When will disgruntled shareholders be permitted to access the "public interest" powers of the Ontario Securities Commission to dispute a contested transaction? A recent OSC decision addressed this question, taking a more restrictive stance on private party standing than in previous cases.
On April 25, 2016, the OSC released its reasons for its March 7, 2016, decision denying Catalyst Group Inc. (Catalyst) standing to bring an application under the public interest jurisdiction of the Ontario Securities Act for additional disclosure and the delay of a shareholder vote on the highly publicized $2.65 billion acquisition of Shaw Media Inc. (Shaw Media) by Corus Entertainment Inc. (Corus).1
Corus' Acquisition of Shaw Media
In January 2016, Corus announced that it had entered into an agreement with Shaw Communications Inc. (Shaw) to purchase all of the shares of Shaw's subsidiary, Shaw Media, the owner of Global Television and other specialty networks and digital platforms, for $2.65 billion in cash and shares. Corus' acquisition of Shaw Media represented a movement of assets within the Shaw corporate group, as both Corus and Shaw are controlled by the same majority owner, the Shaw Family Living Trust. Accordingly, Corus was required to comply with the rules governing related party transactions, as set out in Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions (MI 61-101), which requires, among other things, the approval of minority shareholders. Corus formed a special committee of independent directors to review and consider the proposed transaction and obtained a formal valuation and multiple fairness opinions in respect of the transaction.
On January 29, 2016, Corus filed a notice for a shareholder meeting to be held on March 9, 2016, to seek minority shareholder approval of the acquisition and delivered a management information circular on February 9, 2016.
Catalyst's Opposition Campaign and Application to the OSC
Shortly after Corus announced the acquisition, Catalyst, one of Canada's largest hedge funds, purchased a minority position in Corus' Class B shares (representing 0.4% of the issued and outstanding shares) and immediately began an active campaign in opposition to Corus' acquisition of Shaw Media, taking specific issue with the merits of the proposed acquisition transaction and the quality and adequacy of the disclosure made by Corus in its management information circular. Catalyst's campaign included complaints to the Company and to the OSC, various public statements criticising the proposed transaction, publication of online digital presentations and a website, newspaper advertisements, investor conference calls and, ultimately, the issuing of a dissident proxy circular to shareholders in which Catalyst opposed the acquisition.
On March 4, 2016, only three business days before the shareholder meeting to approve the transaction, Catalyst filed an application with the OSC pursuant to section 127 the Ontario Securities Act seeking an order postponing the shareholder meeting until adequate disclosure was provided by Corus to its shareholders.2 Corus brought a cross-motion seeking to dismiss Catalyst's application on the basis it lacked standing. Shaw Media also sought and was granted leave to intervene. OSC Staff took the position, supporting Corus' motion, that Catalyst should be denied standing to bring its application. Corus and Shaw succeeded in convincing the OSC to bifurcate the proceedings and consider Corus' motion on standing before hearing submissions on the merits of Catalyst's application, if necessary.
The OSC determined that Catalyst lacked standing to bring its application and accordingly dismissed the application without any hearing on the merits. This represents the first time the OSC has denied standing to a private party to commence an application under the public interest jurisdiction provided by section 127 of the Securities Act.3
Section 127 provides the OSC with jurisdiction to intervene in capital markets and make orders where it is in the public interest to do so. A private party cannot bring an application as a matter of right, however, and must be granted standing before the application is allowed to proceed.
The OSC began by recognizing that granting of permission to a private party to bring an application under section 127 is an "extraordinary remedy" and that the applicant bears the onus of showing it is in the public interest for the OSC to grant that party standing to do so. The panel then looked at the factors set out in the 2009 MI Developments Inc. decision, where standing was granted to a private party on the basis that:
(a) the applications related to both past and future conduct regulated by Ontario securities law;
(b) the applications were not, at their core, enforcement in nature;
(c) the relief sought was future looking;
(d) the OSC had the authority to grant an appropriate remedy;
(e) the applicants were directly affected by the conduct (past and future); and
(f) the OSC concluded it was in the public interest to hear the applications.4
In MI Developments, and in the subsequent decisions following it before Corus, the OSC did not bifurcate the hearings, and the proceedings were decided on the merits after standing was granted in a single hearing. Many observers have interpreted MI Developments as setting a low bar to granting public interest standing under section 127 of the Act.
In Corus, however, the OSC took a more restrictive view as a result of the timing and basis of the Catalyst complaint and exercised its discretion to deny standing. The OSC noted that Catalyst's application raised "no novel issues" and placed considerable weight on the efforts made by Corus to comply with the requirements of MI 61-101. The OSC appears largely influenced by the extensive communication campaign by Catalyst, including its dissident proxy circular, in which Catalyst's concerns had "already been disseminated to Corus's shareholders though a variety of means" and had "already been widely considered in an active public debate." The OSC also specifically noted that there was no prima facie case of inadequate or misleading disclosure by Corus. Finally, the OSC was critical of the timeliness of Catalyst's application, which was filed mere days before the scheduled shareholder meeting. Allowing such a late intervention, the OSC found, could impact fairness, efficiency and confidence in capital markets and it declined to authorize any such late intervention in the absence of any critical issues relating to the transaction being raised.
In Corus, the OSC sent a strong message to capital market participants seeking to engage the OSC's public interest powers in the context of a disputed transaction, namely that such avenue may not be so readily available. Private parties will need to clearly demonstrate the need for such intervention to protect the integrity of the capital markets and will have to do so on a timely basis.
Read the full decision here.
1. In the Matter of the Catalyst Capital Group Inc. and In the Matter of Corus Entertainment Inc., http://www.osc.gov.on.ca/documents/en/Proceedings-RAD/rad_20160425_catalyst.pdf> [Corus].
2. Catalyst's application was limited to the adequacy of Corus' disclosure and did not include a broader attack on the merits of, or corporate governance process for, the acquisition transaction.
3. The OSC has refused to hear applications under the analogous provision for interested party applications in takeover or issuer bids (s. 104 of the Securities Act).
4. MI Developments Inc., (2009), 32 OSCB 126 at paras. 109-110 http://www.osc.gov.on.ca/static/_/CBBA/CBBA_MI-Developments-Inc-2009-33OSCB126.pdf [MI Developments].
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