Canada: TSX Overruled — OSC Requires Approval Of Hudbay Shareholders In Proposed Acquisition Of Lundin

Last Updated: July 24 2009
Article by Roger J. Chouinard and Graham P.C. Gow

Most Read Contributor in Canada, September 2018

On January 23, 2009, the Ontario Securities Commission (OSC) exercised its seldom-used statutory power to overturn a decision of the Toronto Stock Exchange (TSX). The OSC issued an order requiring HudBay Minerals Inc. to obtain the approval of the HudBay shareholders prior to proceeding with the issuance of HudBay common shares in connection with the then-proposed acquisition of Lundin Mining Corporation. The TSX's Listing Committee had previously determined that it would not require HudBay to obtain shareholder approval in granting listing approval for the HudBay common shares to be issued to Lundin shareholders as consideration for the acquisition. The OSC released full reasons for its decision on April 28, 2009.

On November 21, 2008, HudBay and Lundin jointly announced a business combination transaction pursuant to which HudBay would acquire all of the outstanding Lundin common shares on the basis of 0.3919 HudBay common shares for each Lundin common share. The imputed price to be paid by HudBay was $2.05 for each Lundin common share, representing a premium of 103 per cent to Lundin's previous-day closing price of $1.01 and a 32 per cent premium to the 30-day volume weighted average trading price.

The proposed transaction was structured as a plan of arrangement of Lundin under the Canada Business Corporations Act that would require approval by Lundin's shareholders (but not HudBay's shareholders). This approval was obtained at a Lundin shareholders' meeting on January 26, 2009. The completion of the proposed transaction would have diluted the existing HudBay shareholders by just over 100 per cent and would have resulted in the existing shareholders of HudBay and Lundin each holding approximately 50 per cent of the combined entity.

The TSX Company Manual requires that a listed issuer obtain securityholder approval for the issue of securities as consideration for an acquisition where the number of securities issuable in payment of the purchase price exceeds 25 per cent of the outstanding securities of the listed issuer. However, this requirement does not apply where the listed issuer is acquiring a public company. Where a listed issuer proposes to acquire a public company, the TSX Company Manual requires securityholder approval of a transaction if, among other things, in the opinion of the TSX the transaction materially affects control of the listed issuer. The TSX Company Manual also provides the TSX with discretion to impose conditions on a transaction, having regard to the effect the transaction may have on the "quality of the marketplace."

In reversing the TSX's decision, the OSC concluded that the "quality of the marketplace" would be significantly undermined by permitting the proposed transaction to proceed without approval of the HudBay shareholders. The factors considered by the OSC included:

  • Level of dilution — The OSC viewed the 100 per cent dilution as "extreme" and concluded that the transaction was more a "merger of equals" than an acquisition by HudBay of Lundin. The OSC observed that this level of dilution would directly affect the voting, distribution and residual rights of the current HudBay shareholders.
  • Economic impact of the transaction on shareholders of HudBay — The OSC noted the precipitous 40 per cent decline in the HudBay share price following announcement of the transaction.
  • Board of the merged entity — The board of HudBay would be substantially reconfigured as a result of the transaction, and the OSC believed that the shareholders of HudBay were being subjected to a "radical change" in board composition without their consent or concurrence.
  • Timing of shareholder votes — The OSC voiced concern with the timing of the Lundin shareholders' meeting and a HudBay shareholders' meeting that had been requisitioned by HudBay shareholders to replace the HudBay board. The OSC noted that if the transaction had been completed before the requisitioned HudBay shareholders' meeting, the purpose of that meeting would have been frustrated. "That is manifestly unfair to the shareholders of HudBay," the OSC added.
  • Transformational impact of the transaction — The OSC considered the proposed transaction to be transformational in nature for HudBay due to its significant impact on HudBay's business plan, risk profile, liquidity and other financial measures.

The OSC focused primarily on the fair treatment of the HudBay shareholders and concluded that the HudBay shareholders should be afforded the right to determine (by simple majority approval at a special meeting) whether the proposed transaction should proceed. The OSC's decision goes on to expressly emphasize the OSC's view that the fair treatment of shareholders is a key consideration going to the integrity and quality of Canadian capital markets.

Dealmakers and market participants should take note: the OSC's decision and additional observations may be a signal of the OSC's increasing receptiveness to fairness complaints from activist shareholders.

To address the situation raised by the decision, the TSX, on April 3, 2009, published for comment proposed amendments to the securityholder approval requirements for acquisitions currently contained in the TSX Company Manual. Under the proposal, an issuer would be required to obtain shareholder approval for the acquisition of a public company that results in dilution of its existing shareholders by more than 50 per cent. A number of investors have already argued that the TSX has set the threshold for approval far too high. By comparison, a similar requirement exists under NASDAQ and NYSE rules for acquisitions resulting in dilution over 20 per cent.

Other Important Points for M&A Transactions

The OSC concluded its written reasons for the decision with two significant observations for M&A transactions.

Independence of Financial Advisor in Question

HudBay's financial advisor was retained on fairly standard terms. Among other fees, the financial advisor was entitled to a signing fee when the arrangement agreement was entered into and a much larger success fee payable upon closing of the transaction. The OSC questioned the independence of a financial adviser who delivers a fairness opinion where the financial adviser is entitled to a success fee. The OSC added that "a fairness opinion prepared by a financial adviser who is being paid a signing fee or a success fee does not assist directors comprising a special committee of independent directors in demonstrating the due care they have taken in complying with their fiduciary duties in approving a transaction."

Fairness opinions are generally considered an important element in demonstrating that the board made an informed and careful decision in deciding to approve a transaction. If the "primary" financial adviser to the board is to receive a success fee, as is usually the case, boards may now feel the need to retain a second financial adviser with the sole responsibility to deliver a fairness opinion, for a fixed fee not tied to the success of the transaction.

Forfeit of Voting Rights "as a Matter of Principle"

In connection with the proposed transaction, HudBay purchased a substantial number of Lundin shares (representing 19.9 per cent of Lundin's outstanding shares) directly from Lundin in a private placement. The shares were acquired following the announcement of the proposed transaction but before the meeting of Lundin shareholders to approve the transaction. Under the share subscription agreement, HudBay agreed to vote the shares in favour of the proposed transaction.

The OSC expressed the view that HudBay had a different, and potentially conflicting, interest in the outcome of the vote on the proposed transaction, relative to the other Lundin shareholders. As a result, despite the absence of any regulatory prohibition against HudBay voting its shares in favour of the proposed transaction, the OSC stated that HudBay should not, as a matter of principle, be permitted to vote those shares in favour of the transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions