In the wake of the recent ruling of the Ontario Securities Commission (the “OSC”) in regards to the previously proposed acquisition of Lundin Mining Corporation (“Lundin”) by HudBay Minerals Inc. (“HudBay”), the Toronto Stock Exchange (the “TSX”) is now proposing to amend its rules to require a listed company to obtain shareholder approval for an acquisition of another public company if certain thresholds are met.
If the proposed amendment to the TSX rules is adopted, a listed company will be required to obtain shareholder approval if the transaction involves the issuance of more than 50 per cent of the listed company’s outstanding shares (on a non-diluted basis). While the TSX recognizes that requiring shareholder approval will increase acquisition costs, it nonetheless believes that shareholders should have the opportunity to vote on a highly dilutive public company acquisition.
The proposed amendment to require shareholder approval in these circumstances is similar to the approach taken in various other jurisdictions, notably including the United States. Both the New York Stock Exchange (NYSE) and NASDAQ generally require shareholder approval for acquisitions that would result in the issuance of 20 per cent or more of the existing share capital of the acquiror, a threshold that is considerably lower than that proposed by the TSX.
The TSX is currently accepting comments on the proposed rule and will release the final form once all comments have been reviewed and necessary approvals obtained.
Miller Thomson Analysis
HudBay and Lundin
On January 23, 2009, the OSC released its decision in which it determined that HudBay must obtain shareholder approval in connection with a proposed transaction that had HudBay acquiring all of the common shares of Lundin (the “Transaction”). In order to reach this decision, the OSC made a rare move, setting aside the decision of the TSX that permitted HudBay to proceed to closing the Transaction without requiring the approval of HudBay shareholders. In its decision, the OSC noted that it generally defers to the judgment of the TSX, particularly in the areas of the TSX’s expertise. It further noted that it will not substitute its own view for that of the TSX simply because the OSC might have reached a different decision in the circumstances. Nonetheless, notwithstanding the TSX’s decision that shareholder approval of the Transaction was not required under the rules of the Toronto Stock Exchange Manual (the “TSX Manual”), the OSC concluded that the quality of the marketplace (as it is defined in s. 603 of the TSX Manual and discussed below) would be significantly undermined if the Transaction was allowed to proceed without shareholder approval.
The Transaction involved HudBay’s acquisition of Lundin by way of an all stock deal whereby HudBay proposed to issue 0.3919 of its common shares for each Lundin common share. With roughly 153 million shares of HudBay outstanding and at least the same number of shares to be issued in connection with the Transaction, the move would have effectively doubled HudBay's outstanding shares. The Transaction was structured such that it was subject to approval by the shareholders of Lundin, but not the shareholders of HudBay.
Pursuant to section 611 of the TSX Manual, a company must obtain shareholder approval if it intends to issue more than 25 per cent of its outstanding shares to buy a privately held company. However this requirement does not apply when the acquisition involves a public company issuing shares to acquire another public company. However, section 603 of the TSX Manual provides the TSX with broad discretion to impose certain conditions on a transaction, including shareholder approval, in situations where a transaction may have a considerable impact on the quality of the marketplace as it is defined in that section.
The OSC Decision
The decision of the OSC was one of first instance and one that it described as a “rare circumstance” in which the OSC interfered with a decision of the TSX. In reaching its decision, the OSC considered a number of factors, most notably: (i) the enormous impact of the Transaction on the rights and economic interests of HudBay shareholders; (ii) the fact that the level of dilution inherent in the Transaction was representative of more of a “merger of equals” as opposed to an acquisition by HudBay of Lundin; (iii) the substantial reconfiguration in the composition of the board of HudBay post Transaction; and (iv) the concerns raised over the appropriateness of HudBay’s corporate governance practices based on the difference in the timing of the scheduled meeting for Lundin shareholders and the scheduled meeting for HudBay shareholders.
Based on the cumulative effect of these considerations, the OSC determined that the quality of the marketplace would be significantly undermined if the Transaction were permitted to proceed without the approval of HudBay shareholders. In its decision, the OSC noted that while it recognizes the legitimacy of the submissions made by HudBay and Lundin with respect to the need for parties in a merger transaction to obtain “deal certainty,” it stated that it cannot read out the discretion granted under section 603 of the TSX Manual to consider the impact of the quality of the marketplace simply because the parties to a merger transaction want certainty.
Following the OSC’s decision to require approval by HudBay’s shareholders, the Transaction was withdrawn.