Canada: OSC Overturns TSX Decision - Requires Shareholder Approval Based On Fairness Concerns

On January 23, 2008, the Ontario Securities Commission issued its decision In the Matter of HudBay Minerals Inc., setting aside a prior decision of the Toronto Stock Exchange and requiring approval by the shareholders of HudBay Minerals Inc. of the company's proposed acquisition of Lundin Mining Corporation. Though issued on an expedited basis with full reasons to follow, the Commission's decision is significant not only because it is rare for the Commission to set aside a decision of the TSX, but also because it significantly alters the landscape for TSX-listed issuers using their listed securities as currency in acquisition transactions.


On November 21, 2008, HudBay and Lundin announced that they had agreed to a business combination whereby HudBay would acquire all of the outstanding common shares of Lundin in exchange for common shares of HudBay by way of a plan of arrangement (the "Transaction"). As a result of the Transaction, HudBay would issue an aggregate of 157,596,192 common shares to the Lundin shareholders. The effect of the Transaction would be to increase the number of outstanding HudBay common shares from 153,020,124 to 310,616,316, resulting in dilution to HudBay shareholders of over 100%. Following the announcement of the Transaction, the common share price of HudBay fell by approximately 40%.

On December 10, 2008, the TSX approved the listing of the additional common shares of HudBay to be issued in connection with the Transaction. The TSX did not exercise its discretion to impose a condition requiring that the Transaction be approved by HudBay shareholders. On December 22, 2008, Lundin announced that the Transaction was to close on January 28, 2009, two days after the scheduled meeting of Lundin shareholders to approve the plan of arrangement. Jaguar Financial Corporation, a shareholder of HudBay, applied to the Commission to have the approval of the TSX set aside and asked the Commission to order HudBay to obtain shareholder approval before proceeding with the Transaction.

Existing TSX Rules

The TSX rules require security holder approval for the issuance of listed securities as full or partial consideration for an acquisition where the number of securities issued or issuable in payment of the purchase price exceeds 25% of the issued and outstanding securities of the listed issuer. This requirement, however, does not apply where the listed issuer is acquiring a public company (a reporting issuer or issuer of equivalent status having 50 or more beneficial security holders, excluding insiders and employees).

Accordingly, until now, it was generally accepted that in acquisitions using listed securities, the TSX would only require shareholder approval in situations where:

  1. the transaction would materially affect control of the acquiror;
  2. the transaction was not negotiated at arm's length and a material amount of the consideration would go to insiders of the acquiror; or
  3. the target was not a public company and dilution for the acquiror's shares would exceed 25%.

The topic of shareholder approvals in public M&A transactions has been discussed in Canada for some time. In November 2006, the Ontario Divisional Court1 affirmed the decision of the Ontario Superior Court of Justice denying the shareholders of Goldcorp Inc. the right to vote on Goldcorp Inc.'s proposed acquisition of Glamis Gold Ltd. based on requirements of Ontario's Business Corporations Act. In October 2007, the TSX issued a request for comments on whether changes should be made to its rules and is currently considering whether there should be a maximum dilution point in acquisitions of public companies beyond which shareholder approval would be automatically required.

The Decision

In the HudBay decision, the Commission focused on the general discretionary authority of the TSX to impose conditions on a transaction pursuant to Section 603 of the TSX Company Manual. Section 603 gives the TSX discretion to impose conditions on a transaction and requires the TSX, when exercising that discretion, to consider the effect that the transaction may have on the "quality of the marketplace".

While the Commission accepted as reasonable the TSX's conclusion that completion of the Transaction would not materially affect control of HudBay, it found that as there was not sufficient evidence to establish the basis for the TSX's decision not to require HudBay shareholder approval under Section 603 of the Manual (the TSX did not present any evidence at the hearing and the minutes of the Listing Committee meeting did not set out reasons), the Commission was unable to defer to the decision of the TSX. As a result, it was up to the Commission to determine the effect the Transaction would have on the "quality of the marketplace" and whether it would be contrary to the public interest.

The Commission noted that "quality of the marketplace" is a broad concept of market integrity that requires careful consideration of all relevant factors in the particular circumstances. Among those factors are the issuer's corporate governance practices and the size of the transaction relative to the liquidity of the issuer. Further, the Commission found that the factors to be considered by the TSX in exercising its discretion include, but are not limited to, the factors set out in Section 603 and, with respect to the Transaction, should include the fair treatment of the shareholders of HudBay.

The Commission found that several aspects of the Transaction raised serious concerns as to the appropriateness of HudBay's governance practices and as to the fair treatment of the existing HudBay shareholders. These included:

  • the enormous impact of the Transaction on the rights and economic interest of the shareholders of HudBay;
  • the extreme level of dilution (leading the Commission to conclude that the Transaction was a "merger of equals" and not an acquisition by HudBay of Lundin);
  • the fact that the board of HudBay would be substantially reconfigured as a result of the Transaction without the consent or concurrence of HudBay shareholders; and
  • the circumstances surrounding the timing of the Transaction.2

In looking at the evidence before it, the Commission found that in the circumstances the quality of the marketplace would be significantly undermined if the Transaction were to proceed without the approval of HudBay shareholders and that allowing the Transaction to proceed without the approval of HudBay shareholders would be contrary to the public interest. In so concluding, the Commission stated that in this case, the "fair treatment of shareholders is fundamentally more important than any consideration as to "deal certainty" in assessing the impact of the Transaction on the quality of the marketplace".


In light of this important decision, issuers and advisors contemplating acquisitions using TSX-listed securities should consider fairness of treatment to shareholders as a significant factor when assessing the effect of a transaction on the quality of the marketplace and appreciate that the TSX will be doing the same when considering the use of its discretionary authority to require shareholder approval. It remains to be seen whether this decision will be appealed by HudBay.


1. McEwen v. Goldcorp Inc. (2006), B.L.R. (4th) 306 (Ont. Div. Ct.), 2006 CanLII 37415 (ON S.C.D.C.).

2. When the Transaction was initially announced, HudBay and Lundin had indicated that the Lundin information circular would be mailed to shareholders in the first quarter of 2009 and that the Transaction would close prior to May 30, 2009. Subsequently, and following both the listing approval by the TSX and the requisitioning of a meeting of shareholders of HudBay by disgruntled HudBay shareholders to replace the HudBay board of directors, the timetable for the Transaction was accelerated by the mailing of the Lundin information circular in December 2008 and the scheduling of the Lundin shareholders' meeting for January 26, 2009. Shortly after the mailing of the Lundin information circular, HudBay announced that the date for the requisitioned shareholders' meeting would be March 31, 2009. The Commission found that the acceleration of the Lundin meeting must be attributed at least in part to the controversy over the Transaction and that if the Transaction was completed before the requisitioned meeting of HudBay shareholders, the purpose of that meeting would be frustrated, which would be fundamentally unfair to the shareholders of HudBay.

About Ogilvy Renault

Ogilvy Renault LLP is a full-service law firm with close to 450 lawyers and patent and trade-mark agents practicing in the areas of business, litigation, intellectual property, and employment and labour. Ogilvy Renault has offices in Montréal, Ottawa, Québec, Toronto, and London (England), and serves some of the largest and most successful corporations in Canada and in more than 120 countries worldwide. Find out more at

Ogilvy Renault is the International Legal Alliance's Canadian Gold Award winner for 2008 in M&A and Corporate Finance.

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