An increasing number of Canadian issuers have steered away from fixed price bids recently and opted for an auction tender process, or so-called Dutch auction, when completing substantial issuer bids. The Dutch auction issuer bid model has been further modified by issuers and investment dealers as a technique to distribute public offerings of securities and, most recently, has also been used by investors seeking to acquire shares in public issuers.
Dutch auction issuer bids
With a Dutch auction issuer bid, the issuer specifies the maximum number of its shares that it is willing to purchase and the maximum price (or a range of prices) at which it will purchase its shares. Based on the elections made by tendering shareholders, the issuer then establishes the lowest price, commonly referred to as the clearing price, within the range of prices previously established by the issuer, which would result in the issuer acquiring the maximum number of shares offered to be purchased under the bid. The company purchases all shares tendered at or below the clearing price, and all shares tendered above the clearing price are returned to the tendering shareholders.
If a tendering shareholder does not wish to choose a price at which he or she is willing to sell, that shareholder is generally entitled to make a "purchase price tender election" which results in the shares tendered by that shareholder being purchased by the company at the clearing price.
Dutch auction public offerings
Dutch auction public offerings have been around for many years and are used extensively for the resale of US government securities. They have been used more frequently in recent years by a number of Canadian and US companies.
In a Dutch auction public offering, investors place their bids with members of the selling group for the number of shares they wish to purchase and the price they are willing to pay. When the subscription period ends, the managing underwriter calculates the highest price, or the clearing price, at which all the shares may be sold. Investors who bid at or above the clearing price receive the shares.
Some market participants have suggested that companies using Dutch auction public offerings are able to get a fairer price for their shares and a group of investors who are less likely to quickly flip their shares for a profit.
Dutch auction investor bids
The mechanics of a Dutch auction investor bid are similar to those used in Dutch auction issuer bids. A recent example of a Dutch auction investor bid in Canada was Crescendo Partners' bid for approximately 14% of Sierra Systems Group. As Sierra Systems shares are thinly traded, any other technique may have taken Crescendo a very long time to acquire a meaningful position in the open market without adversely affecting the share value.
In response to Crescendo's offer, Sierra Systems initiated a normal course issuer bid which appears to have, in part, provided an effective defensive tactic as Crescendo was only able to acquire 6% of Sierra Systems' shares.
Dutch auctions tender offers used by issuers and investors have experienced mixed success. However, there is evidence to suggest that Dutch auctions facilitate market transactions by providing a market bidding mechanism and an opportunity for issuers and investors to match their perceptions of share valuations. Furthermore, Dutch auctions can potentially provide a highly efficient method to sell, acquire or reacquire all or a significant amount of shares and provide an effective, tax-efficient means to distribute excess cash to shareholders.
Paul Grod, Tina Woodside and Nicholas Dietrich
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