David Surat Paul G Findlay July 14 2010 OSC cease trades Magna transaction for disclosure deficiencies Borden Ladner Gervais LLP | Corporate Finance/M&A - Canada David Surat, Paul G Findlay Corporate Finance/M&A On June 24 2010 the Ontario Securities Commission (OSC) released a highly anticipated decision in which it cease traded the proposed transaction to collapse the Magna International dual class share structure.Magna's current dual class share structure has 112,072,348 class A subordinate voting shares, carrying one vote per share and held by the public, and 776,961 class B shares, carrying 300 votes per share and held by the Stronach Trust. The two classes of share have equal rights to distributions of dividends and return of capital. As a result of this structure, the Stronach Trust holds approximately 66% of the voting rights and controls Magna, despite the fact that the public shareholders own approximately 99.4% of Magna's equity.On May 6 2010 Magna announced a proposal to repurchase for cancellation all of its outstanding class B shares from the Stronach Trust in consideration for: 9 million class A subordinate voting shares; $300 million; a four-year extension of the consulting agreements with Frank Stronach's controlled companies; and a controlling interest in Magna's E-Car electric vehicle business. A shareholders' meeting to approve the transaction was scheduled for June 28 2010, with a fairness hearing before the Ontario Superior Court to approve the plan of arrangement to effect the transaction scheduled for June 29 2010.Magna's board and the special committee of independent directors did not make recommendations to shareholders or provide an assessment of the fairness of the proposed transaction. The special committee did not obtain a fairness opinion, an adequacy opinion or a formal valuation of the class B shares.The proposal generated considerable controversy because the level of dilution to the public shareholders of approximately 11.4% far exceeded any other dual class structure collapse. Further, the implied premium for the Stronach Trust over the pre-announcement trading price of the class A subordinate voting shares was approximately 1,800%, before considering the value of the consulting agreements and the controlling interest in the E-Car business.The OSC issued a notice of hearing and statement of allegations on June 15 2010, convening a hearing before the OSC to consider whether the transaction was contrary to the public interest, primarily as a result of deficiencies in Magna's disclosure and the process pursuant to which the transaction was proposed to shareholders.Magna subsequently released additional information regarding certain aspects of the transaction, such as two reports by the special committee's financial adviser and a valuation of the E-Car business prepared by an accounting firm.The hearing was held on June 23 and 24 2010, and the OSC released its decision, including summary reasons, later on June 24. The OSC's full reasons will be released in due course.The OSC determined that the disclosure provided to Magna's shareholders failed to meet the standards required under Ontario securities law and was insufficient to permit the shareholders to make an informed decision as to how to vote on the transaction.Citing the failure of Magna's board and special committee to provide a recommendation or an assessment of fairness of such a complex transaction with Magna's controlling shareholder, the OSC determined that: (i) shareholders must receive substantially the same information and analysis that the special committee considered; and (ii) the disclosure must address the legal and business issues raised by the transaction.The OSC ordered that before re-submitting the transaction to shareholders for approval, Magna must provide an amended information circular remedying the disclosure deficiencies identified in the OSC's decision. The OSC took this position despite evidence that a substantial majority of the class A subordinate voting shares had already been voted in favour of the transaction. The panel noted that while shareholder approval was an important factor in its deliberations, it could not be relied on to say that the disclosure in the Magna circular was adequate.The OSC provided detailed guidance on the matters that should be addressed in the amended circular, based on the evidence and submissions relating to the background to, and rationale for, the transaction presented at the hearing. In particular, 12 specific omissions and deficiencies were identified in the decision that must be corrected to permit shareholders to make an informed decision.The panel was not persuaded that the transaction was abusive of shareholders or the capital markets within the meaning of securities law. Accordingly, it held that the shareholders should be permitted to decide on the merits of the transaction if adequate disclosure was provided.The panel also indicated that it took comfort from the fact that an Ontario court will, as part of the arrangement process, determine whether the transaction as a whole is fair and reasonable, noting that such a determination was not within the OSC's jurisdiction as a securities regulator.The OSC's full reasons should provide valuable guidance to market participants regarding the scope of its public interest jurisdiction. Furthermore, the OSC indicated that the reasons will discuss its concerns with the process followed by Magna's board and special committee. This guidance should be extremely beneficial to boards of directors generally in assessing related-party transactions.For further information on this topic please contact David Surat or Paul G Findlay at Borden Ladner Gervais LLP by telephone (+1 416 367 6000), fax (+1 416 367 6749) or email ([email protected] or [email protected]).