Spotlight On: Crossing the 20% Ownership Threshold

Stakebuilding investors in Canadian public companies have two key ownership thresholds to look out for: 10% and 20%.

For more information about what it takes to cross the 10% threshold, the implications of doing so, how to determine your securityholding percentage, and more, see our blog about crossing the 10% threshold.

The Importance of 20%: Take-over Bid Territory

Any offer by an investor to acquire outstanding voting or equity securities of a class of a reporting issuer made to one or more persons in Canada that would result in the investor, together with any of its joint actors, having beneficial ownership of and/or or control or direction over 20% or more of the outstanding securities of that class constitutes a take-over bid that requires an offer to be made to all securityholders, unless the offer is a step in a voting transaction (such as a plan of arrangement) or an exemption from the take-over bid requirement is available.

Any securities (including unissued securities) of the class that the investor is deemed to beneficially own are included in the number of outstanding securities for purposes of determining whether the 20% ownership threshold has been crossed.

Acquisitions of convertible securities or securities of an entity that itself holds securities in a reporting issuer therefore should be carefully planned as they may constitute indirect acquisitions to which the take-over bid requirement may apply.

Once an investor has beneficial ownership of, and/or control or direction over, 20% or more of the outstanding securities of a class, any further acquisitions of outstanding securities of that class by the investor or any joint actor also may constitute a take-overbid.

The take-over bid requirement does not apply to a private placement of newly issued securities from the issuer or the conversion or exercise of an outstanding security (such as a convertible debenture or warrant) into newly issued securities of the issuer, even if that leaves the investor with beneficial ownership of and/or control or direction over 20% or more of the securities of the issuer.  However, any further acquisitions would then be subject to the take-over bid requirement.

Key Exemptions to the Take-over Bid Requirement

Certain exemptions are available to the take-over bid requirement that allow investors to acquire more than 20% or to continue acquiring securities once having crossed the 20%threshold without being required to make an offer to all securityholders. The most common exemptions are as follows:

Private agreement exemption

Privately negotiated acquisitions of securities by an investor from not more than five people are exempt from the take-over bid requirement subject to certain conditions, including that the value of the consideration paid for any of the securities is not greater than 115% of the market price (including brokerage fees or commissions)or value (if there is no published market for the securities) of the securities at the date of the acquisition.

If the investor knows or ought to know after reasonable inquiry that a seller acquired the securities from one or more other people to rely on the exemption or a seller is acting as a nominee or other legal representative (except in the case of certain trusts or estates) for one or more other people having a direct beneficial interest in the securities, each of those other people must be included in determining if the exemption is satisfied.

Normal course purchase exemption

An investor’s acquisition of securities of an issuer is exempt from the take-over bid requirement if:

• the acquisition is for not more than 5% of the outstanding securities;
• the aggregate number of securities acquired in reliance on this exemption by the investor and any joint actor within any period of 12 months, together with acquisitions otherwise made by the investor and any joint actor within the same 12-month period, does not exceed 5% of the securities of outstanding at the beginning of the 12-month period;
• there is a published market for the securities that are the subject of the acquisition; and
• the value of the consideration paid for any of the securities acquired is not in excess of the market price at the date of acquisition plus reasonable brokerage fees or commissions actually paid.

Control Person Rules

Canadian securities laws generally define a “control person” as any person or company, or combination of persons or companies acting in concert, that holds a sufficient number of voting rights attaching to voting securities of an issuer to affect materially the control of the issuer.  

A person or company, or combination of persons or companies acting in concert, that holds more than 20%of the voting rights attached to voting securities of the issuer is deemed, in absence of evidence to the contrary, to hold a sufficient number of voting rights to affect materially the control of the issuer.

Therefore, once an investor acquires 20% or more of the voting rights of an issuer, they will be deemed to be a control person of the issuer.  Whether an investor who holds less than 20% may also be considered a control person will depend on the particular facts and circumstances of each case.

Conducting trades: control block distributions and other prospectus exemptions

Canadian securities laws impose certain obligations on control persons, including restrictions on the resale of securities by a control person, referred to as a “control distribution” or“control block distribution”. Any resale of securities from the holding of a control person is considered a distribution under securities laws, and requires the filing of a prospectus to qualify the distribution of the securities, unless an exemption from the prospectus requirement is available.

Advance planning is required for any sale of securities from a “control block”, as among other things a filing may be required to be made at least seven days before the trade.

The prospectus exemption available to all control persons is the advance notice exemption set out under section 2.8 of National Instrument 45-102 – Resale of Securities.  This section provides for an exemption from the prospectus requirement for a distribution by a control person where:

• the issuer is a reporting issuer in Canada and has been for at least four months;
• the control person has held the securities for at least four months;
• no unusual effort has been made to prepare the market or to create a demand for the security that is the subject of the trade;
• no extraordinary commission or consideration is paid to a person or company in respect of the trade; and
• the selling security holder has no reasonable grounds to believe that the issuer is in default of securities legislation.

To sell securities pursuant to this exemption, an investor must:

• at least seven days before the first trade, complete and file through SEDAR+ with the securities regulatory authority in each jurisdiction where the investor will sell securities a Form45-102F1 – Notice of Intention to Distribute Securities under Section 2.8 ofNI 45-102 Resale of Securities (“Form 45-102F1”);
• comply with any applicable stock exchange requirements; and
• file, within three days of the completion of any trade, an insider report on SEDI.

A Form 45-102F1 expires on the date which is the earlier of: (i) the date that the investor files the last of the insider reports on SEDI reflecting the sale of all securities referred to in the Form 45-102F1, and (ii) 30 days after it is filed.  If the investor wishes to continue to sell securities from a control block, a new Form 45-102F1 must be filed.

A separate prospectus exemption may be available for a control block distribution by an investor that is an eligible institutional investor if, among other things:

• the investor is filing AMRs and generally satisfies the exemption for eligible institutional investors from the requirement to file SEDI insider reports;
• the sale is made in the investor’s ordinary course of business or investment activities;
• the securities would not be subject to a hold period, if the sale was not a control block distribution;
• no unusual effort is made to prepare the market for the sale and no extraordinary commissions or consideration is paid; and
• the investor files on the issuer’s SEDAR+ profile within 10 days after the sale a letter describing the details of the sale.

Early Warning and Insider Reporting

If an investor has crossed the 10% ownership threshold they will be subject to early warning and insider reporting requirements, unless certain exemptions are available. See our blog about crossing the 10% threshold for more details.

Further acquisitions by the investor between 10% and 20% or acquisitions above 20% in reliance on one of the take-over bid exemptions may therefore need to be disclosed publicly, which would alert issuers and other market participants about an investor’s further accumulation of securities. Any changes in intentions with respect to the issuer from those disclosed in a previously filed early warning report also may need to be disclosed, even absent an acquisition of securities.

Once an investor has crossed the 20% ownership threshold, the “one business day moratorium” on further acquisitions after filing an early warning report no longer applies to the investor and its joint actors.

Shareholder Rights Plans

A stakebuilding investor should be mindful of whether the issuer has a shareholder rights plan (sometimes called a “poison pill”) in place. The ownership threshold in a typical shareholder-approved shareholder rights plan is 20%, although the plan should be carefully reviewed to confirm the activating threshold and determine how beneficial ownership is calculated. In 2024, a shareholder rights plan with a 15% beneficial ownership trigger was adopted by Bitfarms Ltd., an Ontario-based reporting issuer (also the plan was subsequently cease-traded by Ontario’s Capital Markets Tribunal).

If an issuer has a shareholder rights plan in place, an investor may be prevented from acquiring securities above the specified ownership threshold in reliance on an exemption from the take-over bid requirement, discussed above, without triggering the plan.

MI 61-101

If an investor has crossed the 10% ownership threshold in the securities of a reporting issuer, Multilateral Instrument 61-101 may impose requirements on any further acquisitions of securities up to and beyond 20%. See our blog about crossing the 10% threshold for more details.

Key Take-Aways

Many of the key considerations for a stakebuilding investor approaching the 20% ownership threshold will be similar to those for the 10% threshold. Approaching and crossing these thresholds is best done with the benefit of careful legal and tax planning.

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