On January 23, 2009, the Ontario Securities Commission (OSC) exercised its seldom-used statutory right to review decisions of the Toronto Stock Exchange (TSX) and overturned a TSX decision. 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 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 brief reasons for its ruling, noting that full reasons will follow in due course.
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 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 dilute the existing HudBay shareholders by just over 100 per cent and would result 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 issued or issuable in payment of the purchase price exceeds 25 per cent of the issued and 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:
- 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.
- Level of dilution — The OSC viewed the 100% dilution as "extreme" and concluded that the transaction was a "merger of equals" and not an acquisition by HudBay of Lundin. Interestingly, the OSC observed that this level of dilution would fundamentally change the voting, distribution and residual rights of the current HudBay shareholders.
- 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 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.
The OSC focused primarily on the fair treatment of the HudBay shareholders and concluded that the HudBay shareholders should 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 our capital markets, perhaps signalling the OSC’s receptiveness to future fairness complaints from activist shareholders.
We note that the TSX has been considering amendments to the securityholder approval requirements for acquisitions currently contained in the TSX Company Manual. The TSX publicly solicited comments on these provisions on October 12, 2007 but has not yet published any proposed amendments. The OSC’s decision in HudBay will undoubtedly impact proposed amendments to the TSX Company Manual in this area. The challenge for the TSX in maintaining the quality of its marketplace will be to adopt rules that favour efficient deal-making and promote the fair treatment of shareholders.
In the meantime, M&A advisors should carefully consider the impact on the "quality of the marketplace" that could result from the terms of any proposed acquisition of a public company by a listed issuer by way of a securities exchange. They should also be mindful of the possibility of securityholder approval being imposed as a condition to the listing approval of the buyer’s additional securities. A listed issuer buyer can no longer be certain that securityholder approval will not be required in connection with its acquisition of a public company for share consideration. And a public company target will need to factor in deal certainty risks associated with being acquired by a listed issuer for share consideration.