On January 23, 2009, the Ontario Securities Commission prohibited HudBay Minerals Inc. (HudBay) from issuing shares in connection with its proposed merger with Lundin Mining Corporation (Lundin) without first obtaining HudBay shareholder approval for the transaction. The order was made on an application by Jaguar Financial Corporation requesting a review of the TSX decision to allow the listing of the HudBay shares to be issued in connection with the transaction. The order also sets aside the TSX’s decision and makes the listing of these shares conditional on HudBay shareholder approval of the transaction.

Decision of the OSC

The reasons for the OSC’s order will be released at a later date. However, given that Lundin shareholder vote on the transaction is scheduled for January 26, 2009, the panel issued a brief decision on an expedited basis explaining its approach.

The OSC’s decision was based on section 603 of the TSX Company Manual, which gives the TSX discretion to impose conditions on a transaction by a listed issuer that involves the issuance of securities. In exercising this discretion, the TSX is required to consider the effect that the transaction may have on “the quality of the marketplace”.

The record before the OSC did not indicate the factors or circumstances that the TSX considered in exercising its discretion. Accordingly, the OSC was unable to defer to the TSX and conducted its own assessment of the impact of the transaction on the quality of the marketplace. The OSC focussed on the following:

Impact of the Transaction on Shareholders of HudBay

The proposed transaction has an enormous impact on the rights and economic interests of the shareholders of HudBay. The OSC referred to evidence that the transaction is considered by HudBay insiders to be transformational in business terms, and noted that the HudBay share price fell by approximately 40% following the announcement of the transaction.


The transaction contemplates the issuance of additional HudBay shares representing just over 100% of the number of shares currently outstanding - a level of dilution that the OSC characterized as extreme and more indicative of a merger of equals than an acquisition by HudBay.

Board of the Merged Entity

Significant changes are planned to the HudBay board following the transaction. Five of nine directors of the company will be former directors of Lundin. The OSC noted that HudBay shareholders would be subjected to a radical change in the composition of the board without their consent or concurrence.

Timing of Shareholder Votes

Lundin is required to obtain shareholder approval for the transaction. The Lundin shareholder meeting is scheduled for January 26, 2009 and the transaction is expected to close prior to March 30, 2009.

Shareholders of HudBay have requisitioned a meeting for the purpose of removing the HudBay board of directors. HudBay has scheduled this meeting for March 31, 2009.

The OSC viewed the uncommon haste in holding the Lundin shareholder meeting, coupled with the scheduling of the requisitioned HudBay shareholder meeting after the proposed closing of the transaction, as actions that appear to have been taken for the purpose of frustrating the legitimate exercise by HudBay shareholders of their right to require a meeting to consider the replacement of the HudBay board. The OSC concluded that these considerations raise serious concerns as to the appropriateness of HudBay’s governance practices and the fair treatment of HudBay shareholders.

Quality of the Marketplace and the Public Interest

In view of the above considerations, the OSC concluded that permitting the transaction to proceed without the approval of the HudBay shareholders would significantly undermine the quality of the marketplace. The OSC also found that proceeding without a HudBay shareholder vote would be contrary to the public interest.

The OSC noted that fair treatment of shareholders is a key consideration going to the integrity and quality of capital markets and is fundamentally more important than the legitimate concerns of the parties as to deal certainty.

Potential Implications

The OSC found that the TSX followed an appropriate process in responding to HudBay’s listing application and the complaints of HudBay shareholders. However, the OSC’s decision in this matter may affect the manner in which the TSX exercises its discretion and the need for future amendments to the TSX Company Manual.

A similar controversy arose surrounding the acquisition by Goldcorp Inc. of Glamis Gold Ltd. in 2006. In that transaction, despite significant dilution, shareholder approval by Goldcorp shareholders was not required. Robert McEwan, former chairman of Goldcorp Inc., unsuccessfully challenged the transaction before the Ontario Superior Court and Court of Appeal, arguing that shareholder approval was required under the Ontario Business Corporations Act.

In response to the Goldcorp decision, the TSX requested comments in October 2007 on whether the TSX Company Manual should be amended to require shareholder approval in connection with dilutive acquisitions. The TSX has not yet responded to the comments received or proposed specific amendments. Given that the OSC’s decision in this matter is based on an interpretation of the existing provisions of the TSX Company Manual, there may be no need for the TSX to pursue this initiative. However, companies seeking certainty will no doubt press for more detailed rules regarding how the TSX is likely to deal with dilutive acquisitions in future.

The fact that the OSC also found that a HudBay shareholder vote was required based on the public interest may also shift the emphasis of shareholder complaints regarding dilutive acquisitions from the TSX to the OSC and the other securities regulators. As with its decisions in cases such as Canadian Tire and Sears Canada, the OSC's willingness to invoke its public interest mandate under s. 127(1) of the Securities Act (Ontario) in the HudBay matter suggests that a warm welcome awaits shareholders with similar complaints in future.

We look forward to additional guidance on the implications of this decision when the OSC releases its full reasons.

The OSC’s order and decision dated January 23, 2009 are available on its website.