On August 26, 2009, the Ontario Securities Commission dismissed
a request by a significant unitholder of InterRent Real Estate
Investment Trust to reverse a decision of Toronto Stock Exchange
and intervene to stop a private placement of InterRent units from
proceeding. The OSC's decision confirms that only in rare
circumstances will it exercise its power to review a TSX
InterRent applied to TSX for approval of a private placement of
up to 9.3 million units, representing 49% of InterRent's issued
and outstanding units. The private placement was one of several
transactions proposed by InterRent that also included entering into
an agreement that would result in externalization of all of the
REIT's property management services. TSX's listings
committee permitted the private placement without requiring a vote
of InterRent's unitholders, but required that the proposed
property management agreement (which could be viewed as a
"transformative" transaction) be submitted to the
unitholders for approval. Unitholders under the private placement
are entitled to participate in that vote.
NorthWest Value Partners Inc., InterRent's largest
unitholder, complained to TSX that the private placement would
materially affect control of InterRent and that unitholder approval
should therefore be required. TSX received and considered extensive
submissions from NorthWest on this issue. In reaching its decision
not to require unitholder approval, TSX relied in part on
representations by InterRent and others that there were no
ownership or voting agreements among the subscribers to the private
placements or between the subscribers and the proposed third-party
property manager. TSX concluded that, under the circumstances, the
subscribers were not intending to act together to materially affect
control of InterRent.
NorthWest sought review by the OSC of TSX's listing
decision. NorthWest's principal allegation was that TSX made
fundamental errors and overlooked material evidence in determining
that the private placement would not materially affect control of
InterRent. NorthWest also argued before the OSC that full
disclosure of the identities of the subscribers to the private
placement was required to allow the OSC to review and assess
The OSC held a preliminary hearing to consider whether it should
defer to TSX in these circumstances. In a short decision that will
be supplemented later by full reasons, the OSC deferred to the TSX
decision and dismissed NorthWest's request for review.
The OSC confirmed that it will intervene in a TSX decision only
in rare circumstances and an applicant faces a heavy burden in
proving that intervention is justified. The OSC found that
NorthWest did not establish any basis for review: TSX considered
the relevant information and assessed the relevant considerations,
including whether this was an appropriate case for it to exercise
its discretion to require unitholder approval of the private
placement. The OSC concluded that TSX followed a fair process, set
out the rationale for its decision in carefully articulated reasons
and reached a decision that was reasonable in the circumstances.
The OSC therefore concluded that it had a sufficient basis to defer
to TSX. The OSC declined to order disclosure of the names of the
subscribers to the private placement, finding that in the
circumstances this disclosure was not necessary and that on balance
it was more important to protect investor privacy.
In support of its request for review, NorthWest relied on an OSC
decision released earlier this year in which the OSC reversed a
decision of the TSX and required HudBay Minerals to obtain
shareholder approval prior to completing its proposed acquisition
of Lundin Mining. The HudBay decision had led to widespread
speculation that the OSC has become more receptive to fairness
complaints from activist shareholders. The InterRent decision
confirms that only in rare circumstances will the OSC intervene in
a TSX decision. This should provide a greater degree of certainty
for issuers planning and completing transactions.
1.The authors represented TSX before the OSC.
2. Immediately following the release of the OSC's
decision, NorthWest moved before the Ontario Superior Court of
Justice for an injunction to prevent the closing of the private
placement. The Court dismissed NorthWest's motion.
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