Regulating Issuer Bids:
The Case of the Dutch Auction
Anita I. Anand”
Under current securities legislation in Ontario, con-
ventional issuer bids are subject to both “identical consid-
eration” and “pro rata take-up” requirements. A variation
of the conventional issuer bid, known as a “Dutch auction”
issuer bid, has started to gain prominence in Canada as a
mechanism of share acquisition used by issuers to repur-
chase a portion of their outstanding shares. While Dutch
auction issuer bids are distinct in that they allow sharehold-
ers to choose a minimum bid price from a range of prices
set by the issuer, they are currently subject to the same
legislative requirements as conventional issuer bids.
In this article, the author examines the origin of and
policy behind the identical consideration and pro rata take-
up requirements. The author argues that the current regula-
tion of Dutch auctions contains a bias in favour of tender-
ing shareholders and that the identical consideration and
pro rata take-up requirements should not apply to these
kinds of issuer bids. Omitting these requirements for Dutch
auction issuer bids would allow equality of opportunity to
be achieved. According to the author, this latter notion of
equality constitutes the fairest result for both tendering and
non-tendering shareholders in a Dutch auction issuer bid.
En vertu de la 16gislation sur les valeurs mobili~res
actuellement en vigueur en Ontario, les offres ordinaires de
l’dmetteur sont simultanment sujettes A la rfgle de ]a
livraison an prora>, lesquelles r&gles visent a assurer
l’6galit6 de traitement pour les actionnalres ddposants. Une
variante de l’offre de l’6metteur ordinaire, connue sous le
nom d’enchre an rabais (Dutch auction), acquiert depuis
quelque temps au Canada une importante croissance en tant
que m6ecanisme permettant aux 6metteurs de racheter une
partie de leurs actions 6mises. Bien que les offres de
l’6metteur par enchare au rabais soient distinctes, dtant
donn6 qu’elles permettent aux actionnaires de choisir une
offre minimale parmi une gamme de prix 6tablie par
l’6metteur, elles sont actuellement soumises aux mmes
r~gles l6gislatives que les offres ordinaires de l’Nmetteur.
L’auteur, aprs avoir examin6 l’origine des rgles de
la contrepartie identique et de la prise de livraison au pro-
rata, ainsi que la politique qui les sous-tend, conclut
qu’elles visent A 6tablir une 6galit6 de r.sultat dans le trai-
tement des actionnaires qui dtposent en rdponse A une offre
de l’metteur. En outre, r’auteur soutient que la rdglemen-
tation actuelle des ench~res au rabais tend A favoriser les
actionnaires dtposants et que les r~gles de la contrepartie
identique et de Ia prise de livraison au prorata ne devraient
pas rdgir ce type d’offre de l’6metteur. Le fait de suspendre
ces r~gles pour les offres de l’metteur par ench~re au ra-
bas aurait l’effet de permettre l’tablissement de l’6galit6
de traitement. Selon l’auteur, cette seconde notion d’dgalit6
constitue le rdsultat le plus 6quitable, autant pour les ac-
tionnaires ddposants que pour
les actionnaires non-
d~posants, dans le contexte d’une offre de l’6metteur par
enchbre au rabais.
“Assistant Professor, Faculty of Law, Queen’s University, Kingston, Ontario. The author wishes to
thank John Knowlton for his valuable insights and consistent support in writing this paper. Sincere
appreciation is also extended to James Iurner, Robert Yalden, John Tuer, and Andrew Spence who
were kind enough to review original drafts of the paper and offer useful comments. Finally, the author
extends her appreciation to Cheri Bocking and Ted Hopkins who assisted with research for the article.
McGill Law Journal 2000
Revue de droit de McGill 2000
To be cited as: (2000) 45 McGill L.I. 133
Mode de rdfdrence: (2000) 45 R-D. McGill 133
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 45
Introduction
I. The Dutch Auction
II, Relevant History
A. Establishing the Right of a Company to Purchase Its Own Shares
B. The Identical Consideration Provision
C. The Principle of Equality in Corporate and Securities Law
II1.
Identical Treatment
IV. Policy Implications
A. Exiting Shareholders versus Remaining Shareholders
B. Controlling Shareholders versus Minority Shareholders
C. Pro Rata Take-Up
Conclusion
2000]
A.!L ANAND – REGULATING ISSUER BIDS
Introduction
In a conventional issuer bid, the issuer announces a single price at which it will
repurchase a stated number of validly tendered and accepted shares. The shareholder
must simply decide how many shares, if any, he or she wishes to sell to the issuer. The
issuer purchases the tendered shares and the bid is complete.
Recently in Canada, a variation of the conventional issuer bid has started to gain
prominence as a mechanism of share acquisition used by issuers to repurchase a por-
tion of their outstanding shares. Under a “Dutch auction’ issuer bid, shareholders
must choose a minimum price within a range of prices set by the issuer at which they
would be willing to tender their shares. The issuer then selects the lowest price-often
referred to as the “clearing price”-that enables it to repurchase the desired number of
shares or to spend a pre-determined aggregate dollar amount on the bid. All share-
holders who tender at or below the clearing price receive the clearing price in return
for their shares.
At present in Ontario, the securities regulation which governs fixed-price and
Dutch auction issuer bids is the same. Issuers must comply with Part XX of the On-
tario Securities Act’ which, among other things, requires that identical consideration
be paid to those shareholders who tender to a bid In addition, issuers must repur-
chase shares on a “pro rata!’ basis which means that if more securities are tendered
than the issuer wishes to purchase, the issuer must purchase the same percentage of
shares from each tendering shareholder.’
In this article, I will argue that when completing in a Dutch auction, issuers
should not be subject to the provision requiring payment of identical consideration.
Securities regulators should distinguish between two types of equality: equality of op-
portunity and equality of result. In the case of the Dutch auction, securities regulation
that ensures equality of opportunity alone is the fairest for all interested parties.’ I will
contend that the present regulation contains a bias in favour of tendering shareholders
and that this bias is ill-conceived. I will argue that any bias in issuer bid regulation
‘R.S.O. 1990, c. S.5, as am. by S.O. 1992, c. 18, s. 56; S.O. 1993, c. 27, Sch.; S.O. 1994, c. 11, ss.
349-381; S.O. 1994, c. 33, ss. 1-9; S.O. 1997, c. 19, s. 23; S.O. 1997, c. 10, ss. 36-40; S.O. 1997, c.
43, Sch. F, s. 13; S.O. 1997, c. 31, s. 179 [hereinafter OSA].
2 Section 97(1) of the OSA states “Subject to the regulations, where a take-over bid or issuer bid is
made, all holders of the same class of securities shall be offered identical consideration”
‘ Section 95(7) of the OSA states “Where the bid is made for less than all of the class of securities
subject to the bid and where a greater number of securities is deposited pursuant thereto than the of-
feror is bound or willing to acquire under the bid, the securities shall be taken up and paid for by the
offeror proportionately, disregarding fractions, according to the number of securities deposited by
each depositing security holder.”
4 In addition to tendering and non-tendering shareholders, other parties such as creditors, employ-
ees, and management also have an interest in the price paid by the corporation to repurchase its
shares.
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should be in favour of remaining shareholders who choose not to exit the corporation.
Issuers completing a Dutch auction should be permitted to pay unequal consideration
based on the prices chosen by those shareholders wishing to sell their shares. In such
a case, the wealth transfer from non-tendering to tendering shareholders would be
minimized.
I. The Dutch Auction
What is a “Dutch auction”? The term originates from a method of selling flowers
which was developed by the Dutch in the 17th century. Merchants would set an initial
price at which to sell their flowers and then lower it progressively until purchasers
were found for the remaining stock. In the securities law context, a pure Dutch auc-
tion occurs when the issuer invites shareholders to tender their shares at prices speci-
fied by the shareholders. The issuer then proceeds to purchase shares, starting with
those tendered at the lowest price and continuing with those tendered at increasing
prices, until it has accepted all the shares it desires, purchasing shares at the varying
prices at which they were tendered
The version of the Dutch auction that has gained prominence in both the United
States and Canada as a method of share buyback is a modification of the pure Dutch
auction. Under the modified version, the issuer specifies in advance the number of
shares it wishes to purchase.’ Alternatively, the issuer specifies the aggregate dollar
amount that it wishes to expend on the repurchase of shares under the offer.7 The is-
suer then establishes a range of prices within which shareholders can tender their
shares for repurchase. Each tendering shareholder must choose the number of shares
he or she wishes to sell and the lowest price which he or she will accept for the shares
from the range of prices established by the issuer. Based on the prices selected by ten-
dering shareholders and the maximum number of securities that the issuer wishes to
repurchase (or the aggregate dollar amount that the issuer wishes to expend), a share
purchase price, or “clearing price”, is determined. The clearing price is the lowest
price within the established price range which allows the issuer to purchase the
maximum number of securities it wishes to buy or alternatively, to expend a pre-
determined aggregate dollar amount. All securities tendered at or below the clearing
price are taken up and paid for at the clearing price. Those securities tendered at
‘S.M. Piper, M.L. Berman & S.J. Notellovitz, ‘”he Emerging Role of Dutch Auctions” Insights 3:8
(August 1989) 15 at 17.
‘Moore Corporation sought to purchase up to 12 million of its shares under a Dutch auction. See
“Offer by Moore Corporation Limited to purchase for cash 12,000,000 of its common shares at a pur-
chase price of not more than Cdn $32.00 nor less than Cdn $28.00 per share” (29 April 1997) 1 at 6.
Gentra Inc. sought to purchase five million of its common shares under a Dutch auction. See “Offer
by Gentra Inc. to purchase 5,000,000 of its common shares” (4 May 1999) 1 at 5.
For example, in Trimac’s recent Dutch auction, the company announced the aggregate dollar
amount to be $65 million and also specified a maximum number of shares to be purchased. See Tr-
mac, ‘Trimac Corporation Announces $65 Million Issuer Bid”, Press Release, Calgary (16 July 1998).
2000]
A.!L ANAND – REGULATING ISSUER BIDS
prices above the clearing price are returned to shareholders. Thus, the clearing price is
determined according to the ascending order of shareholder bids until the specified
number of shares or aggregate consideration is met.
The Dutch Auction is a popular method of share buy-back in the United States!
This popularity originated in 1981 when the first Dutch auction was completed in the
U.S. by Todd Shipyards.” Between 1985 and 1988, Dutch auctions comprised 4% of
all share repurchase programs and 43% of self-tender offers by exchange-listed com-
panies in the United States. The Dutch auction is also becoming the transaction of
choice for issuers wishing to complete a substantial issuer bid in Canada, ‘ where at
least 10 Dutch auction issuer bids have been completed since 1996. These include
bids by Imperial Oil and M6tro Richelieu in 1996; Agrium, Cogeco, Moore Corpora-
tion, United Dominion Industries, and Shell Canada in 1997; Trimac in 1998; and
both Manitoba Telecom Services and Gentra in 1999. All of these transactions took
the form of the modified Dutch auction outlined above, such that each corporation
specified a price range within which it would accept tenders and the number of secu-
rities or aggregate dollar amount that it wished to expend. A clearing price was then
determined and paid to all shareholders who tendered at or below it.”
The Dutch auction is appealing to issuers for a number of reasons. First, rather
than attempting to isolate a per share price which may ultimately result in the over- or
under-valuing of its shares, the issuer relies on the company’s shareholders to value its
stock. While many issuers will have a valuation completed,” such valuations are often
inaccurate or unsatisfactory, as the Ontario Securities Commission (“OSC”) itself has
0 G.D. Gay, J.R. Kale & T.H. Noe, “(Dutch) Auction Share Repurchases” (1996) 63 Economica 57.
9 In a circular dated September 22, 1981, Todd Shipyards offered to repurchase up to 550,000 of its
own shares. Shareholders were given the opportunity to specify a price between $21 to $28 per share
at which they would be willing to tender. Todd agreed that it would pay each shareholder identical
consideration for their shares, in an amount not exceeding $28. The offer specified that a minimum
number of shares be purchased; that minimum number would be 200,000 shares. Todd stated that it
would determine the clearing price by taking into account the number of shares tendered and the
prices at which they were tendered. The clearing price was left to Todd’s discretion except to the ex-
tent that Todd would be required to pay $28 per share in order to purchase the 200,000 minimum
number of shares. After the expiry date, Todd announced that it had set a clearing price of $26.50 and
that approximately 208,000 shares had been tendered at prices at or below $26.50. Todd then offered
to accept up to an additional 342,000 shares at $26.50 per share until a specified date. Thereafter, the
bid closed and Todd announced that it had purchased a total of 397,825 shares which had been ten-
dered at or below a price of $26.50. See L. Lederman & P. Vlahakis, “Pricing and Proration in Tender
Offers” Review of Securities Regulation 14:20 (18 November 1981) 813 at 814.
” A distinction is drawn in securities legislation and in stock exchange bylaws between “normal
course issuer bids” and “substantial issuer bids”. The Dutch auction is a type of substantial issuer bid.
” For the remainder of this article, the modified Dutch auction will be referred to simply as a
“Dutch auction.”
,2 If Ontario Securities Commission Policy 9.1 (presently being reformulated as Rule 61-501. See
infra note 13) applies to the bid, an independent valuer must prepare a formal valuation of the issuer
and subject securities.
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noted.” Second, if the issuer sets the appropriate price range, it is likely to pay less in
aggregate than it would in a fixed-price issuer bid. The stock is less likely to be over-
valued and the issuer pays only what the market dictates. This is advantageous to the
issuer and non-tendering shareholders alike, primarily because the transfer of wealth
from non-tendering to tendering shareholders is minimized. Finally, Dutch auctions
tend to reduce the premiums paid to arbitrageurs.” Because arbitrageurs are unaware
of the ultimate price which will be paid to shareholders (i.e. the clearing price), they
face greater risk and may be less willing to bid up the price of the security.
II. Relevant History
A. Establishing the Right of a Company to Purchase Its Own Shares
The starting point for a discussion about the legality of a corporation purchasing
its own shares is the 1887 case of Trevor v. Whitworth.” In that case, the articles of the
corporation permitted the corporation to repurchase its shares. When a shareholder of
the corporation whose shares were not fully paid up applied to have his shares repur-
chased by the corporation, the House of Lords held that such a repurchase was im-
permissible” because, in addition to violating the applicable statute, buying back
shares would serve to withdraw capital from the asset base of the corporation. In ad-
dition, allowing the corporation to repurchase its own shares was found not to be in
the best interests of the corporation’s creditors.
Trevor v. Whitworth was distinguished by the Supreme Court of Canada in
Hughes v. Northern Electric and Manufacturing.” In that case, the shareholders of
Northern Electric and Manufacturing were unable to agree upon the management of
the corporation. They created a strategy whereby the corporation was to mortgage its
assets in order to allow dissenting shareholders to be bought out by other shareholders
with the result that the corporation would continue debt-free. The Supreme Court of
Canada allowed this restructuring on the basis that allowing the corporation to operate
debt-free would ensure the greatest protection of creditors’ interests.
” “Notice of a Proposed Rule and Policy Under the Securities Act (Ontario) – Insider Bids, Issuer
Bids, Going Private Transactions and Related Party Transactions” (1996) 19 O.S.C.B. 2981 at 2990.
The OSC has revised the rules relating to valuations in an issuer bid. These rules have been dissemi-
nated for comment. See “Notice of Proposed Changes to Proposed Rule 61-501 and Proposed Com-
panion Policy 61-501CP under the Securities Act-Insider Bids, Issuer Bids, Going Private Transac-
tions and Related Party Transactions”, online: Ontario Securities Commission Homepage
(date accessed: 18
January 2000). See also A.I. Anand, “Fairness at What Price? An Analysis of the Regulation of Go-
ing-Private Transactions in OSC Policy 9.1″ (1998) 43 McGill L.J 115 at 131.
” Piper, Berman & Notellovitz, supra note 5 at 17.
“‘ (1887) 12 App. Cas. 409 (H.L.).
I6lbid. at 423.
‘,(1915), 50 S.C.R. 626,21 D.L.R. 358.
2000]
A.IL ANAND – REGULATING ISSUER BIDS
Trevor v. Whitworth laid down the fundamental principle that it is unlawful for a
company to purchase its own shares. Yet, following the Supreme Court’s decision in
Hughes v. Northern Electric and Manufacturing, it became clear that courts were not
willing to support the rigidity of the rule in Trevor v. Whitworth if the result appeared
disadvantageous to creditors. Subsequent case law followed this approach.” In 1962,
the Report of the Company Law Committee recommended that English companies
should not be entitled to purchase their own shares.’ The Committee relied on Trevor
v. Whitworth but did not explicitly explain the rationale underlying its recommenda-
tion. It appears that the Committee shared the concern of the courts in the above-noted
cases and sought to protect creditors from default risk. However, the Committee’s
recommendation seems odd in light of the fact that it approved of the American prac-
tice of allowing companies to repurchase their own shares. The Committee noted that
such a practice had not led to “abuse and it [was] useful for a number of purposes.”20
Nevertheless, the Committee refused to deviate from the principle laid down in Trevor
v. Whitworth.
The 1965 Report of the Attorney-General’s Committee on Securities Legislation
in Ontarid’ widely supported the recommendations in the Jenkins Report, though it
did not reopen the discussion concerning share repurchases. Two recommendations
outlined in the report related to the pro rata and equal consideration rules. The Com-
mittee endorsed acceptances by the offeror on a pro rata basis.’ The Committee also
recommended that “an offeror who increases the price of his offer… be required to
pay the increased consideration to accepting shareholders whether or not he has, prior
to the increase, taken up and paid for shares deposited under the offer.” ‘ The recom-
mendation regarding pro rata acceptances was embodied in The Securities Act, 1966.’
However, the Act did not endorse the notion that consideration for accepting share-
holders in an issuer bid must be identical. The recommendations contained in the
Kimber Report related specifically to takeover bids. ‘ There is no reason to assume
that they were intended to apply to issuer bids since, at the time of the Kimber Report,
issuer bids were not permitted in the Province of Ontario.
” See Helwig v. Siemon (1916), 10 O.W.N. 296 (Ont. Div. Ct) in which the Ontario Divisional
Court held that the company at issue had no power to repurchase its own shares or to bind itself to re-
sell them. See also Alberta Rolling Mills v. Christie (1919), 58 S.C.R. 208 at 221, 45 D.L.R. 545 at
554 and Zwickerv. Stanbury [1953] 2 S.C.R. 438 at 440, [1954] 1 D.L.R. 257 at 270.
9 Report of the Company Law Committee (London: Her Majesty’s Stationery Office, 1962) at
paras. 167-168 [hereinafter Jenkins Report].
20 Ibid. at para. 167. One of these purposes was that a company could provide employees with
shares as part of a bonus plan and would increase its own shares by repurchasing such shares.
21 (Toronto: Queen’s Printer, March 1965) [hereinafter Kimber Report].
22!bid at para. 3.15.
Ibid at para. 3.22.
24S.O. 1966, c. 142, s. 81(7) [hereinafter 1966 Securities Act].
2 3See, for instance, Part ll of the Kimber Report entitled ‘”ake-over Bids”.
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In 1967, a recommendation came forward in Ontario for the rule in Trevor v.
Whitworth to be abolished and for provisions to be enacted which would enable com-
panies to repurchase their own shares. The Select Committee on Company Law
pointed out a number of useful reasons for a company to purchase its own shares: to
establish bonus or stock option plans without having to extend its equity base to pro-
vide the required shares, to contract its equity base according to the financial require-
ments of the company, to facilitate mergers and acquisitions and to provide flexibility
in the event of the death or retirement from the business of a principal shareholder.”
Accordingly, the Lawrence Report proposed that, subject to restrictions set forth in a
company’s charter, a company should be permitted to repurchase its common shares
unless the company is insolvent or would be rendered insolvent as a result of the re-
purchase.”‘
The Business Corporations Act, 19708 echoed the recommendations of the Law-
rence Report by allowing a corporation to purchase its own common shares out of
surplus and, in limited circumstances, out of issued capital. The legislation stipulated
that share repurchases be made on a pro rata basis from bona fide or former employ-
ees of the corporation or, alternatively, by purchase on the open market if the corpora-
tion had offered its shares for public auction.’9 In addition, the BCA 1970 compelled
corporations to cancel the repurchased shares only if the articles of the corporation
stipulated such cancellation.’ The Business Corporations Amendment Act, 1971″
slightly modified the BCA 1970, by stating:
Where a corporation purchases its common shares … the purchase shall be
made at the lowest price at which, in the opinion of the directors, such shares
are obtainable, and … pursuant to tenders received by the corporation upon re-
quest for tenders addressed to all the holders of the shares of the class and the
corporation shall accept only the lowest tenders…
This provision is significant because it expressly allowed for Dutch auction-style is-
suer bids in Ontario.”
In 1977, the OSC introduced Policy 3-37 under which it expressly permitted is-
suer bids for the first time.’ In the preamble to the policy, the OSC acknowledged that
‘6 Ontario, Legislative Assembly, “1967 Interim Report of the Select Committee on Company Law”
Sessional Papers (1967) at para. 5.2.8. [hereinafter Lawrence Report].
“Ibid. at para. 5.2.9.
S.O. 1970, c. 25, s. 39 [hereinafter BCA 1970]. Prior to the BCA 1970, corporations were permit-
ted only to repurchase their own preference shares for cancellation, conversion or redemption. See the
Corporations Act, R.S.O. 1960, c. 71, s. 27.
2) BCA 1970, ibid., s. 39(5).
‘0 Ibid., s. 40.
“S.O. 1971, c. 26, s. 9.
32 ibid.
” This amendment to the BCA 1970 was repealed in 1982. See Business Corporations Act, 1982,
S.O. 1982, c. 4, s. 277.
2000]
A.!L ANAND – REGULATING ISSUER BIDS
these bids were already permitted under corporate statutes, but stated its concern that
such legislation generally did not contain provisions which required disclosure of in-
formation to shareholders. Thus, Policy 3-37 compelled timely disclosure of certain
information if the issuer did not fall within certain stated exceptions’ and required the
issuer to obtain an independent valuation in certain instances.’ In subsequent amend-
ments to Policy 3-37,” the OSC stated that, in addition to applying to issuer bids, the
requirements contained in the policy applied to a take-over bid made by any insider of
the issuer or any associate or affiliate of the insider.’
One year later, issuer bids came to be regulated with takeover bids in Part XIX of
the 1978 Ontario Securities Act, 1978.”, Thus, corporations wishing to complete an is-
suer bid now had to comply with a number of provisions which had previously ap-
plied only to corporations pursuing a take-over bid. These provisions addressed
minimum bid periods,’ the granting of withdrawal rights” and the pro rata take-up of
shares when the number of shares tendered to the bid exceeded the number sought by
the issuer.2
B. The Identical Consideration Provision
The 1978 Securities Act also contained a provision requiring issuers to pay iden-
tical consideration to all shareholders who tendered to a bid. This provision read:
“[w]here, during the course of a take-6ver bid or an issuer bid, the offeror pays or
agrees to pay a price for securities higher than the consideration offered through the
take-over bid or issuer bid, the take-over bid or issuer bid shall be deemed to be varied
3 “Issuer Bid-An offer by an issuer to purchase, redeem or retire its own securities: timely disclo-
sure” Ontario Policy No. 3-37 (1977) O.S.C.B. 253; amended (1977) O.S.C.B. 268; notices (1977)
O.S.C.B. 273, (1978) O.S.C.B. 60; exemptions (1978) O.S.C.B. 114; amended (1978) O.S.C.B. 224;
interpretation statement (1978) O.S.C.B. 323; draft amendment (1981) 1 O.S.C.B. 7E; addendum to
draft (1981) 1 O.S.C.B. 24E; published as (1982) 4 O.S.C.B. 538E; draft (1990) 13 O.S.C.B. 2021;
replaced (1991) 14 O.S.C.B. 3345; amended (1992) 15 O.S.C.B. 2921.
Policy 3-37 (1977) O.S.C.B. 253 at 257 indicated that the following items must be disclosed:
benefits that would accrue to any senior officer, director or other insider of the issuer, any material
changes, and “a summary of any appraisal or valuation known to the directors or officers of the issuer,
regarding the issuer, its material assets or securities … within the two years preceding the date of the
bid”
Ibid at 262, para. 20(b).
37″Statement of Commission Policy-Notice Regarding Policy 3-37″ (1977) O.S.C.B. 273.
The rule applied only if the bid was for more than 5 per cent of the outstanding shares of the is-
suer and if the change was intended to compel any shareholder to terminate his or her interest in the
issuer.
‘9 S.O. 1978, c. 47 [hereinafter 1978 Securities Act]. See also Bill 7, An Act to Revise the Securities
Act, 2d. Sess., 31st Leg., Ontario, 1978, cl. 27.
40 OSA, supra note 1, s. 95(2).
4 1 Ibid, s. 95(4).
42 bid, s. 95(7).
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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by increasing the consideration to the higher price “‘3 The rationale underlying this
provision was not stated in the 1978 legislation, nor was it stated in the Kimber Report
which originally proposed the inclusion of such a provision. However, a report pre-
pared in 1983 for the OSC, known as the Practitioner Report, stated:
Shareholders of an…issuer and public investors generally should be confident
that transactions which may affect the de facto control of public security issuers
will be made, as a matter of principle, on a basis which requires identical
treatment of holders of the same class of securities and that all such sharehold-
ers will have an equal opportunity to participate in the benefits which may ac-
company a change of effective control of public issuers.’
The Practitioner Report appears to be the first public document in which the notion of
“equal opportunity” was used. It was thought that an identical consideration provision
was an important element in ensuring that shareholders had equal opportunity to share
in the benefits of “change in control” transactions. According to this conception of
equal treatment, treating shareholders equally means treating them identically.
The concern of the Practitioner Committee to ensure the equal treatment of share-
holders stemmed in part from existing controversy surrounding the “private agree-
ment” exemption. 5 In its original formulation, this provision exempted from the take-
over bid rules offers “to purchase shares by way of private agreement with individual
shareholders … not made to shareholders generally:” However, the Securities
Amendment Act, 1971 defined an “exempt offer” more narrowly as “an offer to pur-
chase shares by way of private agreement with fewer than 15 shareholders and not
made to shareholders generally.”‘ Subsequently, a requirement was added that a pur-
chaser acquiring securities pursuant to the private agreement exemption at a price
greater than 115% of the market price make a “follow-up offer” to the remaining
shareholders of the offeree issuer at a consideration equal to that paid under the pri-
vate agreement.”3 The possibility of issuers having the opportunity to purchase shares
in an issuer bid at differing prices, however, was not contemplated by the Practitioner
Committee.
In commenting on the private agreement exemption, the Practitioner Report
stated its concern that the exemption could become an avenue for control-block secu-
rity-holders to realize premiums for control which were not available to minority
“Supra note 39, s. 89(14)(3).
J.G. Coleman, H.G. Emerson and D.A. Jackson, ‘Report of the Committee to Review the Provi-
sions of the Securities Act (Ontario) Relating to Take-over Bids and Issuer Bids” (23 September
1983) at 1 [emphasis added, hereinafter Practitioner Report].
4 Ibid., paras. 5.01 and 5.02. For a history of the development of the private agreement exemption,
see B. Bailey & P. Crawford, “The Take-Over Bid by Private Agreement: The Follow-Up Offer Obli-
gation” (1983) Dal. LJ. 93. See also RJ. Daniels & J.G. MacIntosh, “Toward a Distinctive Canadian
Corporate Law Regime” (1991) 29 Osgoode Hall LJ. 863 at 900.
46 1966 Securities Act, supra note 24, s. 80(b)(i).
43S.O. 1971, e. 31, s. 22
“s Coleman, Emerson & Jackson, supra note 44, par. 5.01.
s4)(i).
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A.L ANAND – REGULATING ISSUER BIDS
shareholders. ‘9 The OSC shared the concern of the Practitioner Report, as evidenced
in the following year when the Commission reviewed a cash offer made by Color Tile
to all shareholders of Color Your World. Color Tile offered shareholders $26 per
share, other than one shareholder whose shares were to be acquired at $17 per share.
Color Tile represented that the shareholder agreeing to accept $17 per share had en-
tered into an agreement with persons controlling Color Your World which provided
for the receipt by him of lower consideration. At the time, the shareholder was aware
of Color Tile’s interest in making an offer to all shareholders at a higher price. The
OSC allowed Color Tile to deviate from the identical consideration provision, but is-
sued a statement which emphasized that such deviation would not be permitted as a
matter of course:
The Commission is aware that permitting a security holder to accept less than
the consideration offered to other security holders may be perceived as creating
an opportunity for significant shareholders of public companies, in effect, to in-
crease the net consideration payable to themselves by obliging other security
holders to accept a lesser consideration. The Commission would consider such
an arrangement as contrary to the provisions of the section.’
The Commission was thus of the view that the identical consideration provision could
be a means of preventing controlling shareholders from receiving greater considera-
tion than other shareholders in the context of a take-over bid. Significantly, the con-
cern of the Commission was to ensure the identical treatment of shareholders in a
take-over bid, but not in an issuer bid.
The rationale underlying the identical consideration provision was further dis-
cussed in the case of CDC Life Sciences, Caisse de Depot et Placement du Quebec,
and Institut Merieux S.A.’ The case dealt with a joint hearing of the OSC and the
Commission des valeurs mobili~res du Quebec which considered certain alleged ir-
regularities in a take-over bid by Institut Merieux for up to 4,369,000 of CDC Life
Sciences’ common shares. Merieux and the Caisse had entered into an agreement that
was collateral to the bid. The OSC was asked to determine whether the agreement had
the effect of providing the Caisse with a consideration of greater value than that which
had been offered to other shareholders of CDC common shares.
Philip Anisman, as counsel to shareholders Allenvest Group and the Ontario Hy-
dro Pension Fund, made a request for a cease trade order of CDC Life Sciences’
common shares. Mr. Anisman noted that there were two policies underlying the iden-
tical consideration provision. Echoing the Practitioner Report, he asserted that the
provision ensured that all shareholders would have an equal opportunity to accept the
bid on the basis of full disclosure relating to the bid, the offeror and the target com-
pany. Second, Anisman argued that the provision ensured that the holders of publicly-
traded securities would be treated equally by those who purchased a large block of se-
41bid., para. 5.04.
(1984) 7 O.S.C.B. 777.
51(1988) 11 O.S.C.B. 2541 [hereinafter InstitutMerieux].
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curities from a controlling shareholder.2 The OSC seemed to agree with this interpre-
tation of the purposes of the identical consideration provision, although it did not ex-
plicitly endorse it.” Ultimately, the OSC held that the Merieux-Caisse agreement of-
fended the principle requiring identical treatment of shareholders. ‘
A review of the history of the identical consideration provision indicates that there
has been little deliberate reflection and discussion by regulators about whether the
provision should apply to issuer bids, or particularly, to Dutch auction issuer bids. It
appears as though issuer bids were grouped in with takeover bids, despite the fact that
these transactions involve very different methods of share acquisition. In a takeover
bid, there may be sound reasons for compelling compliance with the identical consid-
eration provision such as those discussed in Institut Merieux. However, it is question-
able whether such reasons apply in the issuer bid context, especially when one con-
siders the position of shareholders who do not tender to the issuer bid.
C. The Principle of Equality in Corporate and Securities Law
The principle of equal treatment of shareholders is central to both securities and
corporate law.” A historical presumption relating to shares of a corporation is that the
rights of shareholders are equal in all respects. ‘ This principle of equality among
” For a discussion of this point, see L. Sama, Mergers and Acquisitions (Montreal: Jewel, 1994) at
1.50.
“Ibid. at 1.51.
(1988) 14 O.S.C.B. at 3647. In limited instances, the OSC has exempted issuers from the identical
consideration provision. In a case involving Husky Oil (Husky Oil (1988), 11 O.S.C.B. 3647, in L.
Sarna & P Alince, Mergers and Acquisitions (Montreal: Jewel, 1989) vol. 1 at para. 2.8), the OSC
heard an application for an order exempting Husky Oil from the identical consideration provision
with respect to a proposed take-over bid for all of the outstanding common shares of Canterra Energy.
Nova of Alberta held approximately 12.2 per cent of Canterra’s shares and 43 per cent of Husky’s
outstanding shares. Pursuant to an agreement, Nova was to indirectly acquire approximately 51 per
cent of Canterra’s shares. This was done by the acquisition by Husky of the outstanding common
shares of Polysar Energy and Chemical Corp. (“PECC”) from Nova and the general public. This
agreement was made on the basis that certain PECC shareholders would be able to sell their shares for
at least $3.00 per share. Husky subsequently agreed to purchase the shares beneficially owned by
Nova for $2.78 and all publicly owned shares for not less than $3.00. The OSC exempted Husky from
paying identical consideration to all Canterra shareholders, allowing Husky to pay the lesser price to
Nova and the higher price to the public.
” For the purposes of this paper, I discuss corporate law principles as being distinct from securities
law principles. However, it is recognized that in many respects, there is no clear line dividing these
subjects. See P. Anisman, “Regulation of Public Corporations: The Boundaries of Corporate and Se-
curities Law” in The Future of Corporation Law: Issues and Perspectives, Papers Presented at the
Queen’s Annual Business Law Symposium 1997 (Scarborough: Carswell, 1999) 63 at 63.
” See Canada Business Corporations Act, R.S.C. 1985, c. C-44, ss. 24(3), 24(4) [hereinafter
CBCA].
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A.L ANAND – REGULATING ISSUER BIDS
shareholders has been enunciated in numerous cases, ‘ including the relatively recent
case of R. v. McClurg.8 Over the years, the presumption of equality between share-
holders has been modified; a principle of equality of rights applies to shares within a
class of shares but no such principle applies as between classes of shares. 9
In McClurg, the issue under consideration was the proper allocation of dividends
by the corporation among differing classes of shares. The Minister of National Reve-
nue argued that there was a duty to allocate dividends equally among all classes of
common shares regardless of class or any other express conditions attached to the
shares. The Supreme Court of Canada held that the prima facie presumption of equal-
ity was still valid. The Court cited Palmer’s Company Law which states that “[p]rima
facie the rights carried by the shares rank pari passu, i.e. the shareholders participate
in the benefits of membership equally.” Another important aspect of the Court’s de-
cision lay in its confirmation that the right to equality attaches to the share and not the
shareholder. The Court held that this principle justifies the derogation from the princi-
ple of equality with respect to the division of shares into separate classes.
In addition to its prevalence at common law, the principle of equality of share-
holders also underlies the OSA, particularly the legislation’s issuer bid and take-over
provisions.’ As Anisman notes, the policy underlying the take-over bid provisions of
the OSA calls for the equal treatment of shareholders of the offeree? This principle
includes the right of such shareholders to have equal opportunity to make a rational
decision about a take-over bid on the basis of all relevant information. As Anisman
explains:
The Commission has characterized this principle [of equal treatment] as
“paramount.” It is declared expressly in the Act and it pervades Part XIX [now
Part XX]; it underlies the limitations on private agreements, prebid and postbid
transactions and purchases by an offeror during the course of a takeover bid, as
well as the prohibition against collateral agreements between an offeror and a
security holder of a target corporation. … The equal treatment principle has in-
formed most of the Commission’s decisions on takeover bids under the new
provisions of the Act.’
17 Gray v. Portland Bank (1807), 3 Am. Dec. 156; Birch v. Cropper, [1889] 14 App. Cas. 525
(H.L.); North-West Electric v. Walsh, [1899] 29 S.C.R. 33, 11 Man. R. 629; International Power v.
McMaster University, [1946] S.C.R. 178, 2 D.L.R. 81; Bowater Canadian v. R.L Crain Inc. (1987),
62 O.R. (2d) 752,46 D.L.R. (4th) 161 (H.CJ.) [hereinafter Bowater Canadian cited to O.R.].
[1990] 3 S.C.R. 1020,76 D.L.R. (4th) 217 [hereinafterMcClurg cited to S.C.R.].
59See e.g. McClurg, ibid; Bowater Canadian, supra note 57.
McClurg, supra note 58 at 1041, citing C.M. Schmitthoff, ed., Palmer’s Company Law, 23d ed.,
vol. 1 (London: Stevens & Sons, 1982) at 387.
6, Supra note 1, Part XX.
62 p. Anisman, “The Commission as Protector of Minority Shareholders” Special Lectures of the
Law Society of Upper Canada: Securities Law in the Modem Financial Marketplace (Toronto: De
Boo, 1989) 451 at 482.
Ibid at 482-83.
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
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In analyzing the principle of equal treatment, it should not be assumed that one
precise meaning of “equality” exists which is readily applicable in all circumstances.
In other areas of law, particularly human rights law, a distinction is drawn between
two concepts of equality. “Equality of opportunity” seeks to ensure that individuals
have the same rights of access to advantaged positions and resources, but does not
guarantee any particular outcome for these individuals. “Equality of result” seeks to
ensure that disadvantaged persons or groups end up with equal shares of the particular
good being allocated.’
The regulation of issuer bids is premised on the view that, unless shareholders re-
ceive identical consideration, they are not treated equally. However, it is submitted
that as long as shareholders have an equal opportunity to participate in the transaction,
they are indeed being treated equally. Shareholders are treated equally if they have an
equal opportunity to participate and if the rules of the game are stated clearly in dis-
closure documents which are circulated to all shareholders.
The Supreme Court’s holding in McClurg and particularly, its reference to
Palmer’s Company Law are consistent with an “equality of opportunity” concept.
Shareholders are entitled to participate equally in the benefits of membership in a cor-
poration. It is their rights as shareholders which are identical and not necessarily the
consideration paid to them in a given transaction. If shareholders are given equal op-
portunity to participate in a transaction, they are accorded the same benefits of owner-
ship. A prime example of the principle of equal opportunity presently exists in struc-
turing take-over bid transactions. It is common for an acquirer to offer cash or shares
(or a combination of both) to target shareholders. Shareholders are able to choose the
form of consideration they wish to receive and, as such, are treated equally, though
not identically.
It is a contention of this paper that securities regulation needs to be refined in or-
der to account for differing conceptions of equality. In particular, the principal of
equality should not automatically be interpreted to mean equality of result. As will be
argued below, regulators can ensure that shareholders have an equal opportunity to
participate in a transaction without necessarily ensuring that they all benefit in an
identical manner from the transaction.
Ill. Identical Treatment
Issuers wishing to complete a Dutch auction typically apply to securities commis-
sions for an exemption from the proportionate take-up provision of the applicable se-
curities legislation. An exemption is required because issuers offer to purchase at the
clearing price the entire block of shares of holders of “odd lots”. ‘ In addition, some
issuers choose to allow shareholders to make a “proportionate tender” so that the
See M. Rosenfeld, Affirmative Action and Justice (New Haven: Yale University Press, 1991) at 16
for a discussion of these principles.
6In Canadian Dutch auctions, the odd lot number is typically 100 shares.
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A.L ANAND – REGULATING ISSUER BIDS
holder can maintain his or her proportionate interest in the company.’ Securities
regulatory authorities grant the exemption and the issuer may begin the process of
buying back its shares. No exemption is needed from the identical consideration pro-
vision because companies typically agree to establish a clearing price which results in
all tendering shareholders receiving identical consideration.
In the case of a conventional issuer bid, a requirement that issuers treat sharehold-
ers identically seems justified. It is the issuer that is choosing the purchase price. The
only choice facing the shareholder is whether to tender at that price or not. The possi-
bility of unfair treatment typically arises when the issuer is not satisfied with the
number of shares tendered at a certain price. The issuer may then raise the purchase
price as an incentive for other shareholders to tender. The issuer is obliged under the
identical consideration provision to provide all shareholders with the higher price, re-
gardless of the price at which each shareholder originally tendered.
Application of the identical consideration provision in this case is justified be-
cause the shareholders who tendered at the initial price were unaware that a higher
price would be offered. If they had known that the price would be raised, they might
not have tendered. It would be unfair to penalize them for a subsequent decision by
the issuer to increase the price. As Anisman argues, a principle of equality of treat-
ment among offerees is desirable because:
Offerees who accept an offer before the price is increased irrevocably deposit
their shares without the offeror having unconditionally committed himself to
buying them and as a result of their deposit do not have an opportunity to take
advantage of the increase in price. As the offeror benefits from the fact that the
deposit is irrevocable it seems fair that he, in return, pay all shareholders the
same amount where he increases the price.’
By contrast, in the Dutch auction, shareholders are aware at the outset of the
range of prices being offered by the issuer. They know that if they tender at a low
price, their shares are more likely to be purchased than if they tender at a higher price
within the pre-determined range. There is no possibility of unfair treatment since
shareholders have actually chosen the price at which they are willing to tender within
66These types of tenders are sometimes referred to as “purchase price tenders”. Under this type of
tender, a shareholder tenders all beneficially-owned securities and thereby elects to have the issuer
purchase that number of securities necessary to maintain the holder’s proportionate ownership in the
company. The shareholder does not specify a price at which his or her securities may be purchased by
the issuer. Rather, the shareholder must be willing to accept the clearing price set by the issuer once
all tenders have been received. For example, Dutch auctions completed by Imperial Oil (1996) and
Shell (1997) allowed shareholders to tender bids by way of proportionate, or purchase price, tenders.
See “Offer by Imperial Oil Limited to purchase for cash 24,000,000 of its common shares at a pur-
chase price not in excess of Cdn $61.00 nor less than Cdn $53.00 per share” (28 July 1996) and “Of-
fer by Shell Canada Ltd. to purchase for cash 16,000,000 of its class A common shares at a purchase
price not in excess of Cdn $61.00 nor less than Cdn $53.00 per share” (5 May 1997).
67 p Anisman, Takeover Bid Legislation in Canada: A Comparative Analysis (Don Mills, Ont.: CCH
Canadian, 1974) at 90-91.
MCGILL LAW JOURNAL /REVUE DE DROITDE MCGILL
[Vol. 45
the range specified by the issuer.’ Disclosure requirements in securities regulation
support the argument that shareholders are treated equally and fairly since all of the
particulars of the bid are disclosed in the circular which is sent to shareholders.
A common criticism of this argument deserves mention. Some critics contend that
shareholders do not read information contained in disclosure documents. Therefore,
they require further protection in the legislation governing acquisition transactions.
An identical treatment provision is appealing because it is difficult for participating
shareholders to claim that they have been treated unfairly if they have been treated
identically. But to what extent must an issuer “hold the hands” of its shareholders?
How far does an issuer have to go to ensure that shareholders to whom a bid is di-
rected are aware of the terms of the bid? It is submitted that an issuer which has
clearly and concisely outlined the terms of the bid in a circular, including all relevant
information regarding the value of the shares, and mailed this circular to its share-
holders has discharged its responsibility to shareholders. Whether shareholders
choose to review the information and understand the terms of the bid is a matter out-
side of the issuer’s duties.
I contend that issuers should be permitted to repurchase shares at prices chosen
by shareholders within a range of prices specified by the issuer in a Dutch auction. In
fact, as it will now be argued, it would be fairest to all interested parties if the shares
were purchased at the prices chosen by tendering shareholders. All shareholders
would have an equal opportunity to participate in the transaction and in this sense
would be treated equally, though not identically.
IV. Policy Implications
In practical terms, the argument in favour of equal opportunity would mean that
issuers completing a Dutch auction would not be bound by the identical consideration
provision. Yet the question arises as to whether it would be fair in practice if issuers
were permitted to purchase shares at differing prices within a range previously speci-
fied by the issuer through the use of a Dutch auction. In responding to this question,
the differing interests of exiting shareholders and remaining shareholders must be
taken into account. These groups of shareholders may, in some circumstances, consist
of minority and/or controlling shareholders as well as retail or institutional sharehold-
ers. In addition, one must consider the implications of the current proposal in favour
of equal opportunity on the pro rata take-up rule.
‘r The purchase and sale of shares in a Dutch auction are analogous to purchase and sale of shares
on the secondary market. On any particular day, shareholders on the secondary market buy and sell
shares at a number of different prices. Although every shareholder would prefer to sell at the highest
price at which shares traded on the day they sell shares, there is nothing unfair about the fact that
some sellers receive higher prices than others since every market participant is a willing participant. In
the Dutch auction, as in the open market, shareholders are provided with the choice of whether to sell
or not to sell and, if they decide to sell, at what price.
2000]
A.IL ANAND – REGULATING ISSUER BIDS
A. Exiting Shareholders versus Remaining Shareholders
At present, the regulation of issuer bids, including Dutch auctions, contains a bias
in favour of shareholders whose shares are purchased by the issuer (“exiting share-
holders”). Take for example a Dutch auction transaction in which the issuer specifies
a price range between $20 and $25 and Shareholders X, Y and Z tender at the prices
of $21, $22 and $23 respectively. The clearing price is $23 so Shareholders X, Y and
Z each receive $23 for their shares. But what about Shareholders P and Q who ten-
dered at $24 and $25 respectively and Shareholder R who did not tender to the bid at
all? The interests of Shareholders PQ and R seem not to be considered. Even though
these shareholders do not participate in the transaction, they are nevertheless affected
by its outcome. Their wealth is affected because, as remaining shareholders in the
company, they ultimately bear the cost of the issuer’s share repurchase.’
If issuers specify a range of prices and are then permitted to purchase shares at
prices selected by tendering shareholders, they will first purchase shares tendered at
the lowest prices. The transaction is “fair” for exiting shareholders since they are
willing participants and all relevant aspects of the transaction have been disclosed to
them. Shareholders who do not tender to the bid (or tender only a portion of their
holdings) are better off because the dollar amount that the issuer has spent on the bid
is lower than it would be had the issuer paid all tendering shareholders identical con-
sideration.0 Under the scheme proposed in this article, there is no possibility that the
issuer will “overpay” or, in other words, establish a clearing price above that required
to acquire the desired number of shares.7′
It may be argued that remaining shareholders are not treated unfairly under the
current regulation since they have an equal opportunity to sell their shares during the
bid. There appears to be no need or reason therefore to revise the regulation of Dutch
auction issuer bids in favour of remaining shareholders. However, there are several
factors which may deter remaining shareholders from tendering their shares. These
“(Gay, Kale & Noe, supra note 8 at 59.
70 Consider also that in some bids, many of the tendering shareholders are arbitrageurs, or “quick
buck artists”, who subsequently dump whatever shares are not purchased by the company. See James
J. Cramer, “Spot a Dutch Auction and Find Stock Value” Legal 7Times (4 September 1989) 22.
” Indeed, this is an argument made in favour of Dutch auctions generally. As stated in one applica-
tion submitted to the OSC:
[Olverpayment results in excessive payments to tendering shareholders, essentially a
transfer of wealth from non-tendering to tendering shareholders. It is this overpayment
factor that causes some fixed price offers to become coercive-shareholders are forced
to tender to ensure participation in proportion to their ownership interest and avoid
transferring wealth to tendering shareholders (“Re: Application of Agrium Inc. Pursu-
ant to Clause 104(2)(c) of the Securities Act (Ontario) to the OSC” (17 December
1996) Appendix A at 3).
If, on the other hand, issuers were permitted to repurchase shares at prices chosen by tendering share-
holders, the cost of the transaction would be less than under the current regulation since some share-
holders would receive less than the would-be “clearing price”.
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 45
factors include reinvestment opportunities and transaction costs as well as the tax im-
plications that selling shares may have for certain shareholders. In particular, it may
be difficult or costly for shareholders to identify an investment opportunity which is
comparable to that presented by the issuer. In addition, shareholders who are indi-
viduals and who hold shares of the issuer outside an RRSP may face capital gains tax
upon the sale of their shares to the issuer under the bid. For these reasons, many
shareholders may choose not to tender to the issuer bid despite the transfer of wealth
to tendering shareholders.
It could also be contended that the interests of remaining shareholders are pro-
tected since directors are obligated under corporate statute to act in the “best interests
of the corporation:” There is no need to protect the interests of remaining sharehold-
ers in securities regulation as well. On this argument, it is justifiable for securities
regulation to favour exiting shareholders since their interests are directly opposed to
those of remaining shareholders whose interests are protected under corporate statute.
This argument assumes that the directors’ duty to the corporation includes a duty
to remaining shareholders.” However, it is not certain that the interests of sharehold-
ers-whether they are remaining or exiting shareholders-are protected under the di-
rectors’ corporate law obligation. Case law in Canada has firmly established that a di-
rector’s duty under corporate law is owed to the corporation, not to the shareholders
of the corporation.”4 In addition, as Professor Welling et al. have stated, ‘”here are
several ways a legal analyst could interpret the requirement that a director or manager
act ‘with a view to the best interests of the corporation.”” At the very least, one must
accept that in law, the corporation is its own person.”6 In considering what is in the
best interests of the corporation, the shareholders are only one of various groups
whose interests must be taken into account. In addition to shareholders, employees,
creditors, members of the community and, in some cases, government can claim to
have an interest of some sort in the corporation. ‘ To say that remaining shareholders
are protected by virtue of the corporate duty of directors to act in the best interests of
the corporation overlooks this fact.
n CBCA, supra note 56, s. 122(1)(a); Business Corporations Act, R.S.O. 1990, c. B.16, s. 134(1)(a)
[hereinafter OBCA].
” The argument also highlights the importance for the corporation of seeking to repurchase its
shares at the lowest aggregate price possible since its directors have an explicit duty to act in the best
interests of the corporation.
” See Regal Hastings v. Gulliver, [1942] 1 All E.R. 378 (H.L.); Abbey Glen Property v. Stumborg
(1978), 85 D.L.R. (3d) 35, [1978] 4 W.W.R. 28 (Alta. S.C. (A.D.)); Teck Corp. v. Millar, [1973] 33
D.L,R. (3d) 288, [1973] 2 W.W.. 385 (B.C.S.C.); Western Finance v. Tasker Enterprises (1979), 1
Man. R. (2d) 338, 106 D.L.R. (3d) 81, [1980] 1 W.W.R 323 (C.A.); Oliverv. Ruge (1990), 46 B.L.R.
50 (Ont. H.C.J.); Brant Investments v. KeepRite (1991), 3 O.R. (3d) 289, 80 D.L.R. (4th) 161 (C.A.).
” B, Welling et aL, Canadian Corporate Law: Cases, Notes & Materials (Toronto: Butterworths,
1996) 228.
” CBCA, supra note 56, s. 15(1), OBCA, supra note 72, s. 15.
n Welling et al., supra note 75 at 32-36.
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A.L ANAND – REGULATING ISSUER BIDS
At issue here is the justifiability of an apparent bias in issuer bid regulation in fa-
vour of exiting shareholders. It is submitted that the bias is unjustifiable. If a bias is
inherent in a permitted transaction, then that bias should favour remaining sharehold-
ers and others who have an interest in the long-term prospects of the corporation.
With respect to the regulation governing issuer bids, regulators must turn their minds
to the biases inherent in regulation and to the reasons why such biases exist. Only then
can regulation be justified as a device for protecting those shareholders who stand to
be disadvantaged by the particular securities transaction under consideration.
B. Controlling Shareholders versus Minority Shareholders
A further concern relating to the proposals in this paper may arise when one con-
siders the structure of the shareholder base of public companies in Canada. Many Ca-
nadian public companies have a controlling shareholder which may or may not be an
institutional holder. The controlling shareholder may be closely related to or be com-
prised of members of the issuer’s management. The controlling shareholder may have
access to inside information, which enables it to value the company’s stock more ac-
curately than minority shareholders. The controlling shareholder may use the Dutch
auction issuer bid, as modified by the current proposal, to exploit its superior infor-
mation regarding the value of the issuer to the detriment of minority shareholders.78
Where institutional investors hold a large block of shares, those institutional investors
may refuse to tender their block to the issuer in an attempt to bid up the offer price.
However, the very purpose of the issuer bid circular is to close the information
gap, if it indeed exists, between the corporation and/or controlling shareholders on the
one hand and minority shareholders on the other. If regulators are concerned that mi-
nority shareholders may be exploited because they lack information that controlling
shareholders possess, then this is an issue that needs to be addressed in the regulation
regarding the level of disclosure in issuer bid circulars. For instance, a requirement
could be imposed on issuers to deliver to all shareholders any material information
which was, prior to the commencement of the Dutch auction, provided to the control-
ling shareholder for any reason during the previous year and any information regard-
ing the value of the relevant security during the previous 3 years. In addition, the defi-
nition of what information is considered to be “material” for the purposes of the issuer
bid circular could be redrafted to ensure more detailed disclosure.
Each shareholder has varying levels of information about the particular security in
which he or she trades. It is a regular occurrence for shareholders to trade on the basis
of these differing levels of information. The issuer bid need not be treated any differ-
ently from trading on the secondary market. Admittedly, retail shareholders may not
have access to in-house valuations completed by an institutional holder. However,
they are able to rely on their broker’s advice in dealing with their securities. In any
” Note that in some Dutch auctions, shareholders are entitled to participate in the bid by completing
a proportionate tender. Further discussion of pro rata take-up rules will be found below.
152
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case, if the concern is that controlling shareholders have information which other
shareholders do not have access to, then such concern should be a sounding bell for
heightened disclosure obligations. Moreover, the current rules regarding Dutch auc-
tions, conventional issuer bids and securities regulation generally, need to be re-
examined in order to take into account a Canadian shareholder base that contains
large institutional investors and a preponderance of controlling shareholders.
A further issue relating to the current proposal arises if one considers that a con-
trolling shareholder could increase its ownership in the corporation in one of two
ways: it could launch a take-over bid for the corporation (an “insider bid”) or encour-
age the corporation to complete a Dutch auction. ‘ Under the current proposal, the cost
of completing an issuer bid would almost certainly be less than the cost of completing
a take-over bid. It would be useful to address this concern by requiring disclosure in
the issuer bid circular as to whether or not the controlling shareholder plans to tender
to the Dutch auction. If shareholders intending to sell shares into the bid knew in ad-
vance that the controlling shareholder was not going to tender (and thereby planned to
increase its ownership position), they would likely tender at a higher price. Disclosure
of a controlling shareholder’s intentions would thus narrow the gap in cost between
these two methods of increasing share ownership.
In any case, directors of the issuer still have a fiduciary obligation under corporate
statutes to act in the best interests of the corporation.’ As a result of this obligation, it
may not be possible for a controlling shareholder simply to choose whether to in-
crease its ownership by way of an insider bid or issuer bid. Directors of the issuer,
who may include nominees of a controlling shareholder, would have to consider
whether it would be in the best interests of the corporation to use corporate assets or
incur debt to repurchase its shares. Thus, although a controlling shareholder could
launch an insider bid at any time, its ability to influence the issuer to complete a
Dutch auction is limited.
C. Pro Rata Take-Up
If the above argument is accepted and an issuer is permitted to repurchase its
shares at their tendered prices, it follows that the issuer should also be exempted from
the rule with respect to pro rata take-up. This rule stipulates that if more securities are
tendered to the bid than the issuer desires to purchase, the issuer will purchase the se-
curities on a pro rata basis.’ In other words, the issuer will not purchase 100 per cent
” The question arises as to whether take-over bids and issuer bids should be regulated identically.
At first glance, there are reasons to support retaining a principle of equality of result in the take-over
bid context. There is great potential for abuse if acquiring corporations in a take-over bid are permit-
ted to purchase shares at varying prices. Controlling shareholders would likely be paid higher premi-
ums than minority shareholders, making the latter vulnerable. Fall-out from this abuse could include
investor reluctance to purchase shares in companies with controlling shareholders.
‘0 CBCA, supra note 56, s. 122(1)(a).
81 See e.g. OSA, supra note 1, s. 95(7).
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A.L ANAND – REGULATING ISSUER BIDS
of the securities tendered by any one shareholder but rather, will purchase an equal
percentage of securities from each shareholder who tenders to the offer. This rule is at
odds with the current proposal. Proration may be necessary at the highest price at
which an issuer purchases shares.’
One of the rationales underlying proportionate take-up provisions is that it is nec-
essary to treat shareholders equally; it would be unfair if the issuer indiscriminately
purchased 100 per cent of the tendered securities from one shareholder but did not
purchase 100 per cent from another shareholder. However, if the argument in this pa-
per is accepted and shares could be repurchased at the various prices at which they
were tendered, it would not make sense to require an issuer to repurchase shares on a
pro rata basis. Obviously, the issuer would purchase shares beginning with those ten-
dered at the lowest prices first. Proration continues to make sense at the highest price
at which shares are repurchased. For example, if the highest price at which shares are
repurchased is $25 and more shares are tendered at $25 than the issuer seeks to repur-
chase after having purchased all tendered shares below this price, then the issuer
should be required to purchase shares on a pro rata basis from shareholders who ten-
dered at $25.
Conclusion
Securities regulatory authorities in Canada are committed to the concepts of
equality and fairness. In some cases, this commitment has not entailed an assessment
of whether the commitment is justified in a particular instance. The Dutch auction is
one case in which equality of opportunity may be seen to be achieved through appro-
priate disclosure to shareholders. Once shareholders are made aware of all informa-
tion provided to controlling shareholders, including the mechanics of the bid, through
disclosure in an issuer bid circular, they can be considered to have been treated
equally. In a Dutch auction, equal treatment should not be synonymous with identical
treatment in terms of the consideration which is ultimately paid to tendering share-
holders.’
At the end of the day, the question must be asked: why do the interests of tender-
ing shareholders take priority over those of remaining shareholders? It seems to be a
perverse result that the interests of shareholders who decide to hold onto their invest-
ment in an issuer are, as a result of securities regulation, considered secondary to the
In its current regulation of Dutch auctions, the OSC has demonstrated some willingness to depart
from the pro rata take-up rule (see supra note 54). In 1977, United Aircraft offered to buy-back shares
at prices specified by shareholders up to a maximum price stated in the offer. Shares were to be ac-
cepted in ascending order of prices specified until the aggregate number to be purchased were assem-
bled. The SEC approved the proposals and issued a no-action letter in response (see Lederman &
Vlahalds, supra note 9 at 814).
Admittedly, one of the appealing aspects of the Dutch auction as it currently operates is that
shareholders who tender at a lower price may receive a higher price for their shares. In fact, it is pos-
sible that these shareholders would not have tendered at all had there been no clearing price rule.
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interests of shareholders who elect to divest themselves of such investment. This re-
sult is a far cry from the rule in Trevor v. Whitworth which prohibited a corporation
from repurchasing its own shares out of concern for creditors.
When devising regulation, securities regulators should consider the interests of all
parties affected by a transaction and the biases which are inherent in such regulation.
In the case of the Dutch auction, it would be more fair to allow issuers to pay prices
chosen by tendering shareholders within the range established by the issuer. In this
way, the ultimate cost of the bid would be lower, tendering shareholders would be
treated fairly, and remaining shareholders, creditors, employees and management
would be better off.
