Notice and Proposed Rule: OSC Rule - 62-501 - Prohibited Stock Market Purchases of the Offeree's Securities by the Offerer During a Take-Over Bid
Notice and Proposed Rule: OSC Rule - 62-501 - Prohibited Stock Market Purchases of the Offeree's Securities by the Offerer During a Take-Over Bid
NOTICE OF PROPOSED RULE UNDER THE SECURITIES ACT
PROHIBITED TRANSACTIONS IN CONNECTION WITH TAKE-OVER BIDS
Substance and Purpose of Proposed Rule
The Securities Act (Ontario) (the "Act") prohibits an offeror from offering to acquire oragreeing to acquire securities of any class that are subject to a take-over bidotherwise than pursuant to the bid on and from the date of the announcement of theofferor's intention to make the bid until its expiry. There is an exception in the Actallowing an offeror to make limited purchases through the facilities of a stockexchange. Where all shareholders have the opportunity to sell on the exchange, thatexception can be viewed as not fundamentally inconsistent with the principle oftreating all shareholders equally. However, where purchases that result from aprivate agreement take place through the facilities of an exchange, the Commissionis of the view that such purchases are inconsistent with the principle of equaltreatment and should be prohibited. One of the purposes of the proposed Rule is toprohibit such purchases. Such a prohibition is consistent with the view expressed insection 2 of Part A of OSC Policy 9.3 that, prima facie, crosses, put-throughs andany other pre-arranged trades are a form of private agreement, and is consistent withthe principle of treating all shareholders equally.
In addition, in a securities exchange take-over bid, the perception of shareholders ofthe target corporation as to the value of the securities being offered to them underthe bid will be affected, at least in part, by the market price of the securities offered orsecurities related thereto. The Commission is of the view that this price should bedetermined by normal market forces operating in an orderly fashion. In Part C ofOSC Policy 9.3 the Commission states its views on transactions that have the effectof increasing or maintaining the price of offered securities at a market price that ishigher than the market price would be in the absence of bids or purchases by theofferor or persons acting jointly or in concert with the offeror. OSC Policy 9.3 statesthat the Commission views the potential results of market stabilization as giving anartificial or deceptive appearance to the market price of the offered securities. TheCommission is of the view that certain purchases during a securities exchange take-over bid of offered securities or securities related thereto should be prohibited. Inaddition, sales of offered securities in order to depress the price of these securitiesare equally damaging to the maintenance of a fair market and should be prohibited.In order to prevent market manipulation, the Commission proposes to adopt theproposed Rule, which prohibits certain purchases or sales of securities being offeredunder a securities exchange take-over bid and securities related thereto.
Summary of Proposed Rule
OSC Policy 9.3 currently contains miscellaneous guidelines regulating certainactivities during take-over bids. The proposed Rule is intended to replace certainprovisions of OSC Policy 9.3. Section 2.1 of the proposed Rule, which expands onsection 2 of Part A of OSC Policy 9.3, sets out the situations in which purchases areprohibited under subsection 94(3) of the Act. Section 2.1 of the proposed Rule isdesigned to ensure that, if an offeror wishes to make purchases in the market duringa take-over bid, all shareholders of the offeree issuer have the opportunity to selltheir shares to the offeror in that market.
Section 3.1 of the proposed Rule replaces Part C of Policy 9.3. Section 3.1 isdesigned to prevent manipulation of the securities being offered by an offeror in atake-over bid whereby trading activity is engaged in to either increase the price of theoffered securities or securities related thereto or create actual or apparent tradingactivity. Subsection 3.1(1) of the proposed Rule prohibits an offeror from bidding foror purchasing, or attempting to induce the purchase of or causing any other personor company to purchase, offered securities, or convertible securities or underlyingsecurities (as defined in the Rule), unless such activities come within the exceptionsin subsection 3.1(2). The exceptions in subsection 3.1(2) include, among others, (i)bids or purchases over foreign markets where the securities exchange take-over bidis made in compliance with the multijurisdictional disclosure system, (ii) bids orpurchases made by any member of The Toronto Stock Exchange or any other stockexchange or market recognized by the Commission for the purpose of the Rulethrough the facilities of the exchange or market, where the bid or purchase ispermitted under the by-laws, rules and policies of the exchange or market and ismade in accordance with the by-laws, rules and policies of the exchange or market,(iii) bids or purchases where none of the securities trade on any market, and(iv) certain other situations where the offeror does not solicit the trade. Subsection3.1(4) requires the disclosure in the take-over bid circular of bids or purchasespermitted under paragraph 3.1(2)(a) or (b).
Subsection 3.2 prohibits a person or company from selling offered securities,convertible securities or underlying securities for the purpose of depressing the priceof the securities in order to defeat, or assist in defeating, a take-over bid.
Other provisions of OSC Policy 9.3 have been deleted as they are now covered byprovisions of the Act. Section 1 of Part A is covered by subsection 94(2) of the Act.Part B is also no longer required as it is covered by subsection 94(5) of the Act.
Authority for the Proposed Rule
The following provisions of the Act provide the Commission with authority to adoptthe proposed Rule. Paragraph 143(1)28 of the Act authorizes the Commission tomake rules regulating take-over bids, including providing for exemptions from section94 or removing any exemptions set out in that section. Paragraph 143(1)13 of theAct authorizes the Commission to make rules regulating trading in securities toprevent trading that is fraudulent, manipulative, deceptive or unfairly detrimental toinvestors. Paragraph 143(1)39 authorizes the Commission to make rules requiringor respecting the content of all documents required under or governed by the Act, theregulations or the rules, including take-over bid circulars.
Alternatives Considered
The Commission considered three alternatives in this area. The first was to revokePolicy 9.3 and not replace it with any instrument. The second was to re-enact Policy9.3 as a policy with the necessary revisions to ensure that it did not containprovisions of a legislative nature. The third was to enact a rule. In both the first andsecond cases, the Commission would have relied on existing provisions in the Actand rules of the stock exchanges and self-regulatory organizations to regulate theconduct that is the subject matter of the proposed Rule. The Commission is of theview that the best alternative is to adopt the proposed Rule.
Unpublished Materials
In proposing the Rule, the Commission has not relied on any significant unpublishedstudy, report or other material.
Anticipated Costs and Benefits
Security holders of an offeree issuer benefit under the proposed Rule as it isdesigned to provide equal treatment of shareholders of an offeree issuer during atake-over bid and to prohibit manipulation of securities of an offeror being offeredunder a bid. It is anticipated that any costs to the offeror from disclosurerequirements imposed by the Rule would be relatively insignificant. The Rule mayimpose costs on an offeror by making it more difficult or more costly to makepurchases under subsection 94(3) of the Act. In imposing restrictions on thepurchase of offered securities, convertible securities and underlying securities therewill be costs to an offeror, including in some cases, a dealer acting for the offeror, inthat an offeror will be prohibited from carrying out trades in those securities. TheCommission is of the view that the benefits of ensuring that the market price of theoffered securities be determined independently of influence by the offeror outweighany costs to persons restricted or prohibited from purchasing securities under theproposed Rule.
Regulations to be Revoked
The adoption of the proposed Rule does not require any regulation to be revoked.
Comments
Interested parties are invited to make written submissions with respect to theproposed Rule. Submissions received by January 22, 1996 will be considered.
Submissions should be made to:
Daniel P. Iggers, SecretaryOntario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
Questions may be referred to:
Simon RomanoSpecial Counsel
Ontario Securities Commission
(416) 593-8161
Proposed Rule
The text of the proposed Rule follows, together with footnotes that are not part of theproposed Rule but have been included to provide background and explanation.
PART 1 DEFINITIONS
1.1 Definitions(1)
In this Rule
"convertible securities" means securities that, by their terms, are, at theoption of the holder, immediately convertible into, or exercisable orexchangeable for, offered securities, other than securities convertible intoor exercisable or exchangeable for securities of two or more issuers inaddition to the offeror;(2)
"formal bid" has the meaning set out in subsection 89(1) of the Act;
"offered securities" means securities that are being offered in exchange forthe securities that are the subject of a securities exchange take-over bidor shares that have the same or substantially the same dividend rights andrights to participate on liquidation or winding up as the securities beingoffered;(3)
"offeror" has the meaning set out in subsection 94(1) of the Act(4);
"published market" has the meaning set out in subsection 89(1) of the Act;and
"underlying securities" means
(a) securities into or for which offered securities, by their terms,are, at the option of the holder, immediately convertible,exercisable or exchangeable, or
(b) shares that have the same or substantially the same dividendrights and rights to participate on liquidation or winding up asthe underlying securities referred to in paragraph (a).
PART 2 PROHIBITED STOCK MARKET PURCHASES OF OFFEREE'SSECURITIES
2.1 Prohibited Stock Market Purchases of Offeree's Securities
Despite subsection 94(3) of the Act, an offeror may not make purchasesallowed under that subsection unless
(a) the purchases are made in the normal course on a stockexchange described in subsection 94(3) of the Act;
(b) any broker acting for the offeror does not, in connection with thepurchases, perform services beyond the customary broker'sfunctions and does not receive more than the usual fees orcommissions charged for comparable services performed bythe broker in the normal course;
(c) neither the offeror nor any person or company acting for theofferor solicits or arranges for the solicitation of offers to sellsecurities of the class subject to the bid, except for thesolicitation by the offeror or members of the soliciting dealergroup of securities pursuant to the take-over bid; and
(d) the seller or any person or company acting for the seller doesnot, to the knowledge of the offeror, solicit or arrange for thesolicitation of offers to buy securities of the class subject to thebid.
PART 3 PROHIBITED PURCHASES AND SALES OF OFFEROR'SSECURITIES
3.1 Prohibited Purchases of Offeror's Securities
(1) On and from the date of the announcement of the offeror's intentionto make a securities exchange take-over bid that is a formal bid untilthe expiry or abandonment of the bid, the offeror may not bid for orpurchase, for its own account or an account in which it has abeneficial interest, or, except for the solicitation of acceptances of thebid, attempt to induce the purchase of, or cause any other person orcompany to purchase, any offered securities, convertible securitiesor underlying securities.
(2) Subsection (1) does not apply to
(a) a bid or purchase made over a stock exchange or marketlocated outside Canada during a securities exchange take-overbid made in compliance with Rule [MJDS];(5)
(b) a bid or purchase made by a member of The Toronto StockExchange or any other stock exchange or market recognizedby the Commission for the purpose of this Rule through thefacilities of the stock exchange or market if the bid or purchaseis permitted under the by-laws, rules and policies of the stockexchange or market and is made in accordance with the by-laws, rules and policies of the stock exchange or market(6);(7)
(c) a bid for or purchase of offered securities, convertible securitiesor underlying securities, as applicable, if none of the offeredsecurities, convertible securities or underlying securities tradeon any published market(8);
(d) a bid for or purchase of convertible securities if the relevantconversion, exercise or exchange price is 110 per cent or moreof the closing price of the offered security on the last day onwhich the offered security traded before the first publicannouncement of the terms of the take-over bid and neither thebid nor the purchase is made for the purpose of maintaining orincreasing the market price or value of the offered security;
(e) a bid for or purchase of underlying securities if the relevantconversion, exercise or exchange price at which the offeredsecurity is convertible into, or exercisable or exchangeable forthe underlying security is 110 per cent or more of the closingprice of the underlying security on the last day on which theunderlying security traded before the first public announcementof the terms of the take-over bid and neither the bid nor thepurchase is made for the purpose of maintaining or increasingthe market price or value of the offered security;
(f) a purchase of offered securities, convertible securities orunderlying securities either directly from treasury or through anunderwriter acting in that capacity, if neither the purchase northe sale of the offered securities, convertible securities orunderlying securities is made for the purpose of maintaining orincreasing the market price or value of the securities(9);
(g) a bid or purchase by a dealer for a customer, if
(i) the customer's order was not solicited, or
(ii) if the customer's order was solicited, the solicitationoccurred before the restrictions on trading prescribed bysubsection (1) started in respect of the dealer;
(h) a bid or purchase referred to in any of clauses 93(3)(a) through(d) of the Act if the offeror did not solicit the sale of thesecurities sold pursuant to those clauses; or
(i) the exercise of a right to purchase, convert or exchange by aperson or company if the right was acquired before therestrictions on trading prescribed by subsection (1) started inrespect of the person or company.
(3) In making the computation required by paragraphs (1)(d) and (1)(e),the closing price used is determined with reference to that market onwhich the greatest volume of trading in the particular class ofsecurities occurred during the twenty business days before therelevant date.(10)
(4) In addition to the information otherwise prescribed by Ontariosecurities law, a securities exchange take-over bid circular shallcontain a description of
(a) any bid or purchase of the type described in paragraph (2)(a)or (2)(b)(11) by a person or company that is an offeror for thepurposes of this Rule after the restrictions on trading prescribedby subsection (1) started; and
(b) any bid or purchase of the type described in paragraph (2)(a)or (b) contemplated by a person or company that is an offerorfor the purposes of this Rule after the date of the take-over bidcircular.
3.2 Prohibited Sales of Offeror's Securities
No person or company may sell offered securities, convertible securities,or underlying securities for the purpose of depressing the price of theoffered securities in order to defeat, or assist in defeating, a take-over bid.
PART 4 EXEMPTION
4.1 Exemption
The Director or the Commission may grant an exemption to this Rule, inwhole or in part, subject to such conditions or restrictions as the Directoror Commission may impose.
1. At a later date, a general definition rule will be published containingterms used in more than one rule. That rule will also provide that termsused in a rule and defined in the Securities Act will bear the meaning given suchterms in the Securities Act.
2. The words at the end of the definition excluding securities convertibleinto or exercisable or exchangeable for securities of two or moreissuers in addition to the offeror are to exclude Toronto 35 IndexParticipation units ("TIPs") and similar indexed securities which can beexchanged for multiple securities and would not generally be expectedto materially affect the market price of securities of any particular issuer.
3. The phrase "shares that have the same or substantially the samedividend rights and rights to participate on liquidation or winding up" isused in the definitions of "offered securities" and "underlying securities"to apply to a situation where there is another class of securitiesoutstanding with substantially similar economic attributes to the offeredsecurities or underlying securities and a purchase of those securitieswould affect the value of the offered securities or underlying securitiese.g. where the offered securities consist of common shares and there isa class of non-voting common shares also traded. Use of the word"substantially" is intended to address the situation where non-votingshares or subordinate voting shares have a higher dividend rate thancommon shares. If the dividend rate is much higher, then the dividendrights will not be substantially the same and those shares will not be"offered securities".
4. "Offeror" is used in both sections 2.1 and 3.1 of the Rule and in bothcases has the extended meaning found in subsection 94(1) of the Act.This includes persons acting jointly or in concert with the personmaking the offer and, subject to subsection 91(2) of the Act, wouldtherefore include dealers advising the offeror in connection with the bid.As affiliates or associates of dealers are only subject to this Rule if theyare acting jointly or in concert with the person making the bid, a generalexclusion similar to that found in section 26 of OSC Policy 5.1 foraffiliates not engaged in securities activities was not considered to berequired in this Rule.
5. The Rule exempts bids or purchases over a foreign market or exchangeduring a securities exchange take-over bid made in compliance with theRule that replaces the Multijurisdictional Disclosure System (the"MJDS"). The Director or the Commission will consider granting similarrelief in situations where bids would come within the parameters set outin draft National Policy No. 53 - "Foreign Issuer Prospectus andContinuous Disclosure System".
6. The bid or purchase is exempt from section 3.1(1) if made by a memberof The Toronto Stock Exchange (the "TSE") in full compliance with theTSE rules that apply to bids or purchases during a securities exchangetake-over bid.
7. At this time the Commission has not recognized other stock exchangesor markets for the purposes of section 3.1(2)(b) of the Rule.
8. An exemption is available here if the securities do not trade on apublished market since in that case purchases of those securities areunlikely to affect their price.
9. Treasury issuances of offered securities, convertible securities orunderlying securities are permissible so long as they are not engagedin for the purpose of maintaining or increasing the price or value ofthose securities.
10. This clause specifies which market is to be used if securities areinterlisted. That market can be one in or outside of Canada.
11. Clauses (a) and (b) of section 3.1(2) are referenced to make it clear thatit is only purchases or bids over markets or exchanges that must bedisclosed in a circular.