When the bidder goes straight to shareholders, instead of shaking hands in a boardroom, the result is not just your typical merger and acquisition (M&A) deal but a hostile takeover.
In this article, we'll explain this type of takeover, how it works, and the Canadian laws that govern it. To learn more about hostile takeovers, you can also reach out to a Lexpert-ranked M&A lawyer.
What is a hostile takeover?
A hostile takeover bid happens when an acquiring party tries to gain control of a company against the wishes of that company's management and board. Since the target's directors do not support the approach, the bidder will then deal directly with the target's shareholders, or try to replace the target's board, instead of working through a negotiated deal.
In other words, the bidder wants to hold enough voting shares to control shareholder decisions through:
- passing the 50 percent ownership mark, or
- winning enough proxy votes to change the board and management team
It is also called an unsolicited bid because the target corporation has not asked for it, negotiated it, nor agreed to support it. Because the board did not seek out or agree to the bid, it is described as an unsolicited deal.
Ways that hostile takeovers work
Hostile takeovers usually work in two ways:
- takeover bid: this usually occurs for public companies, where the bidder makes a public offer to buy a company's shares that would take its ownership to at least 20 percent of a voting or equity class, and build that stake to a controlling level
- "proxy fight": here, the bidder asks the shareholders to vote out the existing directors and elect a new board; it also includes public broadcast solicitations and small tender offers under 5 percent to build influence without a full proxy contest
A court-approved plan of arrangement is not realistic in a hostile setting because that structure needs the target board's cooperation and court approval. This is why hostile takeovers commonly used in Canada, especially for public companies.
Made from the perspective of a buyer in M&As, here's a video which explains more about these two methods of achieving a hostile takeover:
Reach out to the best mergers and acquisitions lawyers in Canada as ranked by Lexpert for more information on how to deal with hostile takeovers.
Reasons for using hostile takeovers
There are many reasons why interested parties resort to hostile takeovers, instead of a "traditional" M&A deal:
- the target is believed to be undervalued: sometimes, a buyer may see strong assets, stable cash flow, or untapped opportunities in a company that the market is not pricing in
- to get assets, technology, or market position: the buyer might see the target as a direct route into a new market, or to add products and customers that match its strategy
- investors themselves want change: sometimes, the driving force is not another industry player, but activist shareholders of the company itself, who may believe the company should sell itself, spin off businesses, or change its strategy
In other words, the bidder may believe the target is undervalued, want access to its brand, technology, or market position, or aim to force changes in how the business is run.
Check out this podcast from CL Talk of the Canadian Lawyer, one of our sister publications, on one of the biggest M&A deals in Canadian history:
Check out our Special Editions on M&A Law, which lists other resources about the current M&A deals in Canada, including the leading lawyers in this field.
What laws apply to hostile takeovers in Canada?
The core M&A laws in Canada also apply to hostile takeovers, especially the Canadian Competition Act and the regulations from the Canadian Securities Administrators (CSA). Here are some of the ways where M&A laws apply to hostile takeovers:
Hostile takeovers in the Competition Act
- section 114(3), Competition Act: part of the law's notification provisions, which ensures that the information required from the target of a hostile takeover bid is submitted in before the waiting period expires
- section 114(3)(a), Competition Act: requires the Competition Bureau Commissioner to immediately notify the target that a Notification has been received from the acquirer
- section 114(3)(b), Competition Act: requires the target to send the prescribed information within 10 days after it was notified by the Commissioner
Regulations of CSA related to hostile takeovers
- National Instrument 62-103: early stake-building is governed by this instrument, which sets the early warning disclosure requirements; it applies when an investor crosses 10 percent beneficial ownership of a class on a partially diluted basis
- National Instrument 62-104: this regulation sets the core takeover bid rules, such as when a bid is required, how long it must stay open, the disclosure in a bid circular, and how bids must be run; it also sets the statutory minimum tender
- Multilateral Instrument 61-101: hostile bids and follow-on squeeze-out transactions can trigger this instrument, which protects minority shareholders in going-private, insider bids, and certain related party transactions
- National Policy 62-202: this policy guides companies on defensive tactics in response to hostile bids, focusing on shareholder choice and equal opportunity to tender, and allows securities regulators to review rights plans, private placements, and other defences
For more information about these laws, or if there's anything that we haven't discussed here, it's better to consult a Lexpert-ranked M&A law firm near you.
What are the steps in a hostile takeover?
A hostile takeover of a Canadian public company usually follows this process, in addition to the typical steps in an M&A deal:
1. Building a stake and triggering early warning rules
Many bidders start by buying a "toe-hold" position in the target, staying below 20 percent, so the formal bid rules do not yet apply. Once the bidder and its joint actors reach 10 percent on a partially diluted basis, they must:
- issue a press release
- file an early warning report
The report usually sets out the bidder's holdings and intentions. If they go on buying and increase their position in further 2 percent blocks, additional updates are required by law.
2. Deciding to go hostile and preparing the takeover bid
If the target board refuses to support a deal, the bidder can still proceed with a takeover bid that goes straight to shareholders. A bid is required when the offer and existing holdings together would take the bidder to 20 percent or more of a class of voting or equity securities.
Before launching, the bidder must:
- put financing in place so that it can pay all shareholders who tender
- prepare a detailed takeover bid circular describing the offer and the bidder
3. Launching the hostile bid and starting the bid period
The hostile bid begins when the bidder delivers the takeover bid circular to shareholders and files it with the securities regulators. Under the National Instrument 62-104, the bid must stay open for at least 105 days in most cases, unless certain friendly conditions allow a shorter period of 35 days.
During this time, shareholders can tender their shares into the bid, change their minds, and withdraw before the bidder takes up.
4. Target board response and defensive tactics
Within 15 days of the bid, the target board can send a directors' circular to shareholders with its recommendation or reasons for not giving one. It can also consider defensive steps that comply with its fiduciary duties and National Policy 62-202, such as:
- finding a white knight bidder,
- using a shareholder rights plan, or
- considering tactical private placements
Regulators will look at whether these moves help shareholders get better options or mainly block their freedom to tender.
5. Meeting the minimum tender condition and taking up shares
No matter how hostile the offer becomes, the bidder cannot take up any shares until more than 50 percent of the outstanding target securities, other than those held by the bidder and its joint actors, have been tendered.
Once that minimum tender condition and other conditions are met or waived at the end of the initial bid period, the bidder must take up and pay for the deposited shares within the prescribed timelines. The bid must then be extended for at least 10 more days, which gives remaining shareholders one last chance to tender into a winning offer.
6. Completing control with a second-step transaction
If the hostile bidder ends up with less than 90 percent ownership, it often uses a second-step plan of arrangement or amalgamation to buy the remaining shares, subject to shareholder and minority approvals under corporate law and Multilateral Instrument 61-101.
Where the bidder reaches at least 90 percent after the bid and mandatory extension, the law allows a compulsory acquisition of the rest at the bid price, with appraisal rights for dissenting shareholders. That final step turns a hostile campaign into full legal control of the company.
Hostile takeovers: Knowing when a bid turns unfriendly
Hostile takeover stories often start quietly, but they become highly visible once an offer goes straight to shareholders and the board says no. For company owners, executives, and investors, the key is to recognize when a normal deal is becoming a control fight. At that point, or even before that, M&A lawyers help the company make decisions based on a solid understanding of rights, risks, and timing.
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