emphasizes that the protection of shareholder choice is one of the core purposes of the take-over bid regime along with predictability for the participants in a proposed bid.
• The OSC is unlikely to intervene to undermine significant shareholders’ veto power, even if it makes it impossible for a take-over bid to proceed, unless there are exceptional circumstances or clear evidence of abusive or improper conduct that undermines “minority shareholder choice”.
• Given the importance of predictability, obtaining exemptive relief from bid regime provisions like the minimum tender condition likely will be difficult. However, problematic conduct by one or more significant shareholders (e.g., attempts to interfere with the target board’s consideration of options), or misaligned interests between significant shareholders and minority shareholders, might justify granting such relief.

Background

ESW, Maple Rock Capital Partners and EdgePoint Investment Group were control-block shareholders of Optiva (holding approximately 28%, 22.4% and 18.1%, respectively, of the shares). They disagreed about Optiva’s strategic direction and governance. Their dispute led to a proxy contest launched by Maple Rock, litigation commenced by ESW regarding a debenture financing and preferred share issuance—and a proposed, unsolicited take-over bid by ESW for Optiva. In July 2020, ESW announced its intention to make an all-cash offer to acquire the shares that it did not already own for $60 per share conditional upon, among other things, receiving an exemption from the minimum tender requirement. ESW’s offer price represented a 122% premium to the 20-day volume-weighted average price and 92% premium to the 10-day closing high. Maple Rock and EdgePoint announced that they would not tender to the proposed offer and so, without exemptive relief, ESW’s bid would not succeed on the terms that ESW had proposed—and Optiva’s shareholders would have no choice to make with respect to the bid.

After a hearing held on September 10 and 11, 2020 to consider ESW’s request for exemptive relief, the OSC issued an order on September 14 dismissing ESW’s application, with reasons to follow.

Reasons for decision

The OSC grounded its analysis in the observation that when the CSA adopted the 2016 amendments to the bid regime, it had recognized “the potential for enhanced leverage for control block holders as a consequence of the minimum tender requirement” and determined that this could be addressed through exemptive relief. It would be left to the provincial regulators, on a case-by-case basis, to determine how to reconcile the interests of control block holders on the one hand, and on the other, the interests of bidders and target shareholders within a bid framework that is organized around protecting shareholder choice.

In deciding whether it would be in the public interest to grant the requested relief in this case, the OSC considered nine factors “through the lens of the underlying objectives of and principles of take-over bid regulation”, including:

• the nature and circumstances of the bid;
• the pre-existing control dynamics of the target and any changes to such dynamics;
• the conduct of the bidder, the target, the target’s board and the control block holders;
• whether the control block holders had any special or differing interests or stake in the outcome of the bid; and
• the impact on the shareholders of granting or denying the requested relief.

The OSC noted that Optiva’s control block shareholder dynamics pre-dated the proposed offer and that it would have been apparent to Optiva’s minority shareholders that a potential take-over bid would require the support of at least two of the control block holders. The OSC also emphasized that “[a]ll shareholders, including significant or control block shareholders, are entitled to decide in their own interests whether and at what price they are willing to exit.” In the circumstances, control block shareholders such as Maple Rock or EdgePoint were not obliged to facilitate a take-over bid, and absent evidence of abuse, it would be an extraordinary intervention to subordinate their interests to those of other target shareholders.

The OSC also concluded that there was no basis to infer that either Maple Rock or EdgePoint had engaged in any conduct to misuse its control block position to unfairly impede the proposed bid or that either shareholder had otherwise controlled or influenced, or attempted to control or influence, Optiva’s board or its special committee.

Finally, the OSC concluded that the risk of the requested relief resulting in unfair pressure on the minority shareholders to tender to the proposed bid outweighed the risk that denying the requested relief would deny shareholder choice to participate in the proposed bid. This is because granting the requested relief could result in ESW holding a blocking position of slightly less than 50%, a potential outcome that might pressure the other shareholders to tender to ESW’s bid in order to avoid remaining in a company with further reduced liquidity.

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¹ Section 2.29(1)(c) of NI 62-104 prohibits an offeror from taking up securities under a bid unless more than 50% of the outstanding securities subject to the bid, excluding securities beneficially owned, or over which control or direction is exercised, by the offeror or anyone acting jointly or in concert with the offeror, have been deposited to the bid and not withdrawn.