The OSC Clarifies the Rules Applicable in Contested Take-over Bids
The recent decisions of the Ontario Securities Commission and the Ontario Divisional Court in In the Matter of Sears Canada Inc. et al. provide valuable guidance regarding the interpretation of the rules governing take-over bids in Canada, the protection of minority shareholders in the context of take-over bids, and the circumstances in which regulatory intervention is likely to be triggered.
In December 2005, Sears Holdings Corporation announced its offer to acquire the 46% of outstanding shares of Sears Canada Inc. that it did not already own. Sears Holdings also announced its intention to take Sears Canada private pursuant to a second-step going private transaction, for which "majority of the minority" shareholder approval was required.
Following the launch of its take-over bid, Sears Holdings entered into support agreements with various Canadian banks, pursuant to which the banks agreed to support the going private transaction and Sears Holdings agreed to restructure its bid to allow the banks to realize certain tax benefits. Sears Holdings also entered into an agreement with Vornado Realty, a significant shareholder of Sears Canada, pursuant to which Vornado agreed to deposit its Sears Canada shares to a revised offer at an increased price in exchange for price protection and a release from any litigation claims. Sears Holdings also took various other steps aimed at securing the success of its bid, including announcing that it would support the elimination of Sears Canada's practice of paying quarterly dividends if its bid was unsuccessful.
On April 6, 2006, Sears Holdings announced that it had acquired the requisite shareholder approval for the going private transaction. In response, three institutional shareholders of Sears Canada, who were represented by Davies Ward Phillips & Vineberg LLP, filed complaints with the OSC opposing the transaction on the basis that Sears Holdings had violated applicable disclosure obligations and engaged in price manipulation and other abusive tactics.
Key Findings of the OSC
Among other things, the OSC found that Sears Holdings failed to fulfil its disclosure obligations, granted improper collateral benefits and employed coercive and abusive tactics. As a result, the OSC made an order cease trading Sears Holdings' bid until its take-over bid circular was amended to disclose the terms of both the support agreements with the banks and the Vornado release. The OSC also ordered that the shares of the banks and Vornado be excluded from the "majority of the minority" vote and that a release identical to Vornado's be granted to all shareholders tendering to the bid. The findings of the OSC in respect of various key issues are discussed below.
Disclosure Requirements - In finding that Sears Holdings' disclosure did not comply with applicable securities law, the OSC distinguished between disclosure which strictly follows the technical requirements of the applicable rules and disclosure that may be material to an investor's decision to tender its shares to a take-over bid. In this light, the OSC criticized Sears Holdings' failure to comply with the spirit and intent of its disclosure obligations, i.e., to protect the rights and interests of minority shareholders in circumstances involving related party transactions. The OSC was particularly troubled by Sears Holdings' failure to disclose the existence of the Vornado release and the support agreements, the identity of the counterparties to the support agreements and the price protection granted to another shareholder. The OSC further found that Sears Holdings' decisions with respect to disclosure were made for tactical purposes aimed at advancing its own selfinterest rather than ensuring that the investing public received proper and timely disclosure.
Collateral Benefits - The OSC found that the Vornado release was a collateral benefit granted in violation of the prohibition in securities law against providing one shareholder greater consideration for its shares than that offered to the other shareholders. Significantly, the release was found to be improper despite the fact that Sears Holdings did not attach any value to it (as Sears Holdings did not believe that any private cause of action existed against Vornado). With respect to the support agreements, the OSC concluded that because the agreements were designed to satisfy the specific tax objectives of particular shareholders in preference to other shareholders, they also violated the prohibition against collateral benefits.
Coercive and/or Abusive Conduct - The OSC further found that certain aspects of Sears Holdings' conduct was unfair, coercive and abusive. Such conduct included Sears Holdings' threat to eliminate the payment of dividends and its attempt to impugn the good faith of Sears Canada's independent directors.
Appeal to the Ontario Divisional Court
On September 19, 2006, the Ontario Divisional Court dismissed Sears Holdings' appeal of the OSC's decision. The Court's decision was released on October 11, 2006. The Court found that the OSC had engaged in a careful and thorough consideration of all the evidence. The Court was unable to conclude that any finding of the OSC was not arrived at reasonably.
The decisions of the OSC and the Divisional Court will have significant implications for the conduct of mergers and acquisition practice in Canada. Indeed, in the context of take-over bids, the decisions highlight the critical importance of treating all target shareholders equally and ensuring that benefits granted to particular shareholders are, at the very least, publicly disclosed in a manner that protects the rights and interests of all minority shareholders. Moreover, in respect of disclosure obligations, the decisions underscore the need for companies to comply not only with the technical requirements of securities law, but with the spirit and intent of the governing rules.
The growing prominence of class actions in the Canadian litigation landscape witnessed over the past several years continued apace in 2006, with larger, more ambitious actions alleging novel grounds for suit being brought in all of the major class actions jurisdictions (Ontario, Québec and British Columbia). However, along with the increased litigation risk associated with an emboldened Plaintiffs' class actions bar, several judgments of interest were issued in 2006 that may bring some relief to defendants, and possibly even slow the pace of growth of what has come to be pejoratively known as the "class actions industry".
Over the past few years Canada has seen its fair share of "industry" class actions, whereby a plaintiff seeks to institute a class action against a number of companies that operate in the same industry despite the fact that the class petitioner had no relationship (for example, a contract) with each of the named defendants. Typically, the plaintiff will allege some kind of specific fault or misconduct as against one primary defendant, and then name every other player in the same industry as a defendant to the class action, usually on the basis of a generic allegation that all companies in the industry operate using identical business practices as the primary defendant. Being able to launch industry-wide class actions naming, in many cases, dozens of companies, based on no direct evidence or factual allegation of wrongdoing beyond the primary defendant has been a powerful tool in the hands of entrepreneurial plaintiffs' counsel.
In Ontario, it had been decided as early as 2000 that the representative plaintiff(s) in a class action must have a cause of action against every one of the named defendants, frustrating the "industry" class action, at least in that province. British Columbia courts have taken the opposite approach based on a reading of that province's class action legislation, to the effect that "industry" class actions are explicitly permitted there.
Superior Court decisions in Québec, a jurisdiction which has acquired a reputation as being strongly pro-plaintiff, had followed the British Columbia approach and allowed suits to proceed against multiple defendants where the class plaintiff had no cause of action against all of them, until the 2004 decision of the Québec Superior Court in Bouchard v. Agropur. In that case, the plaintiff sought authorization to sue a group of Québec dairies on the basis that the fat content of the milk they sold to consumers was slightly below the percentage listed on the container. However, the plaintiff had only purchased milk processed by one dairy, and therefore had no cause of action against any of the other named defendants. The Québec Superior Court dismissed the proposed $89 million class action and held that the fact that the plaintiff did not have a cause of action against a number of the respondent companies was fatal to his claim against them.
However, not six months later, in the case of Billette v. Toyota Canada Inc. et al., a different judge of the Québec Superior Court, relying on previous decisions that had authorized class actions against companies in respect of which the petitioner had no cause of action, authorized a class action against 19 car manufacturers and related finance companies despite the fact that the petitioner had only contracted with one manufacturer. Given the obvious confusion in the courts below, the Québec Court of Appeal was asked to decide the matter on an appeal of the initial decision in Agropur.
On appeal of the Superior Court decision in Agropur, the Québec Court of Appeal decisively put an end to this controversial issue and held that an individual who seeks to institute a class action against a number of companies must have a cause of action against each of them. The Court of Appeal noted that the requisite interest to bring an ordinary action was equally applicable to class actions and it rejected the appellant's submissions that Québec's class action rules did not require that a petitioner have a cause of action against each respondent and that the necessary interest to sue should not be measured based on his individual action, but rather in light of the collective nature of the relief sought on behalf of the proposed class. The Court of Appeal also reaffirmed the principle that before a class action is authorized it does not exist on a collective basis and that the proposed action of the individual plaintiff must satisfy the requisite statutory criteria before the class action will be authorized, which includes that the plaintiff establish that the facts alleged justify the conclusions sought against all of the defendants.
Of the major class actions jurisdictions in Canada, British Columbia is now alone in permitting "industry" class actions.
A Revolution in the Law of Costs Payable by Losing Defendants
Another often overlooked development of interest, in litigation generally and specifically in the class actions field, is the October 13, 2006 judgment of the Supreme Court of Canada in Walker v. Ritchie, which may prove to have a lasting impact on the amount of legal fees that plaintiff's counsel may claim, which is often a driving force behind such actions. That case concerned the appeal of a costs award in a personal injury case and raised the question of the appropriateness of risk premiums awarded to counsel who take on contingency cases for impecunious plaintiffs, and the extent to which these risk premiums should be paid by losing defendants. At trial, plaintiff's counsel had been awarded a premium of $192,600 on top of a fees award of $577,879.69. The premium was upheld on appeal. The Supreme Court of Canada set aside the premium, holding that risk premiums payable by unsuccessful defendants run contrary to the intentions of the Rules of Civil Procedure (Ontario).
By a unanimous decision, the Supreme Court held that fee awards payable by defendants to the counsel of successful plaintiffs should not incorporate any factor or premium in respect of the risk faced by plaintiffs' counsel in taking on the case. The Court went on to challenge the usual justification for the awarding of risk premiums, namely that they supposedly promote access to justice for impecunious plaintiffs who would otherwise never get their "day in court", holding that "the appropriate source of encouragement lies with the client not with his or her opponent" and that requiring unsuccessful defendants to pay a premium to the plaintiffs was not compelled on the theory of promoting access to justice.
This decision is important across all fields of civil litigation, but particularly so in class actions, since plaintiffs' counsel are nearly always compensated on a contingency basis, or based on the rules governing fee awards in the Ontario Rules of Civil Procedure, or analogous statutes in the other provinces. The removal of any consideration of risk in awarding such fees to plaintiffs' counsel may undermine the economic incentive for launching class actions, thereby moderating their growth. It is important to emphasize, however, that the Supreme Court decision in Walker v. Ritchie was rendered in the context of a personal injury suit, not a class action, and it therefore remains to be seen whether the principles enunciated in that context have a broader application, or will subsequently be restricted to the facts of that case.
Enforcement of Non-Monetary Foreign Judgments in Canada
In its recent landmark decision in Pro Swing Inc. v. Elta Golf Inc., the Supreme Court of Canada held that the traditional common law rule prohibiting the enforcement of foreign non-monetary judgments no longer applies in Canada. The Supreme Court's decision will likely have significant implications for cross-border commerce, ecommerce and litigation, and may open the door to the enforcement of foreign equitable orders such as injunctions.
Pro Swing Inc. v. Elta Golf Inc. involved an appeal by the plaintiff, Pro Swing, in a foreign trade-mark infringement proceeding from a decision refusing to enforce a foreign consent decree and contempt order in Ontario. The defendant, Elta Golf, had been selling goods that resembled those of the plaintiff. The parties entered into a settlement agreement which was endorsed by a consent decree of the U.S. District Court, prohibiting Elta Golf from infringing Pro Swing's trademark. Pro Swing subsequently obtained a contempt order against Elta Golf for violating the consent decree, and filed a motion in the Ontario Superior Court of Justice for recognition and enforcement of the consent decree and the contempt order. The motions judge held that the decree and certain parts of the contempt order were enforceable in Ontario. The Ontario Court of Appeal set aside the motion judge's decision, holding that both orders were unenforceable in Ontario, as they were ambiguous in respect of material matters and, in particular, with respect to the scope of their extraterritorial application. Pro Swing appealed to the Supreme Court of Canada.
On November 17, 2006, the Supreme Court of Canada released its decision. The Court unanimously held that the common law rule prohibiting the enforcement of foreign non-monetary judgments was no longer good law in Canada. However, the Court split over whether the foreign orders at issue in this case should be enforced. The majority of the Court held that although the traditional common law rule should be changed, the consent decree and contempt order in this particular case were not enforceable in Ontario because, among other things: (i) the contempt order was quasi-criminal in nature and Canadian courts will not enforce a penal order; (ii) the different nature of contempt orders in Canada meant that litigants could be exposed to consequences to which they would not be exposed under the foreign law; (iii) the territorial scope of the consent decree was unclear; (iv) recognition and enforcement of the judgment was not the most appropriate judicial tool in the circumstances; and (v) the contempt order required disclosure of personal information.
While the implications of the Supreme Court's decision are potentially vast, the Court did not specifically address certain issues that will be of critical importance in the future. For example, will new and/or expanded defences to enforcement be necessary to ensure that foreign judgments do not conflict with domestic law? What specific test (if any) will be applied by the courts when determining whether to enforce a foreign nonmonetary judgment? Moreover, what are the implications of the requirement that foreign judgments be clear and specific for those who, like Pro Swing, seek to enforce foreign consent orders which may have different meanings to the opposing parties? These and other issues, including the scope of the change to the common law rule, the relative weight to be afforded to each of the considerations set out by the Court and the impact of any additional considerations, remain to be determined in subsequent cases.
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