On Friday, January 23, 2009, in a somewhat surprising decision, the Ontario Securities Commission (OSC) gave the shareholders of HudBay Minerals Inc. the right to vote on its proposed acquisition of Lundin Mining Corporation. The proposed transaction did not require shareholder approval under corporate law, securities law or, before the OSC decision, stock exchange requirements. The OSC decision overturned the approval of the transaction by the Toronto Stock Exchange (TSX) and ordered that HudBay shareholder approval be required by simple majority of the votes cast at a HudBay shareholder meeting. The OSC decision casts serious doubt on the certainty of transaction structures where the shareholders of the target are afforded a vote, while the shareholders of the acquiror are not. In the HudBay/Lundin case, the OSC found the dilution to be extreme (in that the transaction was in essence a "merger of equals" rather than an acquisition), appears to have been swayed by the strong opposition of certain HudBay shareholders to the transaction and was concerned as to the appropriateness of HudBay's governance practices and perceived unfair treatment of its shareholders.

Institutional shareholders hailed the decision stating that they had been lobbying for some time for the TSX to change its policies so as to require shareholder votes in such situations. It is now up to the TSX to respond by proposing changes to its policies. Until then, it remains to be seen whether acquirors will, out of an abundance of caution, voluntarily put such transactions to their shareholders for a vote. It would appear to be prudent to do so if there is a chance of strong shareholder opposition to the transaction.

Prior to this decision, most corporate boards and advisors would have felt comfortable structuring a business combination in the manner done by HudBay and Lundin. Three-cornered mergers or plans of arrangement, where the shareholders of the acquired company are afforded a vote but the shareholders of the acquiring company are not, are a very common deal structure in Canada and one that had withstood legal challenges by disgruntled shareholders in the past.

For example, in a similar situation in 2006, Goldcorp Inc. had entered into a transaction to acquire Glamis Gold Ltd. that would have resulted in the shareholders of Goldcorp owning approximately 60% of the combined company and the shareholders of Glamis owning the remaining 40%. Robert McEwen, former CEO of Goldcorp and its largest shareholder at 1.5%, brought an oppression application under the Ontario Business Corporations Act, arguing that the transaction should require Goldcorp shareholder approval. However, the Ontario Superior Court of Justice, in a ruling subsequently affirmed by the Divisional Court, upheld the transaction structure and determined that it did not give rise to a shareholder vote under the corporate statute. Also, in deference to the Goldcorp board's decision making, the Court held that this type of transaction was consistent with the nature of Goldcorp's business, its history of growth through acquisition and its public pronouncements.

In the HudBay/Lundin case, Jaguar Financial Corporation, which held approximately 1% of the HudBay shares and was one of the shareholders opposing the transaction, took a different approach. Instead of bringing an oppression application under the corporate statute, it applied to the OSC for a "hearing and review" of the TSX decision. Under this rarely used procedure, the OSC is not acting in the capacity of a court of appeal but, rather, as a court of first instance. Although, generally, the OSC defers to the TSX, the OSC determined that in this case it was unable to do so. The OSC agreed with Jaguar and held that the TSX should have required a shareholder vote on the transaction based on the effect the transaction may have on the "quality of the marketplace".

Detailed reasons have not yet been issued by the OSC so it is not yet clear whether this is a unique situation where the OSC decided to intervene to correct what it perceived was high-handed tactics employed by the HudBay board or whether it is truly a shift in the rules applicable to business combinations involving a "merger of equals".


On November 21, 2008, HudBay and Lundin announced that HudBay planned to acquire all of the common shares of Lundin on the basis of 0.3919 HudBay common shares for each Lundin share. The number of HudBay shares to be issued in connection with the transaction would result in the existing HudBay shareholders being diluted by 103%. The transaction was structured as a statutory arrangement which required a shareholder vote of the Lundin shareholders but not a shareholder vote of the HudBay shareholders. The expected closing date was prior to May 30, 2009.

Almost immediately after announcement of the transaction, several shareholders of HudBay publicly voiced their opposition to the transaction, citing among their reasons the fact that HudBay shareholders were not being afforded a vote. On November 24, 2008, HudBay received a requisition from two of these shareholders for a special shareholder meeting for the purpose of replacing HudBay's board of directors. In response, HudBay called a shareholder meeting to be held on March 31, 2009.1 However, in the meantime, the closing date for the proposed HudBay/Lundin transaction was moved up to January 28, 2009 on the basis that the parties now anticipated that all requisite approvals would be in hand by that date. The acceleration of the closing date to January 28, coupled with the scheduling of the requisitioned shareholder meeting for March 31, made the latter somewhat moot given that its purpose was to replace the HudBay board and stop the acquisition of Lundin.

Decision & Analysis

The OSC made three specific orders as follows:

  1. the TSX decision be set aside,
  2. HudBay shareholder approval be required as a condition to the listing of the additional common shares, and
  3. HudBay be prohibited from issuing any securities in connection with the transaction unless approved by a simple majority of the votes cast by HudBay shareholders entitled to vote at a duly convened special meeting of shareholders.  

The OSC focused on interpreting and applying the TSX Company Manual. Pursuant to sections 603 and 604, the TSX has discretion to impose conditions on a transaction, including requiring a vote of the shareholders. Specifically, section 603 provides as follows:

TSX has the discretion: (i) to accept notice of a transaction; (ii) to impose conditions on a transaction; and (iii) to allow exemptions from any of the requirements contained in Parts V or VI of this Manual.

In exercising this discretion, TSX will consider the effect that the transaction may have on the quality of the marketplace provided by TSX, based on factors including the following:

  1. the involvement of insiders or other related parties of the listed issuer in the transaction;
  2. the material effect on control of the listed issuer;
  3. the listed issuer's corporate governance practices;
  4. the listed issuer's disclosure practices;
  5. the size of the transaction relative to the liquidity of the issuer; and
  6. the existence of an order issued by a court or administrative regulatory body that has considered the security holders' interests.  

Section 604 requires security holder approval of a transaction if, among other things, in the opinion of the TSX the transaction materially affects the control of the listed issuer. The OSC agreed with the TSX that the completion of the transaction would not materially affect the control of HudBay.

Generally, the OSC defers to the judgment of the TSX and explained that only in very rare circumstances would it substitute its own view for that of the TSX. Turning to section 603, the OSC then focused on the requirement of the TSX to consider the effect that the transaction may have on the "quality of the marketplace". The OSC stated that the quality of the marketplace is a broad concept of market integrity that requires a careful consideration of all the relevant factors in the particular circumstances. The factors include, but are not limited to, those set out in 603.

In this matter, the OSC stated that the fair treatment of HudBay shareholders should be included as a factor of particular importance. The OSC explained that it could not defer to the TSX decision because the TSX provided no guidance as to the factors or circumstances considered in reviewing and assessing the effect that the transaction may have on the quality of the marketplace or why the TSX came to the decision it did. In fairness, the OSC acknowledged it had more extensive information than did the TSX before making its decision.

The OSC also recognized the importance of deal certainty. But, the OSC emphasized the importance of interpretation and application of the TSX Manual, stating that "those provisions form part of the fabric of securities regulation and involve broader market integrity, investor protection and public interest consideration". In the OSC's view, the principal considerations in the exercise of discretion under section 603 which ought to have been considered in this matter were as follows:

  1. Impact of the Transaction on Shareholders of HudBay

Here, the OSC focused on the market impact of the public announcement of the transaction. The share price of HudBay fell by approximately 40% immediately after the announcement which, according to the OSC, far exceeded the market reaction normally expected from the announcement of a merger transaction such as this.

  1. Dilution

The transaction would result in additional shares representing over 100% of the current number of shares being issued, leaving former shareholders of Lundin with approximately 50% of the ownership of the combined entity. The OSC characterized this level of dilution as "extreme" and at the "very outer end of the range of dilution" in prior transactions where the TSX had not required shareholder approval. The OSC stated that the level of dilution was not determinative but still was an extremely important consideration, adding that in the case at hand it constituted a "merger of equals" rather than an acquisition. Given this characterization, the OSC questioned the fairness of the transaction when the shareholders of one party (Lundin) were given a vote while the shareholders of the other party (HudBay) were not. Dilution is also relevant, said the OSC, because it fundamentally changed the shareholder voting, distribution and residual rights of the HudBay shareholders.

  1. Board of Merged Entity

The OSC focused on the fact that five of the nine directors of the merged entity would be former directors of Lundin, calling this a fundamental change in the board's composition. The OSC emphasized that the right of shareholders to vote on and determine the make-up of the board is a fundamental governance right. It should be noted, however, that the OSC seems to have overlooked that two of the five former directors of Lundin were also directors of HudBay, such that six of the nine directors of the merged entity would, in fact, be former directors of HudBay.

  1. Timing of Shareholder Votes

The timing of the shareholder meeting caused the OSC to have serious concerns as to the appropriateness of HudBay's governance practices and the fair treatment of its shareholders. While the transaction was scheduled to be completed at the end of January, the requisitioned shareholders meeting was scheduled for the end of March, effectively denying HudBay shareholders a fair chance to have their say with respect to the transaction. Also, in the OSC's view, Lundin exemplified "uncommon haste" over the holiday season in accelerating the scheduling of its shareholder meeting. The OSC observed that the actions of both HudBay and Lundin were for the purpose of frustrating the legitimate exercise by HudBay shareholders of their right to require a shareholders meeting to consider the replacement of the HudBay board. That, the OSC said, was fundamentally unfair to HudBay shareholders. In fairness to the TSX, the OSC noted that the shareholder meetings were scheduled after the TSX decision.

Ultimately, given the extreme economic consequences of the transaction on HudBay shareholders, to allow the transaction to proceed would, in the view of the OSC, be contrary to the public interest.

Legal Implications

Without speculating on what the OSC's full reasons for the decision will say, there are some clear legal implications from the decision on its face. It is clear that in deciding whether to approve a particular transaction, the TSX must now formally consider, in addition to the enumerated factors of sections 603 and 604 of the TSX Manual, the impact of transactions on the "quality of the marketplace" and be able to explain how its decisions are arrived at. "Quality of the marketplace" includes the factors enumerated in the Company Manual as well as any other factor the TSX may consider relevant in the circumstances.

One particularly important factor to be considered is dilution. The TSX requires shareholder approval for companies to issue more than 25% of their shares to make an acquisition. However, unlike other major exchanges, the TSX allows such acquisitions to occur without shareholder approval where the assets are acquired from a reporting issuer (or equivalent) having 50 or more beneficial securityholders, excluding insiders and employees. The TSX will have to consider, as part of a policy review, whether there should be a specified level of dilution above which shareholder approval would automatically be required. Pressure to change the policy has been coming from shareholder rights advocates and major institutional shareholders for some time. One would expect that the decision of the OSC applies even more.