The proxy battle at HudBay Minerals Inc.("HudBay") terminated last night with the resignation of its board of directors and the appointment of the nominees of SRM Global Master Fund Limited Partnership ("SRM") in their place. The decision was made in advance of the shareholder meeting scheduled for March 25, 2009, in light of the preliminary proxy vote count. The interim chief executive officer ("CEO") of HudBay also resigned and Peter. R. Jones was appointed as CEO of HudBay.

As previously reported, the Ontario Securities Commission ("OSC") ruled on January 23, 2009 that approval of the shareholders of HudBay was required before HudBay could proceed with its acquisition of all of the shares of Lundin Mining Corporation ("Lundin").* The OSC decision was particularly significant as corporate law did not require HudBay shareholder approval of the transaction which was structured as an arrangement involving the issuance of HudBay shares to Lundin shareholders in exchange for their Lundin shares. In addition, the Toronto Stock Exchange ("TSX") had decided not to exercise its discretion to require HudBay shareholder approval. However, relying upon its infrequently used right to review TSX decisions, the OSC determined that allowing the transaction to proceed without HudBay shareholder approval would have a negative impact on the quality of the marketplace and would be contrary to the public interest.

The OSC made its order in response to an application from Jaguar Financial Corporation ("Jaguar") to set aside the TSX decision and require HudBay shareholder approval. Given the highly dilutive nature of the transaction and other factors, Jaguar and three other shareholders had asked the TSX to exercise its discretion to require HudBay shareholder approval as a condition of the listing of the additional HudBay shares, but the TSX declined to do so.

The circumstances considered by the OSC in reaching its decision included (i) the issuance of HudBay shares representing just over 100% of the HudBay shares outstanding, (ii) the 40% drop in the HudBay share price after the public announcement of the Lundin transaction, (iii) the planned board reconfiguration, and (iv) the advancing of the Lundin shareholder meeting so that the transaction could potentially be closed by January 28, 2009, before the requisitioned HudBay shareholder meeting to replace the HudBay board in March 2009.

Subsequently, HudBay decided not to place the Lundin transaction before its shareholders for approval at the March meeting and instead announced on February 23, 2009 that it was terminating the transaction. HudBay cited strong feedback from many of its shareholders indicating that they would vote against the transaction. On March 10, 2009, HudBay announced the resignation of Allen J. Palmiere, as CEO and as a director of HudBay, effective March 9, 2009. Colin K. Benner, a director of both HudBay and Lundin and a former CEO of Lundin, was appointed interim CEO of HudBay.

However, the termination of the transaction and the resignation of the CEO did not end the proxy battle to replace the current HudBay board. As noted above, a shareholder meeting was requisitioned by a HudBay shareholder, SRM. The meeting was scheduled for March 25, 2009. SRM asserted in its circular that the board of directors of HudBay disregarded shareholders' interests. HudBay management asserted in its circular, among other things, that SRM was planning to use HudBay's cash for a major repurchase of HudBay shares and that this was not in the best interests of shareholders.

According to the SRM circular in connection with the meeting, SRM owns or exercises control or direction over 11% of the HudBay shares. Goodman and Company, Investment Counsel Ltd. ("G&C") recently reported that it exercises control or direction over 10.3% of the HudBay shares and the portfolio manager of G&C had been quoted as being in favor of replacement of the HudBay board. Accordingly, the proxy battle appeared to have a solid base of support.

The proxy battle illustrates some of the risks of structuring a very substantial transaction without a requirement for shareholder approval in the face of opposition from significant shareholders. If such shareholders promptly requisition a meeting, evidencing the degree of their opposition, that requisition is one more factor for regulators to consider when deciding if shareholders are being treated fairly. And the fact that shareholder approval was not sought provides a central theme for the proxy circular.

As noted earlier, the OCS decision does not necessarily create a bright line dilution threshold that triggers shareholder approval requirements. However, the decision suggests that when a listed company intends to issue shares to acquire a public target in a highly dilutive transaction, it would be prudent to plan for shareholder meetings of both the buyer and the target.