In its recently released Reasons for Decision in Mithaq Canada Inc. (Re)1 (the "Decision"), the Capital Markets Tribunal (Tribunal") articulated its reasons for denying an application by Mithaq Canada Inc. ("Mithaq") to cease trade a private placement announced by Aimia Inc. ("Aimia"), a Toronto Stock Exchange ("TSX") listed company, on the basis that it was allegedly a defensive tactic calculated to respond to a take-over bid by Mithaq, a significant shareholder.
The decision provides guidance concerning the application of the test articulated in Hecla Mining Company (Re)2 ("Hecla") whether to cease trade a private placement on the basis that it is an abusive defensive tactic under National Policy 62-202 Takeover Bids – Defensive Tactics ("NP 62-202"). It is also noteworthy for an issue that the Tribunal raised during the hearing, but did not decide, namely, whether the Tribunal should block a private placement only where there is "clear abuse of the target shareholders and/or the capital markets" (the standard applied in Hecla) given that the genesis of that standard "pre-dates the 1994 amendments to the [Securities] Act that added, as purposes of the Act, the protection of investors against 'unfair' practices and the fostering of 'fair' capital markets".3
As none of the parties to the proceeding advocated for a different standard, the Tribunal applied the "clear abuse" standard articulated in Hecla but noted that "it remains to be seen whether, in some future proceeding, a party will submit that the standard ought to change".4 This could be interpreted as an invitation for a future applicant to advocate for the Tribunal's intervention based upon a fairness standard instead of requiring a demonstration of "clear abuse".
It is unclear whether the application of such a lower standard would have changed the outcome of Mithaq's application.
Background
Mithaq was the largest common shareholder of Aimia, owning or controlling over 30% of Aimia's common shares as of May 2023 following purchases which had gradually increased its ownership position.
Prior to the Aimia annual general meeting of shareholders in April, Mithaq announced that it would vote against re-election of the board of Aimia. The results of that election and Aimia's refusal to agree to a proxy review of the voting results prompted Mithaq to commence litigation against Aimia in the Ontario Superior Court. In separate civil proceedings, Aimia sought to prevent Mithaq from, among other things, requisitioning a shareholders meeting and voting Mithaq's shares. In June, Aimia adopted a shareholder rights plan but ultimately never sought approval of it.
In September Aimia sought and obtained from the TSX conditional approval for a private placement. Approximately one week after the date of the TSX's conditional approval, Mithaq made an all-cash offer for all outstanding shares of Aimia. In response, Aimia announced that it had appointed a Special Committee to assess the offer.
On October 13, Aimia declared its intention to complete a $32.5 million private placement of over 10.4 million common shares and an equal number of common share purchase warrants to a group of undisclosed investors, to close on October 19. The investors would get up to three of the eight board seats. If fully subscribed, the placement would represent almost 25% of the then-outstanding common shares on an undiluted basis.
In response to and shortly after Aimia's announcement, Mithaq brought an application to the Tribunal, seeking orders to:
- Cease trade the private placement that Aimia implemented, primarily on the ground that it was a defensive tactic designed to thwart Mithaq's take-over bid; and
- Set aside the TSX's decision to approve the private placement without requiring that Aimia obtain shareholder approval.5
In response, Aimia brought a cross-application for an order denying Mithaq the benefit of an exemption contained in Ontario securities law that permits a bidder to acquire up to 5% of the target's shares if certain conditions are met. That application was also denied by the Tribunal.
No Cease Trade of Aimia's Private Placement
The Tribunal applied the two-stage analytical framework set out in Hecla in deciding whether to grant Mithaq's application to cease trade the Aimia private placement, as set out below:
- The Tribunal must determine if the private placement is "clearly not" a defensive tactic designed, in whole or in part, to alter the dynamics of the bid process.
- If it cannot be said that the private placement is clearly not a defensive tactic, the Tribunal will apply the principles set out in NP 62-202 to balance the corporate objectives of the private placement against facilitating shareholder choice.6
Stage One: The Private Placement Became a Defensive Tactic
A preliminary step in the application of the first stage of the Hecla test is to determine which party has the onus on the issue of whether or not the private placement was a defensive tactic. Following Hecla, the Tribunal indicated that if Mithaq was able to demonstrate that the private placement's impact on the existing bid environment was material, Aimia would have the burden of establishing that the private placement was clearly not a defensive tactic.
The Tribunal found that Mithaq had demonstrated that the impact of the private placement on the existing bid environment was material (due to its effect on Mithaq's ability to meet the minimum tender condition and its effect on other potential bids). Accordingly, the onus shifted to Aimia to demonstrate that the private placement was "clearly not" a defensive tactic.
Aimia failed to discharge that onus. While the Tribunal accepted that Aimia had a serious and immediate need for financing and that the private placement was not primarily designed as a defensive measure, it "came to have multiple purposes".7 As Mithaq's activism increased, Aimia "was content that the private placement strategy already being pursued might help Aimia to resist that activism".8 Accordingly, after Mithaq announced its bid, the private placement took on "a defensive character."9
As such, Aimia failed to establish that the private placement was "clearly not" a defensive tactic. The principles of NP 62-202 were thus engaged and the Tribunal was required to move on to the second part of the test for the purpose of deciding whether the private placement constituted "clear abuse" of either the Amia shareholders or the capital markets warranting an order to cease trade the private placement.
Stage Two: The Private Placement was Not "Clearly Abusive"
In determining whether the private placement was "clearly abusive", the Tribunal considered the following factors set out in Hecla10:
- Whether the private placement would benefit Aimia's
shareholders;
The Tribunal decided that on balance it would.
- The extent to which the private placement altered the
pre-existing bid dynamics;
The Tribunal determined that it did. It materially interfered with Mithaq's ability to achieve the minimum tender condition under its bid and the exercise price could discourage other potential bidders. However, the Tribunal attached little weight to this factor because almost every step involved in the private placement preceded Mithaq's announcement of its intention to make a take-over bid.
- Whether the private placement investors are related to
Aimia, or to each other, in such a way as to enable Aimia's
board to summarily reject Mithaq's bid or a competing
bid;
Based upon the evidence, the Tribunal declined to draw an inference that the private placement investors were recruited by Aimia due to their "willingness to just say 'no'" to Mithaq's shareholder activism and to any forthcoming bid.11 Further, their intention not to tender to Mithaq's bid was "tenuous".12 Their comfort for Aimia may have evaporated had Mithaq modified its bid or another offeror made a bid. This factor was neutral in the Tribunal's analysis.
- Whether the views of other Aimia shareholders should
influence the Tribunal's decision;
The Tribunal attached no weight to the unsworn letters and emails from Aimia shareholders filed by the parties. The "limited samples" were not quantitively persuasive.13 This factor was neutral in the Tribunal's analysis.
- Whether Aimia's board appropriately considered the
interplay between the private placement and Mithaq's
bid.
The Tribunal found that there were some deficiencies in the work conducted by Aimia's Special Committee of the board. It was not as comprehensive as it could have been. However, it was not so deficient that it overcame Aimia's need for financing and the fact that the private placement was planned before Mithaq announced its bid.14 These conclusions were reached without reference to expert reports on Aimia's board's process in responding to the Mithaq bid, which were ruled inadmissible.15
Weighing the factors discussed above, the Tribunal decided that it could not defer to the Special Committee's work. Instead, it reached its own independent conclusion that while the private placement did have an impact on the bid environment, that impact was outweighed by the benefit to Aimia's shareholders and as such, the private placement was not "clearly abusive" to Aimia's shareholders or the capital markets.
Other Public Interest Considerations
The Tribunal also declined Mithaq's invitation to rely upon the decision of the Ontario Securities Commission hearing panel (now the Tribunal) in Eco Oro Minerals Corp (Re)16 as a basis for an order under section 127. Although Eco Oro did not involve a takeover bid, the OSC decision contemplated that, in the right case, it might be appropriate for it to make an order under section 127 to cease trade a private placement in the context of a shareholder activist dispute even in the absence of a bid.17 Ultimately, however, the Tribunal was not satisfied that it should interpret Eco Oro as providing a basis for making a section 127 order against Aimia. Unlike the facts in Eco Oro, Mithaq's application did not involve a proxy contest in anticipation of an upcoming shareholder vote, or a transaction that materially affected control of the issuer.
The TSX's Decision Is Not Set Aside
The Tribunal also denied Mithaq's request that it set aside the TSX's decision to approve Aimia's private placement without requiring shareholder approval. None of the concerns that Mithaq raised about the TSX's decision or its decision-making process was found to satisfy the "heavy burden" of establishing that the TSX made an error in principle.18
Denial of Other Requests for Relief
In the alternative, Mithaq sought an order that the private placement shares not be counted in the number of outstanding shares for the purposes of satisfying the 50% minimum tender condition in Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions for a two step business combination ("minimum tender relief") and that it could rely upon the exemption in section 2.2(3) of National Instrument 62-104 Take-Over Bids and Issuer Bids permitting it to buy up to 5% of the outstanding securities subject to the bid through market trades while the offer was outstanding (the "5% exemption"). In turn, Aimia sought an order prohibiting Mithaq from relying upon that exemption. The Tribunal declined to make any of these orders.
The Tribunal noted, in relation to the request for minimum tender relief, that predictability is important. The Tribunal should be cautious in granting relief that alters the carefully calibrated bid regime. It should only be granted in exceptional circumstances or where there is abusive or improper conduct, which was not the case at hand.19
The Tribunal also declined to make any order confirming Mithaq's ability to rely upon the 5% exemption, finding that it lacked jurisdiction to issue such a declaration.
Finally, the Tribunal was not persuaded that it was in the public interest to make an order denying Mithaq the ability to rely upon the 5% exemption on the basis that Mithaq's offer was "too conditional" to have been made in good faith.[20] Mithaq had removed two of the conditions that Aimia objected to.
Key Takeaways
The Decision stands for the following propositions:
- The Tribunal is open to considering arguments that the Hecla "clearly abusive" standard for making an order to cease trade a private placement in the context of a takeover bid is not appropriate.
- The decision in Eco Oro should not be interpreted as contemplating the exercise of the Tribunal's public interest jurisdiction to cease trade a private placement in the context of every shareholder activist dispute.
- Whether a private placement is a defensive tactic may change over time.
- It will be difficult for parties to persuade the Tribunal to admit expert evidence about the adequacy of processes followed by boards of directors and special committees. The Tribunal considers that it is sufficiently expert in these issues and it does not require such evidence.
- The Tribunal will closely scrutinize the quality of the evidence filed by the parties for and against a request for an order to cease trade a private placement. However, the Tribunal will resist deciding the merits of issues that are the subject of parallel court proceedings unless there is a need for a speedy resolution or because of the Tribunal's expertise.
Footnotes
1. Mithaq Canada Inc. (Re), 2024 ONCMT 9 [Mithaq].
2. Hecla Mining Company (Re), 2016 BCSECCOM 359 and Re Hecla Mining Company (2016), 39 OSCB 8927. These were simultaneous hearings of the British Columbia and the Ontario Securities Commissions.
3. Mithaq at para. 44.
4. Ibid at para. 45.
5. Ibid at para. 2.
6. Ibid at paras. 40, 58-59.
7. Ibid at para. 102.
8. Ibid.
9. Ibid at para. 104.
10. In Hecla, the private placement was found to have been instituted for non-defensive business purposes. As such, the second stage of the test was not considered.
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