Recently, an increasing number of Canadian companies completing substantial issuer bids have steered away from fixed-price bids and instead have opted for a Dutch auction process.
Under a Dutch auction issuer bid, a company specifies the maximum number of its shares to be purchased (or the maximum amount that it will pay for shares) subject to the terms of the bid, and establishes a range of prices at which it will purchase its shares. Each shareholder can choose the number of shares it wishes to tender and the lowest price, within the established range, at which it is willing to sell. Based on the choices made by tendering shareholders, the company works out the lowest clearing price within the established price range, which will result in it acquiring the maximum number of shares to be purchased (or paying the maximum amount that it is offering) under the bid. All shares tendered at or below the clearing price are purchased.
If a tendering shareholder does not wish to choose a selling price, it is generally entitled to make a purchase price tender election which results in the shares tendered by such a shareholder being purchased at the clearing price. Tendering shareholders have also recently been afforded the option of making a proportionate tender election, which allows them to sell that number of shares so that they retain their respective proportionate interests in the company at the conclusion of a bid.
By allowing the ultimate purchase price to be determined (within a range) by tendering shareholders, Dutch auction issuer bids help to avoid potential over- and under-valuation problems which arise when establishing a purchase price under fixed-price issuer bids. (Obviously, careful consideration must be given in establishing a purchase price range, as a low range could be perceived as undermining a market under-valuation rationale which may motivate an issuer bid in the first place.) By avoiding over-valuation, Dutch auction issuer bids can allow for the purchase of shares on economically favourable terms, advantageous for both companies completing bids and their remaining shareholders. Dutch auction issuer bids may also reduce the involvement of arbitrageurs in substantial issuer bids, who may be reluctant to become involved where a purchase price is not determinable at the outset.
Chad Hutchison and Nicholas Dietrich
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