In the acquisition by Goldcorp Inc. of Glamis Gold Ltd., the Ontario Superior Court has denied an application to force Goldcorp Inc. to obtain its shareholders’ approval to issue from treasury a significant number of Goldcorp shares (aggregating 67% of the outstanding shares) to pay Glamis shareholders for their Glamis shares. The application was brought by Robert McEwen, the founder, former CEO and former chairman of Goldcorp, who holds approximately 1.5% of Goldcorp’s outstanding shares. Mr. McEwen appealed the decision, but the appeal was dismissed by the Divisional Court on November 3.
The Court’s decision is consistent with long-standing Canadian law that accords deference to the business judgment of the board of directors in these circumstances and affirms the legality of the prevailing market practice not to obtain shareholder approval for share issuances by an acquiror in either negotiated or hostile M&A transactions. The Court noted that if "stakeholders wish to change the law in Ontario or the regulatory regime, this objective must be addressed in a different forum." In this regard, the press has reported that institutional shareholders may seek regulatory changes from the Toronto Stock Exchange and the Ontario Securities Commission.
In late August, Goldcorp and Glamis announced a deal that upon completion would result in the world’s third largest gold company by market capitalization and the world’s fifth largest gold producer. The transaction structure is not unusual: Glamis will be reorganized by way of a plan of arrangement under the Business Corporations Act (British Columbia), and its shareholders will receive 1.69 Goldcorp shares and payment of $0.0001 for each Glamis share held. The Goldcorp shares that are issued to the Glamis shareholders would represent approximately 67% of Goldcorp’s outstanding shares. The Glamis plan of arrangement was approved by the Supreme Court of British Columbia and by 98.6% of the votes cast at a meeting of Glamis shareholders on October 26, 2006.
Goldcorp’s board of directors approved the transaction after receiving due diligence reports, pro forma financial statements showing the benefits of the deal, a fairness opinion from Goldcorp’s financial adviser (Merrill Lynch Canada Inc.) and advice on the merits of the deal from CIBC World Markets Inc. The board considered but decided not to hold a shareholder vote, basing this decision on legal advice that a shareholder vote was not required and the board’s belief that seeking shareholder approval would jeopardize the certainty of the deal. The transaction would not result in a change of control of Goldcorp because the shares to be issued to Glamis shareholders would be widely distributed.
The application was made on the following three grounds, all of which were dismissed:
- The transaction is an "arrangement" of Goldcorp that requires shareholder approval under the Business Corporations Act (Ontario) (OBCA), Goldcorp’s incorporating statute. The Court disagreed, concluding that the arrangement provisions of the OBCA would apply only if Goldcorp had proposed an arrangement, which it had not done. In the Court’s view, "a corporation should not find itself within the ambit of these provisions by inadvertence" and "the fact that some of the elements of a multi-stage transaction could have been structured by way of an arrangement [of Goldcorp] is insufficient." The Court also noted that following completion of the transaction, Goldcorp shareholders would continue to hold the same shares with the same rights, privileges and conditions as existed before the transaction.
- Goldcorp’s failure to hold a shareholder vote is oppressive because it contravenes the legal rights and reasonable expectations of Goldcorp shareholders. The Court held that Goldcorp’s conduct did not breach any shareholder’s legal right or fail to meet the reasonable expectations of shareholders and, thus, was not oppressive. The transaction is consistent with Goldcorp’s business, its history of growth through acquisitions and its public pronouncements. The Court deferred to the business judgment of Goldcorp’s directors in choosing the proposed structure as a cost-effective and tax-efficient manner of completing the transaction. The Court also deferred to the board’s decision not to seek shareholder approval and accepted expert evidence that it is neither conventional nor prevailing practice to obtain shareholder approval for a transaction of this nature.
- The Court should use its discretionary authority under the OBCA to order that a shareholders’ meeting be held where it would otherwise be "impracticable". The Court held that it should not order a shareholders’ meeting because the applicant had failed to show the required exceptional circumstances that would justify doing so and he failed to pursue the OBCA procedure whereby holders of not less than 5% of the issued shares that carry a right to vote can requisition a special meeting.
Current Stock Exchange Rules
TSX rules require a listed company to obtain shareholder approval to issue shares as payment for an acquisition that exceeds 25% of the outstanding securities of the company, on a non-diluted basis, unless the target has 50 or more beneficial securityholders (excluding insiders and employees). Even if the target has 50 or more beneficial securityholders, shareholder approval can be required in certain circumstances, such as if the issuance of shares will materially affect control of the listed company—for example, if it results in any shareholder (or combination of shareholders acting together) holding more than 20% of the voting securities or the ability to influence the outcome of a vote in the particular circumstances. In addition, the TSX has overriding discretion, based on a number of factors, to require shareholder approval.
The New York Stock Exchange has more extensive requirements for shareholder approval in these circumstances. Shareholder approval is generally required for share issuances that would (i) result in a change of control of the listed company; (ii) represent 20% or more of a company’s outstanding shares; or (iii) represent 20% or more of the voting power.
Goldcorp is listed on the TSX and NYSE. The TSX did not require a shareholder vote because Glamis is widely held and the issuance of Goldcorp shares would not materially affect control of Goldcorp. The NYSE also did not require a shareholder vote, even though the issuance of Goldcorp shares would represent approximately 67% of the company’s outstanding shares. Goldcorp was able to avoid the NYSE rule because the TSX is its primary trading market, and the NYSE deferred to Goldcorp’s home-country laws and regulations, in accordance with its policy of avoiding duplicative regulation.
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